Financial Activity Can't Glissade Into Situation Where Its Operations Become Impossible: Kerala HC Issues Directions On Status Of Nidhi Companies

The High Court held so while finding force in the apprehensions of the “Nidhi Companies” that amendment to Section 406 of the Companies Act, 2013 will authorise the Government to bring in changes to the Nidhi Rules, 2014, to en-draft Rules 3A and 23A thereby rendering their existence & operations impossible.

A Single Bench of Justice Devan Ramachandran observed that “in the case of any right vested to any individual or class of persons/entities, necessary regulatory mechanism and reasonable restrictions are desideratum, if not imperative, especially when public money is involved. Such cannot be challenged, if they are reasonable in nature and are within the constitutional perimeter”. (Para 10)

As per the brief facts of the case, the petitioners stated to be 'Nidhi Companies' operating under the Companies Act, 1956, called into question the amendments brought to Section 406 of the Companies Act, 2016, through Act 1 of 2018, whereby, the obtention of declaration as a 'Nidhi Company' has been made mandatory. The petitioner asserted that this marks a deviation of the statutory regime applicable until now, taking it back to the era of the Companies Act, 1956, under which Section 620A thereof, required such declaration as a mandatory requisite. They pleaded that under the guise of regulation, particularly Rules 3A and 23A of Nidhi Rules 2014, conditions are being imposed, which is not possible for any of them to comply with; and hence most of them stand denuded of their status as a 'Nidhi Company'. Thus, they challenged the amendments brought into Section 406 of the Companies Act, 2013, as well as the corresponding amendments made into the Nidhi Rules, 2014, as being illegal, unlawful, and unconstitutional.

This was opposed by the counsel for Respondent i.e., Solicitor General of India, that the primary reason, which persuaded the Government of India to consider an effective regulatory mechanism for 'Nidhi Companies', was that complaints were being received on a regular basis from various sources, including stake holders, State Level Co-ordination Committees and such other, regarding deleterious malpractices indulged by various “Nidhi” companies. The counsel stated that these companies used to refuse repayment of matured amount with interest and lure members with exorbitant promises and expensive gifts through advertisement and then blatantly violates them. It was also alleged that they refused permission to members to withdraw from their own amounts; and, in some cases, Directors and Promoters absconded, so as to avoid repayment of deposit by small investors. Thus, it was pleaded that unless their operations are well regulated and brought under an effective monitoring scanner, it would benefit no one, but would operate as a great detriment to bonafide investors, who are generally from small towns and who make small investments from their hard-earned money.

When the petitions were earlier listed on Nov 22, 2023, the Court had ordered thar all coercive action against the petitioner shall stand deferred till Nov 24, 2023.

At the same time, the Court had also stated that the petitioner companies shall not enrol any new members beyond 10% of the existing membership.

The Court directed the Petitioners to ensure that all deposits and loans to new members will be in compliance with the guidelines provided under the Companies Act, 1956, as also the Nidhi Rules, 2014; and granted liberty to the respondents to take necessary action in case of any violation in this regard.

The Court also directed the petitioner not to create any charge over the deposit of the members and they will be obligated to file returns as required in law, which will be subject to further orders.

The Bench observed that during such earlier listing, Deputy Solicitor General (DSG) had assured that new regime could be streamlined to give an opportunity to the desirous petitioner companies to make fresh applications under “NDH-4” format as is mandated under the “Nidhi Rules, 2014”, however, on condition that they apply for compounding of all offences committed qua the pre-amendment era.

The DSG re-affirmed that, if the “Nidhi Companies” are to apply for compounding the offences committed earlier, it would be considered in the afore perspective and with the empathy it deserves; but, of course, after verifying and confirming absence of criminality, on a case-to-case basis, added the Bench.

Opposing the same, the counsel for Petitioner reiterated that the petitioner companies were faced with the prospect of being burdened with large sums as compounding fees which is as high Rs.75,000/- to Rs.85,000/- per offence and then be facing the prospect of their “NDH” applications being rejected, for frivolous reasons and on conditions which are impossible to perform. The counsel for the Petitioner further added that the orders whereby, the “NDH 4” applications have already been rejected are also illegal for the reason that it has been done not by the Government of India, but by a statutorily incompetent Authority.

The Bench found that at first blush, the regulatory mechanism appears to be far less exacting than what the Reserve Bank holds over financial entities like banks or NBFCs; and this is admitted by all the counsel for the petitioners also.

The Bench opined that an opportunity be given to see whether the “Nidhi Act” and the “Nidhi Rules” can be allowed to operate, without causing an oppressive impediment to the petitioners, in either obtaining registration, or in continuing with their operations, as the case may be.

It is fundamental in interpretation of statutes that every attempt ought to be made to allow it operate to the extent possible and that it will be set aside, only if it is found to be so incapable, on grounds of arbitrariness, capriciousness or arbitrariness, added the Bench.

The Bench therefore refused to decide on the amendments to Section 406 of the Companies Act, 2013, as also to the “Nidhi Rules, 2014” as impelled in these writ petitions, and granted liberty to each of the petitioners to approach the competent Authority, for compounding the offences alleged against them; thus leading to the imposition of the least sum of penalty, as permissible in law, however, subject to the evaluation and determination of such, on a case-to-case basis by the competent Authority.

However, the Bench clarified that these protections will not apply in a case where criminality is suspected, or found, or in which action under the criminal law is initiated or proposed.

At the same time, the Bench observed that on the offences committed by the Nidhi Companies, if any, being compounded, then they will be at liberty to apply afresh, in the format prescribed as per the “NDH Form”; and if this is done, it will be considered dispassionately and without being influenced by the earlier rejections.

Lastly, on the issue of raising of the share capital so as to achieve the qualifications of 'Nidhi Company' under law, the High Court ordered that the competent Authorities will permit the petitioners to raise their capital within the threshold limit as per the Statutory requirement; for which purpose, all applications and requirements for such will be acceded to, subject to other mandatory requirements being satisfied.

Counsel for Petitioner/ Assessee: Sabu George, P.B. Krishnan, P.B. Subramanyan and Manu Vyasan Peter

Counsel for Respondent/ Revenue: DSGI S. Manu

Case Title: ANNAMANADA GRAMAKSHEMAM NIDHI LIMITED verses UOI

Case Number: WP(C) NO. 38860 of 2023

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