Depositors can seek attachment of assets transferred by financial establishments in bad faith, Madras HC rules

Virutcham Agro Limited, Sivakasi, promoted by Srinivasan @ Srinivasagan, and certain associated companies accepted deposits from the public and subsequently defaulted in repayment. A criminal case was registered by the Economic Offences Wing, Virudhunagar, and cognizance was taken by the Special Court under the Tamil Nadu Protection of Interest of Depositors (in Financial Establishments) Act, 1997 (“TNPID Act”) in C.C.No.21 of 2017.

Ramu, claiming to be an interested person/depositor, applied before the Special Court for attachment of the property in question. He alleged that the property, originally belonging to the promoter Srinivasan, had been transferred to Subbulakshmi and thereafter to Ramesh in order to defeat the claims of depositors. The Special Court allowed the application and directed attachment of the property by order dated 26 February 2020. C. Radhakrishnan, who claimed to have paid a substantial amount to Ramesh pursuant to a proposed reconveyance, challenged the attachment after the registration department declined to register the transaction.

1. Whether Ramu’s application before the Special Court seeking attachment of the property under Section 8 of the TNPID Act was maintainable?

2. Whether C. Radhakrishnan had the locus standi to maintain the civil miscellaneous appeal against the attachment order?

The Court applied the statutory scheme of the TNPID Act under which the Government may make an interim attachment of the properties of a defaulting financial establishment, while the competent authority may apply to the Special Court to make the attachment absolute; interested persons may seek to raise the attachment.

Section 8 of the TNPID Act permits the Special Court, where there is reasonable cause to believe that property was transferred otherwise than in good faith and for consideration, to issue notice to the transferee and attach property equivalent to the value of the transferred property; the provision does not restrict initiation of proceedings to the police or competent authority. Rule 7 of the TNPID Rules provides that transfers made after an attachment by the Government are null and void; the Court held that the same consequence could be inferred for an attachment ordered by the Special Court.

The Court distinguished Section 8 from the provisions governing ordinary attachment under Sections 3 and 4. Since Section 8 refers to the Special Court’s satisfaction based on affidavit or otherwise and does not designate the Government, police, or competent authority as the exclusive applicant, any interested person or depositor could maintain an application under that provision. Ramu therefore had locus standi to seek attachment of property allegedly transferred by the promoter through mala fide transactions.

Radhakrishnan, however, relied on a transaction allegedly entered into after the Special Court’s attachment order. Applying the principle underlying Rule 7, the Court held that it could not recognise or rely upon a subsequent transfer to confer standing on Radhakrishnan. At most, Ramesh, the purchaser whose property was attached, could challenge the attachment; Radhakrishnan, as a subsequent proposed transferee, had no locus standi.

The Court declined to examine the merits, dismissed C.M.A.(MD) No.336 of 2022, and made no order as to costs.