Tuesday, 31 August 2010

It is a case of cheating and money circulation scheme, says Supreme Court

Now let us look at the judgement of the highest court of the land, the Supreme Court of India. In Kuriachan Chacko and others vs. State of Kerala (2008) 8 SCC, the Supreme Court stated that Section 2 (c) of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 does not insist that enrollment of members must be by members already enrolled. It also stated that enrollment of new members by whosoever is immaterial. (It should be noted here that Amway also claims that there is no compulsion to enroll new members.)
A quick look at the scheme reveals that each member has to pay Rs. 625 and purchase one unit of lotteries from the promoters. The promoters will make use of Rs. 350 to purchase 35 lottery tickets of the Kerala Government for the next 35 weeks. If the unit-holder wins any prize up to Rs. 5000 in the 35 draws, the promoters shall collect the amount and pay the same to the unit-holder. If the unit-holder wins any prize above Rs. 5,000 the ticket shall be handed over to the unit holder for collection of the amount. The balance of Rs. 275 will be used for the subscription of a magazine for one year. The unit holder will be returned not only Rs. 635 for twice his investment Rs. 1250 on an early date. The promoters said that all persons would be able to double their investment at the earliest. No specific time, however, was given but it was assured that the amount would be doubled at the earliest and it would be paid on the basis of seniority.
Under the scheme, the amount of Rs. 1250 will be paid to the unit-holder as soon as 14 more members are enrolled. The idea appeared to be very attractive and the membership collection during a short period reached to almost Rs. 500 crore (five billion). There was aggressive publicity and marketing through visual and print media. More and more amounts were coming into the kitty of the promoters from unit holders.
Suddenly, however, there is a jolt to the scheme. Police authorities registered a crime against the promoters for an offence punishable under Section 420 of IPC (cheating) read with Section 34 (joint liability) and under Sections 4 and 5 read with Sections 2(c) and 3 of the PCMC Act, 1978 and Sections 45 -I (bb) 45-S and 58-B of the Reserve Bank of India Act, 1934. The High Court confirmed the trial court framing of charges.
When the case reached the Supreme Court, in this case, it was held that both the essentials of Section 2(c) of the Act are present. The scheme provides for (i) making of quick of easy money and (ii) it is dependent upon an event or contingency relative or applicable to the enrollment of members into the scheme. A member would be entitled to double the amount only when after his enrollment, additional 14 members are enrolled in the scheme. The second ingredient such payment of money is dependent on the 'event or contingency relative or applicable to the enrollment of members into the scheme' is thus very much present. The contention that there is no obligation on the part of the unit-holder to enroll more members has no force. Section 2 (c) nowhere provides that a member of the scheme must himself, enroll other members. The requirement of law is 'an event or contingency relative or applicable to the enrollment of members into the scheme' and nothing more. The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrollment of the members into the scheme. It is immaterial by whom such members are enrolled. The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrollment of more persons into the scheme, nothing more though nothing less. In the present case, the second ingredient is very much present.
It is clear in the advertisement, a member would get double the amount when after his enrollment, two members were enrolled under him and thereafter, 4 other persons were enrolled under them and after their enrollment 8 persons were enrolled under them. Thus only after 14 persons under the first enrolled person become members under the scheme, the first person would get Rs. 1250 i.e. double the investment. It must be evident for any discerning mind that this scheme cannot work unless more and more subscribers join.
The Supreme Court stated that there is no reason to assume that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders. The Court took note that the fact that inherently there is merit in the allegation of the prosecution that the scheme so grossly unworkable that the persons who made representations to that effect and induced persons to part with money did entertain the contumacious intention.
The Supreme Court upheld the High Court observation that the promoters very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew full well that it could not work successfully. It could work for some time in that "Paula can be robbed to pay Peter" but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money. If it is so, it could be said to be a case for application of Section 420 (cheating) read with 34 (joint liability) of IPC of course at this stage.
The Supreme Court, thus, dismissed the appeals.

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