The State of Karnataka & Ors. V The Karnataka Pawn Brokers Assn. & Ors.

CIVIL APPEAL NO. 5793 OF 2008

DECIDED ON 15/03/2018

A two-judge bench of the Apex Court, headed by Justices MADAN B. LOKUR and DEEPAK GUPTA, set aside the judgment of the High Court of the Karnataka.

The case was that The State of Karnataka enacted the Karnataka Money Lenders Act, 1961 ( M.L. Act) with a view to regulate and control the transactions of money lending in the State and simultaneously enacted the Karnataka Pawn Brokers Act, 1961 ( P.B Act) to regulate and control the business of pawn brokers. The only difference is that a pawn broker is authorized to accept valuable articles like gold, gold ornaments etc. as pledge for security of the payment. In the year 1985, amendments were brought out to both the Acts. Section 7-A & 7-B were introduced in the M.L. Act and corresponding Sections 4-A & 4-B were introduced in the P.B. Act. These amendments provided that the persons desirous of obtaining a licence had to deposit a security and the rate of security was fixed slab-wise in relation to the extent of business carried on by the licensee.

A large number of pawn brokers and money lenders challenged these amendments. A Division Bench of the Karnataka High Court in Manakchand Motilal vs. State of Karnataka upheld the validity of these amendments. The Division Bench relying upon the judgment of the Supreme Court in Jagdamba Paper Industries (P) Ltd. vs. Haryana State Electricity Board held that the money lenders / pawn brokers were entitled to interest on the security deposits at the prevailing rate of interest payable by the scheduled banks on a fixed deposit for a period of one year. The State Government was also directed to make proper rules in this behalf.

No appeal was filed by the State of Karnataka against this judgment. However, the money lenders and pawn brokers filed an SLP which was dismissed. Thereafter the State framed certain rules pursuant to the directions of the Division Bench of the Karnataka High Court. These Rules were also challenged by the money lenders/pawn brokers.

The association of pawn brokers and money lenders filed writ petitions in the High Court of Karnataka challenging the constitutional validity of these amendments. The learned Single Judge dismissed the writ petitions but was allowed by the Division Bench and these amendments were held to be constitutionally valid.

This was further challenged in the Supreme Court through Special Leave Petition where appeals were partly allowed, the judgment of the High Court of the Karnataka was set aside and pending applications were disposed of.

It was further observed that:

• Section 7-A & 7-B of the M.L. Act and 4-A & 4-B of the P.B. Act were held valid from the date of their enactment;
• That the provisions making these amendments retrospective from 1985 are illegal and invalid.