The liability of directors and persons managing a company that accepts deposits has important criminal-law consequences, particularly where the company defaults in repayment of deposits.
A significant judgment of the High Court of Kerala in Crl.A. No. 2318 of 2024, Biju Raphel & Others v. State of Kerala & Another, decided on 11 September 2026, considered whether the Managing Director and Directors of a deposit-taking company could be prosecuted under the Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act) when the company itself had not been arrayed as an accused.
The Court also examined the distinction between cheating under Section 420 of the IPC and criminal breach of trust under Section 406 of the IPC in the context of deposit transactions.
The judgment is particularly relevant to directors, depositors, companies involved in financial activities and practitioners dealing with prosecutions arising from deposit defaults.
1.Background of the case
The case arose from a prosecution relating to a company described in the judgment as Chirayath Benefit Fund Nidhi Limited (“Nidhi Ltd.”).
According to the prosecution, Accused No.1 was the Managing Director and Accused Nos.2 and 3 were Directors of the company. One of the accused had also started a branch at Kunnumpuram.
The prosecution alleged that the company accepted deposits from members of the public despite the applicable restrictions and that the depositors were promised high rates of interest.
The judgment records that three depositors had deposited:
₹15,15,000/- by PW1;
₹5,00,000/- by PW2; and
₹2,95,000/- by PW3.
The total amount involved was therefore ₹23,10,000/-.
According to the prosecution, after maturity, the amounts and promised interest were not returned.
The Special Court convicted the accused under:
* Sections 406 and 420 read with Section 34 of the IPC;
* Section 4 read with Section 22 of the BUDS Act; and
* Section 5 of the Kerala Protection of Interests of Depositors in Financial Establishments Act, 2013 (KPIDFE Act).
The accused challenged the conviction before the Kerala High Court.
2.The principal legal question: Is the company required to be made an accused?
One of the principal arguments raised on behalf of the appellants was that the deposits had actually been accepted in the name of Nidhi Ltd., which was a separate legal entity.
The deposit receipts were issued in the name of the company. Therefore, according to the appellants, the company was the actual “deposit taker”.
However, the company itself had not been arrayed as an accused.
The argument was that the Managing Director and Directors could not be prosecuted merely on the basis of their positions in the company, particularly on the principle of vicarious criminal liability.
The appellants relied upon several Supreme Court and High Court decisions concerning the prosecution of directors and officers of companies.
The Kerala High Court, however, rejected this contention in the context of Section 25 of the BUDS Act.
3.What does Section 25 of the BUDS Act provide?
Section 25 of the BUDS Act deals with offences committed by a deposit taker which is not an individual.
The provision states, in substance, that where an offence under the Act has been committed by a deposit taker other than an individual, persons who were in charge of and responsible to the deposit taker for the conduct of its business, as well as the deposit taker, are deemed to be guilty and liable to be proceeded against and punished.
Section 25(2), however, provides a statutory defence where the person proves that:
- the offence was committed without his knowledge; or
- he exercised all due diligence to prevent the commission of the offence.
Section 25(3) additionally deals with situations where the offence is committed with the consent or connivance of, or is attributable to the neglect of, a director, manager, secretary, promoter, partner, employee or other officer.
4.Kerala High Court’s interpretation of Section 25
The Court considered the language and legislative purpose of Section 25(1).
According to the Court, the provision creates liability not merely against the deposit-taking entity but also against persons who, at the relevant time, were in charge of and responsible for the conduct of its business.
The Court observed that where the deposit taker is a company or another non-individual entity, liability under Section 25 is not confined to the entity itself.
It can extend to the persons responsible for the conduct of its business.
At the same time, Section 25(2) provides an express statutory defence based upon lack of knowledge or due diligence.
This is an important feature of the judgment.
The practical proposition
The judgment establishes, on the facts and statutory framework considered by the Court, that:
The mere fact that the deposit-taking company has not been arrayed as an accused does not, by itself, absolve persons who otherwise fall within Section 25(1) of the BUDS Act.
The Court expressly rejected the argument that non-arraying of Nidhi Ltd. automatically vitiated the prosecution against the Managing Director and Directors.
5.Why the BUDS Act position is significant
Ordinarily, criminal liability of directors cannot simply be presumed merely because a person holds the office of director.
Criminal liability is generally dependent upon the language of the statute creating the offence and the conditions under which liability can be imposed upon persons connected with a company.
Section 25 of the BUDS Act contains a specific statutory mechanism for extending liability to persons responsible for the conduct of the business of the deposit taker.
The Kerala High Court therefore treated Section 25 as having a specific legislative purpose.
For persons involved in managing a deposit-taking entity, the judgment demonstrates the importance of examining:
* their actual role in the business;
* whether they were in charge of and responsible for the conduct of the business;
* their knowledge of the transactions;
* the circumstances surrounding acceptance of deposits;
* compliance with applicable regulatory requirements; and
* whether due diligence was exercised to prevent the alleged offence.
The statutory defence under Section 25(2) is particularly relevant in this context.
6.Incorporation of a company does not itself authorise acceptance of public deposits
Another important aspect of the judgment concerns the legal significance of the company’s certificate of incorporation.
The Registrar of Companies had produced the certificate of incorporation of Nidhi Ltd.
The certificate specifically indicated that incorporation did not itself constitute a licence or permission to conduct business or solicit deposits or funds from the public, and that permission from the relevant sector regulator would be necessary wherever required.
The Court therefore noted that the mere incorporation of a company does not automatically confer regulatory permission to undertake activities for which a separate licence, registration or regulatory approval is required.
This is an important compliance lesson for companies and their directors.
Company incorporation and regulatory permission are different things
A company may be validly incorporated under the Companies Act while still being prohibited from undertaking a particular regulated activity without the necessary statutory permission.
Therefore: Incorporation ≠ regulatory licence.
Companies and directors must separately examine the regulatory requirements applicable to the business they propose to conduct.
7.What is a “deposit taker” under the BUDS framework?
The BUDS Act is intended to provide a framework for banning unregulated deposit schemes and protecting the interests of depositors.
The judgment explains that:
* Section 3 deals with banning Unregulated Deposit Schemes;
* Section 4 deals with fraudulent default in Regulated Deposit Schemes;
* Section 5 deals with wrongful inducement in relation to Unregulated Deposit Schemes; and
* Section 6 identifies certain schemes as Unregulated Deposit Schemes.
In the present case, the conviction under consideration included Section 4 read with Section 22 of the BUDS Act.
Section 4 prohibits a deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, from committing fraudulent default in repayment or return of the deposit upon maturity or in rendering a specified service promised against the deposit.
Section 22 prescribes the punishment for contravention of Section 4.
8.Difference between deposit default and cheating
An especially interesting part of the judgment concerns the charge under Section 420 IPC.
The defence argued that the depositors had received interest for a substantial period. Therefore, it could not safely be concluded that there was a dishonest intention to cheat them at the inception of the transaction.
The High Court accepted this contention.
The Court noted that PW1 had categorically stated that interest had been received for a period of one year. In those circumstances, the Court held that it was not safe to conclude that the accused had a deceitful intention at the inception sufficient to attract Section 420 IPC.
Consequently, the conviction under Section 420 read with Section 34 IPC was set aside.
9.Cheating and criminal breach of trust are conceptually different
The judgment also refers to the Supreme Court decision in Saminathan G. v. State, as well as the principle discussed in Delhi Race Club (1940) Ltd. v. State of U.P.
The distinction is important.
Cheating
For cheating, the prosecution has to establish dishonest or fraudulent intention associated with the inducement, including the requirement that the dishonest intention existed at the inception of the transaction.
Criminal breach of trust
Criminal breach of trust involves:
- entrustment of property or dominion over property; and
- dishonest misappropriation, conversion, use or disposal in violation of the applicable legal obligation or contract.
The High Court emphasised that the ingredients of Sections 406 and 420 are materially different.
The Court therefore held that the offences under Sections 406 and 420 IPC could not both be sustained on the same factual foundation in the circumstances considered in the case.
10.What must be proved for criminal breach of trust?
The judgment provides a useful discussion of the ingredients of Section 406 IPC.
The Court identified the essential requirements as including:
* entrustment of property or dominion over property;
* dishonest misappropriation or conversion;
* dishonest use or disposal contrary to law or contract; and
* the necessary dishonest intention.
The prosecution must prove the relevant ingredients beyond reasonable doubt.
The judgment further emphasises that mere failure to account for property does not automatically amount to criminal breach of trust.
There must be dishonest misappropriation or conversion.
The Court also noted the distinction between a civil wrong and criminal breach of trust: negligence or misconduct causing loss may create civil liability, but criminal liability requires the additional element of dishonest misappropriation or conversion.
11.Section 5 of the Kerala Protection of Interests of Depositors Act
The prosecution also relied upon Section 5 of the Kerala Protection of Interests of Depositors in Financial Establishments Act, 2013.
The provision, as extracted in the judgment, concerns default by a financial establishment in:
* returning deposits;
* paying interest on deposits; or
* providing the promised service or property against the deposit.
It provides for criminal liability of every person responsible for the management of the affairs of the financial establishment upon conviction.
The High Court ultimately confirmed the conviction under Section 5 of the KPIDFE Act in this case.
12.The Court confirmed the BUDS Act conviction
After re-appreciating the evidence, the High Court concluded that the contentions raised by the appellants did not dislodge the findings relating to:
* Section 406 read with Section 34 IPC;
* Section 4 read with Section 22 of the BUDS Act; and
* Section 5 of the KPIDFE Act.
The Court specifically held that the Special Court was right in finding the commission of those offences.
However, the conviction under Section 420 read with Section 34 IPC was set aside.
13.Compensation to depositors enhanced
The total amount deposited by PW1 to PW3 was recorded as ₹23,10,000/-.
While considering the sentence, the High Court modified the compensation payable from the fine amount.
The Court directed that, upon realisation of the fine amount:
₹35,00,000/- should be given to PW1;
₹14,00,000/- should be given to PW2; and
₹7,00,000/- should be given to PW3.
The conviction and sentence in respect of the other offences were otherwise confirmed.
The Court also cancelled the order suspending the sentence and granting bail and directed the appellants to surrender before the Special Court to undergo the modified sentence.
14.Key legal takeaways from the judgment
The judgment provides several practical points for companies, directors and depositors.
i.Non-arraying of the company is not necessarily fatal
Under Section 25 of the BUDS Act, the mere failure to array the deposit-taking company as an accused does not automatically absolve persons who independently fall within the statutory liability contemplated by Section 25(1).
ii. Directors’ liability depends upon the statutory framework
The liability of directors in a criminal proceeding must be examined with reference to the specific statutory provision creating such liability.
In this case, Section 25 of the BUDS Act was central to the Court’s conclusion.
iii.Section 25(2) provides a statutory defence
A person covered by Section 25(1) may rely upon the statutory defence that the offence was committed without his knowledge or that he exercised due diligence to prevent its commission.
iv. Incorporation is not the same as regulatory permission
A certificate of incorporation does not by itself authorise a company to undertake activities requiring separate regulatory permission.
v. Deposit default does not automatically establish cheating
The prosecution must establish the ingredients of cheating, including the requisite dishonest intention at the inception of the transaction.
The High Court found that the evidence in this case did not safely establish such intention and therefore set aside the Section 420 conviction.
vi. Criminal breach of trust requires more than non-payment
For Section 406 IPC, entrustment and dishonest misappropriation/conversion must be established. Mere failure to account or repayment difficulties, without the required dishonest element, do not automatically constitute criminal breach of trust.
15. Why this judgment matters for directors of financial establishments
The judgment highlights the importance of understanding the difference between corporate status and personal criminal liability.
A director cannot assume that because a transaction was entered into in the name of the company, criminal exposure can never extend to the individuals managing the company.
At the same time, the statutory requirements for individual liability remain important. Section 25 of the BUDS Act specifically refers to persons who are in charge of and responsible to the deposit taker for the conduct of its business, while also providing statutory defences.
Accordingly, directors and officers involved in deposit-taking activities should carefully maintain records concerning:
* regulatory licences and approvals;
* board decisions;
* deposit acceptance policies;
* compliance procedures;
* financial records;
* repayment arrangements;
* communications with depositors;
* internal allocation of responsibilities; and
* steps taken to ensure compliance with applicable deposit regulations.
Such documentation may become significant if criminal proceedings are subsequently initiated.
Conclusion
The Kerala High Court’s judgment in Crl.A. No. 2318 of 2024 provides an important examination of criminal liability arising from deposit-taking activities.
The central proposition is that, under Section 25 of the BUDS Act, the mere non-arraying of a company that acted as the deposit taker does not, by itself, prevent prosecution of persons who otherwise fall within the statutory category of persons responsible for the conduct of its business.
At the same time, the judgment demonstrates that different criminal offences have distinct ingredients. The Court set aside the conviction for cheating because the evidence did not establish the necessary dishonest intention at the inception of the transaction, while confirming the findings relating to criminal breach of trust, the BUDS Act and the KPIDFE Act.
For directors and persons managing financial establishments, the case underlines the importance of regulatory compliance, proper documentation, due diligence and a clear understanding of personal liability under special penal statutes.
Case: Biju Raphel & Others v. State of Kerala & Another
Court: High Court of Kerala at Ernakulam
Case No.: Crl.A. No. 2318 of 2024
Date of Judgment: 11 September 2026
Judge:Hon’ble Mr. Justice A. Badharudeen
CNR: KLHC011606072024
Citation: 2026:KER:70384