Bombay High Court upholds prosecution under MPID Act against Director of Co-operative Credit Society

1. Background of the proceedings

The matter in Shukul s/o Dharmaji Makde Vs State of Maharashtra came before the Bombay High Court as a Criminal Application Apl No.673/2021, where the applicant invoked Section 482 of the CrPC seeking to quash:

  • FIR in Crime No.301/2020, and
  • the consequential Special MPID Case No.26/2022 pending before the District Judge-15 and Special Court under the MPID Act at Nagpur.

The FIR alleged commission of offences under:

  • Sections 403, 406, 409, 467, 468, 471, 477-A of the IPC, and
  • Sections 3 and 4 of The Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act).

The prosecution was triggered by an Audit Report covering the years 2001–2018 in respect of “Shri Santaji Nagari Sahakari Pat Sanstha Limited”, a registered co-operative credit society. The applicant was a Director and one of the founder members of this Society.

According to the allegations, irregularities in acceptance and handling of deposits, loan disbursement and non-repayment to investors resulted in a loss quantified at Rs.1,31,29,059/-.

2. Core factual allegations from the Audit and investigation

2.1 Role of the Society and its governance structure

  • The Society carried on co-operative credit business, accepting deposits from members/investors and disbursing loans.
  • The applicant was on the Board of Directors and was one of the founders of the Society.

2.2 Findings reflected in the Audit Report (2001–2018)

The FIR was based on an Audit Report which allegedly revealed:

  • Loans were sanctioned and disbursed:

    • without following due procedure, and
    • without securing approval from the full Board of Directors.

  • Deposits collected from investors were:

    • not correctly reflected in the records, and
    • in several cases, allegedly diverted or transferred to other bank accounts.

  • No meaningful steps were taken for recovery of outstanding loan amounts.

  • Monies entrusted by investors were not returned on maturity, resulting in misappropriation and a recorded loss to the Society of Rs.1,31,29,059/-.

2.3 Statements recorded during investigation

During investigation, the police recorded:

  • The statement of the Auditor (informant), explaining the manner in which the Board of Directors, Managers and Accountant allegedly handled and misappropriated funds.
  • The statement of Sangpal Telang, who asserted that lack of control by the Directors over the Society’s transactions enabled the Manager, Cashier and some Directors to misappropriate funds.
  • Statements of various investors, who deposed that:
    • they had placed their amounts in Fixed Deposits or daily deposit schemes,
    • upon maturity, their amounts were not repaid, and
    • they believed that the Board of Directors and employees had misappropriated their money.

On a cumulative reading of these materials, the High Court noted that there was prima facie indication of involvement of all Directors, including the applicant, in the alleged economic offence.

3. Applicant’s contentions before the High Court

The applicant’s counsel advanced, in substance, the following arguments:

  • The FIR and investigation papers contained only general accusations against all Directors, with no specific attribution of day-to-day management functions to the applicant.
  • The applicant was employed with Western Coalfields Limited and allegedly not engaged in the routine operations of the Society.
  • Even if irregularities existed as recorded in the Audit Report, the ingredients of Section 409 or Section 406 IPC (criminal breach of trust) were not made out against the applicant.
  • In this backdrop, continuation of criminal proceedings against the applicant was argued to be an abuse of process, warranting quashing under Section 482 CrPC.
  • Applicability of Sections 3 and 4 of the MPID Act was also disputed, on the footing that the transactions in question did not fall within the statutory concept of “deposit” under the Act, or that misappropriation of “deposits” by the Society, as such, was not established.

4. State’s response opposing the quashing

The learned APP for the State strongly resisted the application and contended that: