Bombay High Court allows graded fund distribution under MPID Act

The Bombay High Court on Monday

said the objective of Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act (MPID) was to protect the middle class and poor depositors and allowed for graded distribution of funds among small depositors.

A division bench of Justices S S Shinde and Manish Pitale allowed the Maharashtra government to distribute funds procured from attached assets in the case to small investors whose outstanding dues were between Rs two lakh and Rs 10 lakh.

The court was hearing two appeals filed by the Maharashtra government and a small investor challenging two orders of October and November 2020 passed by a lower court hearing matters pertaining to MPID Act.

The lower court had said the amount realized from assets attached under the provisions of the MPID Act in the case has to be distributed equally.

The government in its appeal, however, claimed the distribution of money should be in a graded or preferential manner and not merely equally.

The HC, while allowing the appeals, noted that the object of the MPID Act was to deal with the crisis faced by the middle class and poor depositors who wereduped on the promise of unprecedented high interest rates on deposits.

"The power of attachment and liquidation of assets (under the Act) shows the concern under the said legislation for protecting the interest of small investors," the court said in its order.

The court noted that in the present case, the largest number of investors are those whose outstanding amounts fall between Rs 2 lakh and Rs 10 lakh and, hence, if the money is distributed in a graded manner then it would satisfy almost entirely the dues payable to them.

"But, if the amounts are equally distributed or distributed on prorata basis, then the amounts that would be paid to each investor would be in a small proportion, thereby leading to a situation where none of the investors would get any substantial amount," the court said.

The government had, between 2014-15, distributed the outstanding dues of 608 investors, whose amounts were less than Rs 2 lakh and 50 per cent of the outstanding amounts of 6,445 investors, whose amounts were more than Rs 2 lakh but less than Rs 10 lakh.

With regard to the 5,862 investors, whose outstanding amounts were more than Rs 10 lakh, about 6.5 per cent of the outstanding amounts were paid.

In 2018, the government sought the court's permission to distribute the remaining available funds to the remaining 50 per cent of those investors whose outstanding amounts were between Rs 2 lakh and Rs 10 lakh.

This request was, however, turned down by the lower court which said the funds shall be equally distributed among all the investors/depositors.

Following this, a sum of Rs 35 crore was distributed equally among the 12,127 investors/depositors.

Thereafter, an amount of Rs 40 crore was once again available for distribution among the investors following which the government filed an application before the lower court seeking that priority be given to the small investors first.

The lower court rejected this application too and said the MPID Act only provides for equitable distribution of funds.

The Maharashtra government and a small investor, Rabibai Ismail, then approached HC in challenge.

Special public prosecutor Avinash Avhad, appearing for the government, argued that the lower court had erred and failed to understand the object of the MPID Act, which is to protect the small investors.

Agreeing to this, the bench said the true purport of the word 'equitable' used in MPID Act cannot be interpreted to mean equal or prorata distribution.

The court said the approach adopted by the lower court cannot be said to be in consonance with the objects and reasons of the MPID Act.