State govts can attach assets of defaulting chit fund cos, says SC

A state government is entitled to initiate the process of attaching properties of chit fund companies which swindle innocent investors and fail to pay them back as per their promise, the Supreme Court has said.

A bench of N V Ramana and Prafulla C Pant held as valid one such order passed by the authorities under the Tamil Nadu Protection of Interests of Depositors (In Financial Establishments) Act, 1997.

The state government issued orders for attaching the immovable properties of the partners of financial establishment (Global Capital Trading Services) on complaints that the company offering higher rate of returns had made only part payments on huge deposits of money.

After going through the relevant provisions of the Tamil Nadu Act, the bench said it showed that the object of law was to ameliorate the situation of thousands of depositors from the clutches of financial establishments.

The companies deceived the investors by offering high rates of interest on deposits and committed deliberate fraud in repayment of the principal and interest after maturity of such deposits, the court added.

“It is clear from the relevant statutory scheme that in order to curb the malady of financial swindlers and to deal with such problems effectively, the state of Tamil Nadu enacted this statute to protect the interest of innocent investors,” the bench said.

The court noted that in the instant case, an FIR was registered for cheating and criminal breach of trust in 2010 against the company.

Subsequently, in 2012, the orders were issued for attaching the properties of the financial institution and its partners.

The apex court allowed an appeal filed by the state against the Madras High Court’s Madurai bench order, which had set aside the proceedings of attachment initiated against the company.