Repayment, Damages for Fraud, and Punishment

The proviso to (b): renewal of any such deposit shall be done in accordance with the provisions of Chapter V and the rules. So an old deposit could not simply be rolled over on the old terms; renewing it meant coming inside the new regime.

Note the "whichever is earlier" in (b). A deposit with four years left to run had to be repaid in three; a deposit with one year left had to be repaid in one. The three years is a ceiling, not an entitlement.

And note the overriding words in (a): the duty to file applies notwithstanding anything contained in any other law for the time being in force, or in the terms of the deposit, or in any scheme framed under any law. A company could not point to a rescheduling scheme and say the statement was unnecessary.

Section 74(2): the Tribunal may extend. The Tribunal may, on an application made by the company, after considering the financial condition of the company, the amount of the deposit or part of it and the interest payable, and such other matters, allow further time as it considers reasonable to repay.

The application is the company's to make, and the Tribunal weighs the company's condition against the depositors' interest.

Section 74(3): the penalty for failing. If a company fails to repay within the time in sub-section (1) or such further time as the Tribunal allows, then in addition to paying the deposit and the interest due:

• the company shall be punishable with a fine of not less than one crore rupees and up to ten crore rupees; and
• every officer of the company who is in default shall be punishable with imprisonment up to seven years, or with a fine of not less than twenty-five lakh rupees and up to two crore rupees, or with both.

Note that the fine is in addition to repaying the money. It is not a substitute for it.

Damages for fraud: section 75

This is MU's label, and it is one sentence.

Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section, and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in sub-section (3) of that section and liability under section 447, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.

Break it into its four elements, because a problem question is answered by taking them in order.

1. A failure to repay under section 74. The section is tied to section 74 deposits and to the section 74 timetable, including any extension the Tribunal has allowed.

2. Proof of fraudulent intent. It must be proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose. Mere inability to repay is not enough; a company that took the money honestly and then failed is outside section 75.

3. Who is liable. Every officer of the company who was responsible for the acceptance of such deposit. Not every officer, and not every director: the test is responsibility for the acceptance.

4. What the liability is. Personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by the depositors. Note "losses or damages", which is wider than the deposit itself.

And the liability is cumulative, not alternative. The words "without prejudice to the provisions contained in sub-section (3) of that section and liability under section 447" mean that section 75 liability sits on top of the section 74(3) fine and imprisonment and on top of liability for fraud under section 447. Three consequences from one set of facts.

Punishment for contravening section 73 or section 76: section 76A

When it applies. Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or the rules, or where a company fails to repay the deposit or part of it or any interest due within the time specified under section 73 or section 76 or the rules, or such further time as the Tribunal may allow under section 73.

Note the second limb of the opening words. "Allows or causes any other person to accept or invite on its behalf" catches the company that uses an agent, a broker or a related entity to collect the money.

The punishment:

• (a) the company, in addition to paying the deposit and the interest due, shall be punishable with a fine of not less than one crore rupees, or twice the amount of deposit accepted by the company, whichever is lower, and up to ten crore rupees; and
• (b) every officer of the company who is in default shall be punishable with imprisonment up to seven years and with a fine of not less than twenty-five lakh rupees and up to two crore rupees.

The minimum for the company is worth reading twice. It is one crore rupees or twice the deposits accepted, whichever is lower. A company that took ten lakh rupees faces a minimum of twenty lakh, not one crore. The "whichever is lower" keeps the floor proportionate for a small contravention while leaving the ten crore ceiling in place for a large one.

The proviso: knowing or wilful contravention. If it is proved that the officer in default contravened the provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.

Note the five people who may be the object of the intention to deceive: the company, its shareholders, its depositors, its creditors, or the tax authorities. An officer who deceives the tax authorities through a deposit contravention is within the proviso even though no depositor was targeted.

A worked example

Ratnagiri Fisheries Limited held two crore rupees of public deposits taken in 2012 under the old Act, of which sixty lakh rupees remained unpaid when the 2013 Act commenced.

Section 74(1)(a). Within three months of commencement it had to file with the Registrar a statement of all deposits accepted and sums remaining unpaid with the interest payable, together with the arrangements made for repayment. That duty applied notwithstanding the terms on which the deposits were taken and any scheme framed under any law.

Section 74(1)(b). Repayment had to be made within three years of commencement, or by the end of the deposits' own term, whichever is earlier. Deposits with two years left to run had to be repaid in two, not three.

An extension. The company applies to the Tribunal under section 74(2). The Tribunal considers its financial condition, the amounts and interest involved and such other matters, and allows a further eighteen months.

It still fails. Under section 74(3) the company must still repay the deposits and interest, and in addition faces a fine of one to ten crore rupees, while every officer in default faces up to seven years' imprisonment, or a fine of twenty-five lakh to two crore rupees, or both.

Now add fraud. It emerges that the 2012 deposits were collected on a prospectus of orders that did not exist, and that two directors knew. Section 75 applies: it is proved that the deposits were accepted with intent to defraud the depositors, so every officer responsible for the acceptance is personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by the depositors, and that is without prejudice to the section 74(3) fine and to section 447.

A different company, a fresh contravention. Chiplun Marine Private Limited advertises a deposit scheme through a broker and collects eighty lakh rupees from non-members, having no eligibility under section 76 at all. Section 76A applies, because the company allowed another person to accept or invite deposits on its behalf in contravention of section 73.

The company's fine is at least one crore rupees or twice the deposits accepted, whichever is lower. Twice eighty lakh is one crore sixty lakh, which is higher than one crore, so the minimum here is one crore rupees, with a ceiling of ten crore. Had it collected only thirty lakh, twice that is sixty lakh, which is lower, so the minimum would have been sixty lakh rupees.

Every officer in default faces up to seven years and twenty-five lakh to two crore rupees. And if it is proved that a director contravened knowingly or wilfully with intent to deceive the company, its shareholders, its depositors, its creditors or the tax authorities, the proviso sends him to section 447.

Distinctions that carry marks

What this does NOT mean

It does not mean failing to repay is fraud. Section 75 requires it to be proved that the deposits were accepted with intent to defraud or for a fraudulent purpose. Honest failure is section 74(3) and section 76A territory.

It does not mean every officer is liable under section 75. Only every officer who was responsible for the acceptance of the deposit.

It does not mean the company's minimum fine under section 76A is always one crore. It is one crore or twice the deposits accepted, whichever is lower.

It does not mean paying the fine discharges the debt. Both section 74(3) and section 76A(a) impose the fine in addition to payment of the deposit and the interest due.

Quick revision

• 74(1)(a): file with the Registrar, within three months, a statement of all deposits accepted and sums unpaid with interest and the arrangements for repayment, notwithstanding any other law or the terms of the deposit.
• 74(1)(b): repay within three years of commencement or by the end of the term, whichever is earlier. Renewal only under Chapter V.
• 74(2): the Tribunal, on the company's application, may allow further time, weighing the company's financial condition and the amounts involved.
• 74(3): on failure, in addition to repayment, company one to ten crore rupees; officer in default up to seven years, or twenty-five lakh to two crore rupees, or both.
• 75: failure to repay under section 74 plus proved intent to defraud the depositors or a fraudulent purpose makes every officer responsible for the acceptance personally responsible, without any limitation of liability, for all or any losses or damages of the depositors, without prejudice to section 74(3) and section 447.
• 76A: contravention of section 73 or 76, including allowing or causing another person to accept or invite on the company's behalf, or failure to repay under them: company one crore or twice the deposits accepted, whichever is lower, up to ten crore, plus repayment; officer in default up to seven years and twenty-five lakh to two crore rupees. Proviso: knowing or wilful contravention with intent to deceive the company, its shareholders, depositors, creditors or the tax authorities attracts section 447.

Test yourself

1. By when had deposits accepted before the 2013 Act to be repaid? Within three years from the commencement of the Act, or on or before the expiry of the period for which the deposits were accepted, whichever is earlier: section 74(1)(b).

2. What had to be filed, and within what time? A statement of all deposits accepted and the sums remaining unpaid with the interest payable, together with the arrangements made for repayment, filed with the Registrar within three months of the commencement or of the date the payments fell due: section 74(1)(a).

3. State the elements of section 75. A failure to repay a section 74 deposit or interest within the section 74(1) time or the Tribunal's extended time; proof that the deposits were accepted with intent to defraud the depositors or for any fraudulent purpose; and then every officer responsible for the acceptance becomes personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by the depositors.

4. Is section 75 liability instead of, or in addition to, other liability? In addition. The section operates without prejudice to section 74(3) and to liability under section 447.

5. What is the minimum fine on a company under section 76A? Not less than one crore rupees or twice the amount of deposit accepted by the company, whichever is lower, with a maximum of ten crore rupees, and in addition to payment of the deposit and interest due.

6. When does an officer in default under section 76A face action under section 447? Where it is proved that he contravened the provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or the tax authorities: proviso to section 76A.