'Equitable Distribution' Not Always 'Equal', MPID Court Not Correct In Directing Sums To Be Distributed To NSEL Investors Equally: Bombay HC

Interpreting the term 'equitable' as it appeared in Section 7(4) of the Maharashtra Protection of Interest of Depositors (MPID) (In Financial Establishments) Act, a Division Bench of Justices SS Shinde and Manish Pitale underscored that the term 'equitable' is not the same as 'equal'."

Relevant Extract of Section 7(4)

The designated court shall…issue such direction as may be necessary for realisation of the assets attached and for the equitable distribution among the depositors of the money realised out of the property attached.

Holding that the Special Court under the MPID Act erred in conflating the term 'equitable' with 'equal' when distributing sums between

investors in this manner, Justice Pitale speaking for the Bench said,

"We are of the opinion that when this definition is kept in mind, it becomes clear that the approach adopted by the designated court in proceeding on the basis that equitable distribution would necessarily mean equal distribution, is not correct… the purpose of enacting the MPID Act is to deal with the crisis faced by the middle class and poor depositors, who stand duped on the promise of unprecedented high attractive interest rates on deposits".

Facts

After irregularities were discovered in the functioning of the erstwhile National Spot Exchange Ltd (NSEL) in 2013, its assets were attached by a competent authority (CA) constituted by MPID Act.

Proceedings in relation to the irregularities were taken over by a Special Court constituted in terms of the legislation.

During proceedings before the MPID Special Court, the CA had submitted that funds collected through liquidation were distributed during the period 2014-15 in such a manner that 608 investors, whose outstanding amounts were less than Rs 2 lakhs were paid and they were 'first satisfied'.

Additionally, 50 per cent of the outstanding amounts of 6445 investors, whose outstanding amounts were more than Rs.2 lakh but less than Rs 10 lakh, were also paid.

To 5682 investors, whose outstanding amounts were more than Rs.10 lakh, were concerned, about 6.5 per cent of the outstanding amounts (6 per cent of Rs 5048. 47 crore) were paid.

"Thus, during the initial phase, when distribution of amounts were made, the smallest of investors had their dues satisfied entirely," the HC noted.

After these payments, an outstanding amount of nearly 172.88 crore for investors claiming amounts between Rs 2 lakh to Rs. 10 lakh remained to be paid.

Through two orders from October 22, 2020 and November 3, 2020 the MPID Court had directed the CA to distribute the remaining sum equally among the remaining investors, interpreting the term 'equitably' in Section 7(4) in this manner. The CA's prayer for a graded, priority-based distribution was rejected.

Aggrieved, an investor along with the state government through the CA preferred appeals to the High Court.

In the High Court, Special Public Prosecutor Avinash Avhad, representing the CA, argued that that the MPID Court had erred in rejecting the prayer for a graded distribution of amounts to investors. Since the MPID aimed at protecting small investors, the CA was justified in seeking graded distribution of available funds in favour of small investors.

The NSEL Investors Action Group through Senior Advocate Venkatesh Dhond, however, argued that the equitable distribution meant equal distribution of available money among all depositors and any artificial classification or graded distribution cannot be permitted.

Holding

"We are of the opinion that the said approach adopted by the Designated Court cannot be said to be in consonance with the objects and reasons of the MPID Act. The expression 'equitable distribution' has to be interpreted in terms of the said objects and reasons as also the purpose for which the MPID Act was enacted", the Court said.

Referring definitions of equitable in Black's Law Dictionary and Stroud's Judicial Dictionary of Words and Phrases, the Court emphasized that the quality of being just, as well as fairness and reasonableness was what the term embodied.

The legislature would have simply used the word 'equal' if it wanted a Court to distribute monies realized after attachment 'equally', the Court reasoned.

"By using the said specific expression in the context of the power available with the Designated Court to give a direction for distribution of monies amongst the depositors, it has been clearly indicated that the Designated Court would have the power and discretion to pass appropriate direction for equitable distribution of money in terms of the object of the MPID Act. In a given case, depending on the facts and circumstances, equitable distribution may mean equal distribution of money amongst the depositors. But, this cannot lead to a conclusion that in particular facts and circumstances where the Designated Court may find it just, fair and reasonable to give appropriate direction for distribution of money amongst the depositors not necessarily in equal proportion but, in a graded manner, it cannot do so. This aspect was not appreciated in the correct perspective by the Designated Court while passing the impugned order."

The Court added,

"The beneficial nature of the legislation to protect the interest of small investors has to be taken into consideration because it is generally such small depositors, who are at the receiving end in such scams."

Noting that the largest number of investors were those whose outstanding amounts fall between Rs 2 lakhs and Rs 10 lakhs, the Bench observed,

"It becomes clear that if the prayer of the CA for distribution of money in a graded manner is accepted, it would satisfy almost entirely the dues payable to them."

Therefore, the Court ruled that the CA could distribute the available amounts to 6445 depositors/investors in a 'graded manner', whose outstanding amounts fall within the range of Rs.2 lakhs to Rs.10 lakhs. The Court made clear that amounts already disbursed would not be reopened.

After the NSEL Investors Action requested a stay on the operation of the judgment in order to file an appeal before the Supreme Court, the Bench resolved to kept the order in abeyance for two weeks.

Click here to read the judgment