Deposit matching is a fraudulent process: HC
Disapproving of ‘deposit matching’, wherein a financial institution sets off an outstanding loan against a borrower by allowing him to enter into a settlement with a depositor, the Bombay high court said the arrangement was fraudulent.
“This is nothing but a fraudulent preference, which cannot be permitted when an entity is in liquidation,” a division bench of justice DY Chandrachud and justice AV Mohta observed last week.
The court was hearing a bunch of petitions filed by depositors of Bhudargad Urban Co-operative Credit Society, largest urban co-operative credit society from western Maharashtra that went into liquidation 10 years ago.
As on December 31, 2010, the credit society had deposits of Rs135 crore invested by more than 2.07 lakh depositors, and the advances to the tune of Rs167 crore were outstanding against 4,268 borrowers.
What irked the judges was that the committee appointed by the state government for liquidation of the credit society had shown Rs109 crore “recovered” by way of “deposit matching”.
“Such private arrangements are a complete fraud and are contrary to the interest of the society, its members, and the general body of deposit holders, who have not been paid so far,” they observed.
The court directed the state government to reconstitute the liquidation committee by including conversant and experienced members. Also, the committee has to take immediate steps for revoking the “deposit matching” transactions.
The judges observed: “This procedure was entirely unlawful and should not have been permitted in the first instance.”
The court also came down heavily on the state machinery for not taking expeditious steps to recover outstanding amounts from borrowers.
Though recovery certificates were issued as far back as September 1, 2009, out of Rs46.03 crore only Rs4.37 lakh has been recovered so far. “The fact that deposits of small depositors and individuals from rural Maharashtra are involved does not seem to move either the state government or the committee into action,” the court said.