Delhi Cloth and General Mills, Vs.
Union of India, [1983] INSC 83 (21 July 1983)
DESAI, D.A.
DESAI, D.A.
ERADI, V. BALAKRISHNA (J) MISRA, R.B. (J)
CITATION: 1983 AIR 937 1983 SCR (3) 438 1983
SCC (4) 166 1983 SCALE (2)16
CITATOR INFO :
RF 1992 SC1033 (31)
ACT:
Companies Act, 1956-S. 58A-Companies
(Acceptance of Deposit) Rules, 1975-R 3A-Imposition of obligation on Companies
inviting/accepting deposits from public to deposit or invest 10 per cent of
deposits maturing during the year with a Scheduled bank or in government
securities, etc.
Constitutional validity of.
HEADNOTE:
Section 58A of the Companies Act, 1956
confers power on the Central Government to prescribe inter alia the conditions
subject to which deposits may be invited or accepted by a company either from
public or from its members. Sub-rule (1) of r. 3A of the Companies (Acceptance
of Deposits) Rules, 1975 obligates a company inviting deposits to deposit or
invest, before the 30th day of April of each year, a sum which shall not be
less than 10 per cent of the amount of its deposits maturing during the year
ending on the 31st day of March next following, according to any one or more of
the methods set out in that sub-rule.
Sub-rule (2) of r. 3A lays down that the
amount so deposited or invested shall not be used for any purpose other than
for repayment of deposits maturing during the year referred to in sub-r. (1).
The petitioners/appellants challenged the
constitutional validity of both s. 58A and r. 3A mainly on the ground that the
obligation imposed by r. 3A contravened the rights guaranteed under Arts. 14
and 19(1) (g).
The respondents raised a preliminary
objection to the maintainability of the writ petitions on the ground that an
incorporated company, being not a citizen, could not complain of denial or
deprivation of the fundamental right guaranteed by Art. 19(1) (g) and that the
situation was not improved by joining either a shareholder or a director as
co-petitioner.
Dismissing the petitions and appeals,
HELD: 1. (a) Rule 3A which makes it
obligatory to keep 10 percent of the deposits maturing in a year provides one
of the conditions subject to which deposits can be invited or accepted and,
indisputably, s. 58A confers power on the.
Central Government to prescribe by rules the
conditions subject to which deposits can be invited or accepted by companies.
This provision of 10 per cent deposit ensures repayment of deposits maturing in
the year and in order to enable the company to meet its obligation, a provision
is made in sub-r. (2) of r. 3A itself that the amount deposited or invested
under sub-r. (1) shall not be utilised for any purpose other than for repayment
of deposits maturing during the year referred 439 to in sub-r. (1). This
necessarily implies that the 10 per cent deposit can be utilised for refunding
the deposits maturing in a year and that in order to provide the company with
liquid finance to meet its obligation, the provision of compulsory deposit is
introduced. The contention that the protection afforded to the depositors by
rule 3A is neither adequate nor sufficient and therefore of doubtful utility
and accordingly must be rejected as arbitrary cannot be accepted. It is true
that the provision is not so effective as to ensure every depositor whose
deposit is maturing in the year to be fully paid out of the deposit amount. But
no regulatory or protective measure can be rejected as arbitrary on the short
ground that it fails to fully protect the person for whose benefit it is
enacted. Nor can the contention that having regard to the numerous in-built
safeguards in s. 58A, the imposition of 10 per cent compulsory deposit under r.
3A is in excess of requirements of protection to depositors and is therefore
unnecessary be accepted. No legal step can be said to be final or unnecessary
because social control has inevitably to follow to defuse abuses of economic
power. Undoubtedly, depositors with a company, unless otherwise indicated,
would be unsecured creditors and in the event of winding up of the company,
secured creditors and preferential creditors would score a march over them in
the distribution of the assets of the company. But every measure cannot be
viewed or interpreted in the event of a catastrophe overtaking the company. One
has to view the immediate object in view to achieve which the provision is made
and not its remote consequences.
[459 F-460 A; 460 D] (b) There cannot be any
quarrel with the proposition that where power is conferred to effectuate a
purpose and for that end in view to impose conditions, the conditions to be
valid must fairly and reasonably relate to the object sought to be achieved.
The power conferred by s. 58A on the Central Government to prescribe the limits
upto which, the manner in which and the conditions subject to which deposits
may be invited or accepted by non-banking companies had a definite object,
namely, to check the abuse of economic power by the corporate sector and to
protect the depositors.
It cannot be said that the conditions
prescribed by the Deposit Rules are so irrelevant or have no reasonable nexus
to the objects sought to be achieved as to be arbitrary.
These rules do operate to extend a measure of
protection against the notorious abuses of economic power by the corporate
sector. [463 E-H] Pyks Granaide Co. v. Ministry of Housing and Local Govt.
& Anr, [1958] I All England Reports 625; and Chertsey Urban District
Council v. Mixnam's Properties Ltd., [1965] A.C. 735 referred to.
(c) It is clearly discernible from the
marginal note of r. 3A that the requirement of 10 per cent deposit is a measure
to ensure that part of the funds of a company are kept as liquid assets
available for use for specified purpose. Even when the money is kept in
deposit, it remains the property of the company and available for its use
albeit as provided in the statute. It is well-known that economic planning may
provide for earmarked funds and if by voluntary self-discipline and sound
economic planning financial viability is not maintained, a Welfare State with
planned economy may impose statutory discipline in larger public interest. Such
disciplinary measures cannot be termed deprivatory in character. [461 C-E] 440
(d) The contention that since r. 3A cannot extend even a semblance of
protection to the depositor has to be viewed in the wider spectrum of
regulation of credit system of the country, control of circulation of money in
the economy and imposition of financial discipline on the corporate sector and
that when so viewed it would be clearly ultra vires s. 58A being far in excess
of the requirements of that section, ought to be rejected on the short ground
that r. 3A does extend some protection to the depositor howsoever minimal it
may be. When viewed in the context of various other provisions devised to
extend protection to depositors it does play a small but effective part.
[464 F-H] (e) The contention that the proviso
to r. 3A (1) is retrospective in operation inasmuch as it requires that in
relation to deposits maturing during the year ending 31-3- 1979 the sum
required to be deposited under that sub-rule shall be deposited before
30-9-1978 irrespective of the fact that such deposits might have been accepted
prior to the coming into force of r. 3A and hence r. 3A is ultra vires s. 58A
cannot be accepted. A statute is not properly called a retroactive statute
because a part of the requisites for its action is drawn from a time antecedent
to its passing.
Viewed from this angle the provision can be
properly called prospective and not retroactive. [466 C-G] D. S. Nakara v.
Union of India, [1983] 1 S.C.C. 305 referred to.
(f) The contention that the exclusionary
clause to the definition of 'deposit' contained in the Rules has been so widely
worded that only private sector companies have been arbitrarily signed out for
regulatory treatment overlooks the object and purpose underlying the enactment
of s. 58A and the Rules made thereunder. It is regulatory measure to checkmate
the abuses to which private sector corporations are prone to. If this object is
kept in view, the exclusionary clause explains itself. [468 H-469 B]
2. (a) Even prior to the introduction of s.
58A, the Reserve Bank of India had been empowered to regulate the acceptance
and repayment of deposits by non-banking companies. It is manifest from the
Statement of Objects and Reasons appended to the 1974 Amendment Act which
incorporated s. 58A in the Companies Act that the legislature, having become
aware that the regulatory measures introduced by the Reserve Bank had not
effectively protected the depositors, felt that the needs of the time
necessitated introduction of statutory provisions enabling the Central
Government to take effective measures.
Experience had shown that deposits taken by
companies were not being refunded on due dates and in many cases either the
companies had gone into liquidation or had no funds to refund the deposits.
Section 58A, amongst various other things, was designed to introduce some
measure of control over the non-banking companies inviting and accepting
deposits in the ultimate interest of the depositors and to meet cases of abuse
or distortion of the system. The section must receive its legitimate
construction in the back-drop of this fact situation. The interpretation has to
be such as to achieve the purpose of imposing a measure of social control to
remedy the mischief, to suppress which the provision was enacted. Company is
not a field of legislation in which finality is to be expected, as the law
falls to be applied to a growing and challenging subject matter and growing use
of the company system as an 441 instrument of business and finances and the
possibilities of abuse inherent in that system. A vigilant Parliament keeping a
close watch over this corporate sector wielding considerate economic power has
to take steps by doses to eradicate the abuses of economic power. [458 D-459 E;
462 E] (b) The charge of excessive delegation of essential legislative
functions is wholly untenable. The policy is do definite and the guidelines are
available from the history of the legislation and the Companies Act taken as a
whole.
The policy is the gradual, ever-widening and
effective control of the corporate sector so as to ensure a measure of
protection to the persons dealing with it and to minimise the abuses of
economic power by that sector. The wisdom of the policy is not for the Court to
examine. And in economic legislation, the Court should feel more inclined to
judicial deference to legislative judgment. The Deposit Rules have been framed
in exercise of power conferred under ss. 58A and 642, and s. 642 requires that
every rule framed in exercise of the power conferred by it must be placed
before each House of Parliament for a period of thirty days and both Houses
have power to suggest modification in the proposed rules. This control of
Parliament is sufficient to check any transgression of permissible limits of
delegated legislation by the delegate.
[466 A, D, 465 G, 466 E-F] R. K. Garg etc. v.
Union of India, [1982] 1 S.C.R. 947;
Prag Ice & Oil Mills & Anr. v. Union
of India, [1978] 3 S.C.R. 292; R. C. Cooper v. Union of India, [1970] 3 S.C.R. 530;
D.S. Garewal v. State of Punjab & Anr., [1959] Supp. S.C.R. 792, referred
to.
(c) Parliament had the legislative competence
to enact s. 58A. Applying the doctrine of pith and substance, s. 58A which is
incorporated in the Companies Act is preferable to Entries 43 and 44 in the
Union List and the enactment viewed as a whole cannot be said to be legislation
on "money- lenders and money-lending" or being referable to Entry 30
in the State List. [466 B, A] A.S. Krishna v. State of Madras, [1957] S.C.R.
399;
Ishwari Khaitan Sugar Mills v. U.P. State,
[1980] 3 S.C.R. 331; Union of India v. H.S. Dhillon, [1972] 2 S.C.R. 33;
Kerala State Electricity Board v. Indian
Aluminium Company, [1976] 1 S.C.R. 552; and State of Karnataka v. Ranganath
Reddy, [1978] 1 S.C.R. 641, referred to.
3. The objection that a company, being not a
citizen, cannot complain of denial of the fundamental right conferred by Art.
19(1) (g), is an of treated contention whenever the petitioner is an
incorporated company but the law in this behalf is in a nebulous state; that
apart, the trend is in the direction of holding that in the matter of
fundamental freedoms guaranteed by Art. 19 the rights of a shareholder and the
company which the shareholders have formed are rather co-extensive and the
denial to one of the fundamental freedom would be denial to the other. It is
time to put an end to this controversy but in the present state of law the
petitions cannot be thrown out at the threshold. [451 C-G, 453 A-E] State
Trading Corporation of India Ltd. v. Commercial Tax Officer, Vishakhapatnam
[1964] 4 S.C.R. 99; Tata Engineering and Locomotive Company v.
442 State of Bihar, [1964] 6 S.C.R. 885; R.
C. Cooper v. Union of India, [1970] 3 S.C.R. 530; and Bennett Coleman and Co. v.
Union of India, [1973] 2 S.C.R. 757, referred to.
Divisional Forest Officer v. Bishwanath Tea
Co., A.I.R.
1981 S.C. 1368; and Western Coal Fields Ltd.
v. Special Area Development Authority, A.I.R. 1982 S.C. 697 not relevant to the
contention raised.
ORIGINAL JURISDICTION : W.P. Nos. 1637, 1733,
1933-35, 1952, 1961-62, 1963-64, 2002-03, 2007, 2021, 2085, 2109-12, 2114,
2189, 2837, 3131, 3354, 3643, 4233, 4681, 5723, 7447, 7624 of 1981 & 2628,
2835, 3471, 4310, 4382, 4385, 8513, 2404, 2748, 5507, 5508, 2499, 2748 &
9341 of 1982.
AND C.A. Nos. 747-68, 850-52, 769-73, 854,
941, 1091 & 1417 of 1981.
From the Judgment and Order dated the 5th
December, 1980 of the Gujarat High Court in Special Civil Application Nos. 1138
to 1148, 1150, 1151, 1153-1155, 1166-67, 1170, 1928 of 1978, 868-869 of 1980,
1152, 2503 of 1978, 1252/80 and 1186, 1863, 1149, 1187, 1185, 1128, 1188, 1184
& 1190 of 1978.
AND Civil Appeal No. 1535 of 1981 From the
Judgment and Order dated the 15th April, 1981 of the Gujarat High Court in
Special Civil Application No. 1281 of 1981.
AND Civil Appeal No. 3013 of 1981.
Appeal by Special leave from the Judgment and
Order dated the 9th July, 1979 of the Allahabad High Court in Civil Mis. W.P.
No. 8426 of 1978.
WITH
Special Leave Petition (Civil) No. 4454 of 1982.
443 From the Judgment and order dated the
21st April 1982 of the Delhi High Court in C.W.P. No. 1165 of 1982.
The 21st nay of July, 1983.
For the Petitioners:
Mr. S.S. Ray, H.K Puri and V.K. Bhal in W.P.
1637/81.
H.K. Puri in WP. No. 8513 of 81.
O.P. Malhotra, Harish Salve, P.H. Parekh and
Divyang K. Chhaya in WP. Nos. 2085 and 3131 of 1981.
R.P. Bhatt, Ravinder Narain, O.C. Mathur,
Mrs. A.K. Verma, Talat Ansari, D.N. Mishra. Miss Meera Mathur and Sukumaran in
WP. No. 1935 of 1981.
Harish Salve, Ravinder Narain, O.C. Mathur
and D.N. Misra in WP. No. 1733/81. O.C. Mathur, D.N. Mishra, Sukumaran, Sanjay,
Mrs. A.K Verma and Miss Meera Mathur in WP. Nos. 1933, 1934, 1952, 2002, 3643,
7643, 7624 of 1981.
A.N. Haksar, O.C. Mathur., Mrs. A.K Verma,
Sukumaran, Miss Meera Mathur, Ravinder Narain and Sanjay in WP. No. 2021 of
1981.
P.C. Cokhale, B.R. Agarwala and Miss
Vijayalakshmi Menon in WP. No. 2007 of 1981.
P.C. Bhartari in WP. Nos. 1961-64 of 1981.
A. Subba Rao in WP. Nos. 2003/81 and 2404/82.
C.A. Shah, Srikumar and Mr. M.N. Shroff in
WP. Nos.
2109-2112/81, 7447, 2837, 3354, 4233/81 and
5507-08/82.
V.J. Francis in WP. No. 2114/81 S.S. Khanduja
in WP. Nos. 2189/81 and 2628/82.
444 S.K Gambhir in WP. No. 4681/81.
M.G. Ramachandran in WP. No. 3471 of 1982
R.P. Kapur in WP. Nos. 4310, 4382 and 4385 of 1982.
P.K. Mukherjee in WP. No. 2748 of i982.
O.C. Mathur and D.N. Misra in WP. No.
5723/81.
Shri Narain in WP. No. 2835/82.
M.N. Shroff in WP. Nos. 2499 and 9341/82 For
the Appellants in Appeals S.T. Desai, Harish Salve, Ravinder Narain, O.C.
Mathur, Mrs. A.K. Verma, O.C. Gandhi, Talat Ansari, Sukumaran, Miss Meera
Mathur and D.N. Mishra in C.A. Nos. 747-68 of 1981.
D.N. Mishra in CA. Nos. 850-52 and 1535 and
1091 of 1981.
P.C. Bkartari in CA. Nos. 769-773, 854, 941
and 1417/81.
Ashok Grover in SLP No. 4454 of 1982.
S.T. Desai and Anil Sharma in CA. No. 3013 of
1981.
For the Respondents in all the matters:
L.N. Sinha, Attorney General, MsA. Subhashini
and P.P. Singh.
The Judgment of the Court was delivered by
DESAI, J. In this group of writ petitions under Art. 32 and appeals by special
leave under Art. 136 of the Constitution, constitutional validity of Rule 3A of
the Companies (Acceptance of Deposit) Rules, 1975 ('Deposits Rules' for short)
introduced by Companies (Acceptance of Deposits) Amendment Rules, 1978 which
became operative from April 1, 1978 and incidentally of sec. 58A of the
Companies Act, 1956 ('Act' for short) inserted by Companies (Amendment) Act,
1974 which came into force on February 1, 1975 is challenged. The challenge
proceeds on diverse grounds which may be briefly summarised.
445 At the very outset, it must be noticed
that the factual matrix has little or practically no relevance in this case.
The contention put in the forefront was that
in the absence of guidelines both sec. 58A and the Rule 3A of the Deposits
Rules enacted in exercise of the power conferred by sec. 58A confer arbitrary
and uncanalised powers and hence are violative of Art. 14. Contravention of
Art. 14 was canvassed for the additional reason that the power to exempt from
the application of the rule confers wide discretion so that it can be used
arbitrarily to pick and choose with the result that equality before law is
denied. Further the obligation to deposit 10% of the deposits maturing during
the year ending 31st March next following has no rational nexus to the object
sought to be achieved by the provisions and is either in excess of the
requirement or irrelevant and in any case arbitrary. The next in order of
priority came the challenge that having regard to the numerous inbuilt
safeguards provided hl sec. 58A, the imposition of a liability to deposit 10%
of the total deposits maturing in a year in the manner as required by the
impugned rule, if it was enacted for the protection of the depositors, the
protection is illusory and does not subserve the purpose for which it is
enacted and therefore, requirement is wholly unreasonable and imposes an
unreasonable restriction on the freedom to carry on business conferred by Art.
19 (1)(g). As a corrolary, it was submitted that if Rule 3A is enacted not for
the limited purpose of protecting depositors, but has a wider aim particularly
with regard to the regulation of credit system of the country, control of
circulation of money in India's economy and imposing financial discipline, it
is clearly ultra vires sec. 58A. As a second string to the bow, it was
contended that if sec. 58A enacts a legislative policy, a rule framed to carry
out the policy must be relevant to the implementation of the policy so laid
down, but the provision contained in Rule 3A is neither relevant nor capable of
being regarded as relevant for implementation of the policy and therefore, it
is ultra vires sec. 58A.
Mr. S.T. Desai, who appeared in some matters
further contended that if sec. 58A is widely construed to encompass the mode or
manner of utilisation of the funds of the company which will include the
deposits made with the company, obviously sec. 58A itself will be rendered
unconstitutional as transgressing the permissible limits of delegated
legislation and it would appear that the Legislature was guilty of abdication
of its essential legislative 446 functions. It was said that Rule 3A cannot be
saved as a regulatory measure because the regulatory measure must subserve some
purpose which Rule 3A fails to achieve, namely, protection of depositors and in
examining the matter, the Court should eschew a dogmatic or doctrinaire
approach.
Mr. O.P. Malhotra, learned counsel appearing
in some matters raised an additional contention that Parliament did not have
legislative competence to enact sec. 58A and ipso facto Rule 3A because the
legislation is referable to Entry 30 in the State List: Money lending and money
lenders;
relief to agricultural indebtnees and not to
Entries 43 and 44 of the Union List.
Mr. G.A. Shah, appearing in some matters
raised an additional contention that to the extent limited retrospectivity is
given to Rule 3A, it is ultra vires sec.
58A and the Constitutions.
Mr. A. Subba Rao, learned counsel appearing
in some other matters canvassed one more contention when he urged that the
obligation to deposit 10% of the amount of deposits maturing in the year constitutes
temporary deprivation of property without any countervailing obligation or
benefit and therefore it is ultra vires the Constitution.
The learned Attorney General appearing for
the Union of India raised a preliminary objection that the writ petitions under
Art. 32 or those filed in the High Court under Art.
226 were not maintainable because the
incorporated company being not a citizen, freedom guaranteed by Art. 19 (1) (g)
is not secured to it, and situation would not b. improved by merely impleading
a Director or a shareholder as one of the petitioners because company has a
juristic personality independent of the shareholders and the Directors and
trade or business carried on by the company cannot be said to be the trade or
business carried on by the Director or Shareholders. And to keep Art. 14 out of
the way, it was urged that it is merely a facade to invoke the jurisdiction of
this Court. It was next urged that sec. 58A enacts a legislative policy, and
wisdom or necessity of the policy is in the domain of the Legislature and the
Court R never undertakes to examine the wisdom or otherwise of the legislative
policy. Proceeding along this line, it was said that if Rule 3A is enacted for
the implementation of the legislative policy, the Court is precluded from
examining the wisdom or otherwise of the 447 policy; because legislature is the
best Judge in this behalf. It was urged that the charge of excessive delegation
is unsustainable because the legislative policy underlying the provision was
devised after consulting and obtaining guidance of an expert body like the
Reserve Bank' of India and the relevant rules were placed before the Parliament
which had complete control over the rules and exemption or exclusionary clause
can be properly implemented because of the guidance available from the scheme
of the Act as also the purpose and object underlying the impugned provision. An
alternative submission was that the Court need not undertake the examination of
the validity of the exemption provision because it is severable and its
invalidity will not affect the rest of the scheme if it was otherwise valid. In
answer to the contention whether the impugned rule has nexus to the objects
sought to be achieved and the effectiveness of the rule, it was submitted that
firstly sec. 58A must receive such interpretation as would suppress the
mischief and advance the remedy. It was pointed out that the mischief which was
sought to be remedied is clearly discernible from the Statement of objects and
Reasons as also the notes on clauses published while introducing 1974 Amendment
Act. It was next urged that if the rule imposes a restriction on the
fundamental freedom to carry on trade or business, the same is reasonable
because it is of a regulatory nature enacted with a view to protecting
depositors coming from a socially and economically weaker section who may be
tempted by the alluring promises made in an advertisement inviting deposits
with no umbrella of protection when the company folds up its tent; becomes sick
and in winding-up, the depositor has to stand in a queue as an unsecured
creditor. It was lastly submitted that even if it can be said that there was
limited retrospectivity, the same is permissible because the mere fact that a
part of the requisite for the application of the rule is derived from an
anterior date by itself will not make it retrospective.
Before we examine the various contentions
summarised here, a brief review of the relevant provisions of the Act and the
Deposits Rules would be advantageous. The Companies Act. 1956 was enacted to
consolidate and amend the law relating to companies and certain other
associations. Sec. 58A was introduced by the Companies (Amendment) Act, 1974.
The relevant portion of sec. 58A is extracted
hereunder:- "58A: Deposits not to be invited without issuing an
advertisement: (1) .......
448 (2) No company shall invite, or allow any
other person to invite or cause to be invited on its behalf any deposit
unless:- (a) such deposit is invited or is caused to be invited in accordance
with the rules made under sub-sec. (1) and (b) an advertisement, including
herein a statement showing the financial position of the company, has been
issued by the company in such form and in such manner as may be prescribed.
(3)(a) Every deposit accepted by a company at
any time before the commencement of the Companies (Amendment Act, 1974 in
accordance with the directions made by the Reserve Bank of Indian under Chapter
III B of the Reserve Bank of India Act, 1934 (2 of 1934), shall, unless renewed
in accordance with clause (b) be repaid in accordance with the terms of such
deposit .
(b) No deposit referred to in . clause (a) be
renewed by the company after the expiry of the term thereof unless the deposit
is such that it could have been accepted if the rules made under sub-sec. (I)
were in force at the time when the deposit was initially accepted by the Company.
(c) Where, before the commencement of the
companies (Amendment) Act, 1974, any deposit was received by a company in
contravention of any direction made under Chapter III of the Reserve Bank of
India Act, 1934 (2 of 1934), repayment of such deposit shall be made in full on
or before the 1st day of April, 1975 and such repayment shall be without
prejudice to any action that may be taken under the Reserve Bank of India Act,
1934 for the acceptance of such deposit in contravention of such direction.
(4) Where any deposit is accepted by a
Company after the commencement of the Companies (Amendment Act, 1974, in
contravention of the rules made under sub- 449 section (1), repayment of such deposit
shall be made by the company within thirty days from the date of acceptance of
such deposit or within such further time, not exceeding thirty days, as the
Central Government may, on sufficient cause being shown by the company, allow.
...........
...........
(7) (a) Nothing contained in this section
shall apply to:- (i) a banking company, or (ii) such other company was the
Central Government may, after consultation with the Reserve Bank of India,
specify in this behalf.
(b) Except the provisions relating to
advertisement contained in clause (b) of sub- section (2), nothing in this
section shall apply to such classes of financial companies as the Central
Government may, after consultation with the Reserve Bank of India, specify in
this behalf." In exercise of power conferred by sec. 58A read with sec.
642 of the Act, Central Government enacted and promulgated the Companies
(acceptance of Deposits) Rules, 1975. Rule 2B defines 'deposit' to mean any
deposit of money with, and included any amount borrowed by a company; but does
not include what is set out in subclauses (i) to (x).
Rule 3 prescribes conditions subject to which
the deposits may be accepted. Deposits against unsecured debentures or deposits
from share-holders of a public company or deposits guaranteed by any person,
who at the time of giving the guarantee, is a director of the company, together
with short-term deposits, if any, accepted shall not exceed 10% of the paid-up
capital and free reserves of the company. Any deposit other than those
mentioned herein before shall not exceed 25% of the paid-up capital and free
reserves of the company. No deposit for a term less than six months and
exceeding thirty-six months can be accepted save what is called short-term
deposit as set out in the proviso to rule 3(1)(b). A ceiling on the rate of
interest was imposed at 15% per annum (See 450 rule 3). Then comes Rule 3A
which is the centre of this fierce controversy. It may be reproduced in
extenso:
"3A. Maintenance of liquid assets:
(1) Every company shall, before the 30th day
of April of each year deposit or invest, as the case may be, a sum which shall
not be less than ten percent of the amount of its deposits maturing during the
year ending on the 31st day of March next following, in any one or more of the
following methods, namely:
(a) in a current or other deposit account
with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central
Government or of any State Government;
(c) in unencumbered securities mentioned in
clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act. 1882 (2 of
1882).
Provided that with relation to the deposits
maturing during the year ending on the 31 st day of March, 1979, the sum
required to be deposited or invested under this sub-rule shall be deposited or
invested before the 30th day of September, 1978.
Explanation: For the purposes of this sub-
rule, the securities referred to in clause (b) or clause (c) shall not be
reckoned at their market value.
(2) The amount deposited or invested, as the
case may be, under sub-rule (1), shall not be utilised for any purpose other
than for the repayment of deposits maturing during the year referred to in that
sub-rule, provided that the amount remaining deposited or invested, as the case
may be, shall not at any time fall below ten percent of the amount of deposits
maturing until the 31st day of March of that year," 451 Rule 4 prescribes
form and particulars of advertisement which must be issued for inviting
deposits. Rule 5 prescribes the form of application to be made for deposits and
Rule 6 makes it obligatory to furnish a receipt for the deposit. Rule 7
obligates the company to maintain register of deposits. Rule 10 requires the
company to file a return of deposits with the Registrar. These are the
conditions prescribed by rules subject to which deposits can be invited and
accepted. The challenge is confined to Rule 3A only which obligates the company
to deposit 10% of the deposits maturing during the prescribed year in the
manner set out in cl. (a), (b) and (c) of sub-rule 1 of rule 3A.
The learned Attorney General raised a
preliminary objection to the maintainability of the writ petitions filed in
this Court under Art. 32 and those filed in the High Court under Art. 226 of
the Constitution. The submission was founded on the ground that an incorporated
company being not a citizen for the purposes of Art. 19 and therefore it cannot
complain of the denial or deprivation of fundamental freedom guaranteed by Art.
19(1)(g) of the Constitution and the situation is not improved by joining
either a share- holder or a Director as co-petitioner. It was said that the
company has a juristic personality independent of the Director or a shareholder
and the business or trade carried on by the company is not that of either the
shareholder or the Director. As the corrolary, it was urged that even if the
impugned Rule 3A imposes an unreasonable restriction on the fundamental freedom
to carry on trade or business, this Court cannot entertain a petition under
Art. 32 nor the High Court can entertain one under Art. 226 of the
Constitution.
Frankly speaking, this is an oft repeated
contention whenever the F petitioner is an incorporated company but the law in
this behalf is in a nebulous state and therefore, it is not possible to throw
out the petition at the threshold.
More so because a petition under Art. 226 of
the Constitution can be filed by the company for any other purpose and also the
petitioners complain of violation of Art. 14 of the Constitution. The reasons
for stating that the law is in a nebulous state may briefly be mentioned. In
State Trading Corporation of India Ltd. v. The Commercial Tax Officer,
Visakhapatnam(1) and Tata Engineering & Locomotive Co. v. State of
Bihar,(2) this Court held that a Corporation was not a citizen within the
comprehension 452 of Art. 19 and therefore, could not complain of denial of
fundamental freedom guaranteed by Art. 19 to a citizen of this country. These
two decisions are an authority for the proposition that an incorporated company
being not a citizen could not complain of violation of fundamental freedom
guaranteed to citizens under Art. 19. But a different note was struck in R.C.
Cooper v. Union of India,(1) when it was held that 'a measure executive or legislative
may impair the rights of the company alone, and not of its share-holders;
it may impair the rights of the shareholders
as well as of the company. It was further held that jurisdiction of the Court
to grant relief cannot be denied, when by State action the rights of the
individual shareholder are impaired. if that action impairs the rights of the
company as well. In that case, the Court entertained the petition under Art. 32
of the Constitution at the instance of a Director and the shareholder of a company
and granted relief. The two conflicting trends in this behalf were noticed by
this Court in Bennett Coleman & Co. & Ors v. Union of India &
Ors.(2) where after review of the afore-mentioned decisions and several others,
it was held as under:- "As a result of the Bank Nationalisation case
(supra) it follows that the Court finds out whether the legislative measure
directly touches the company of which the petitioner is a shareholder. A
shareholder is entitled to protection of Art. 19. That invidiual right is not
lost by reason of the fact that he is a shareholder of the company. The Bank
Nationalization case (supra) has established the view that the fundamental
rights of shareholders as citizens are not lost when they associate to form a
company. When their fundamental rights as shareholders are impaired by State
action their rights as shareholders are protected. The reason is that the
shareholders' rights are equally and necessarily affected if the rights of the
company are affected. The rights of shareholders with regard to Article 19
(1)(a) are projected and manifested by the newspapers owned and controlled by
the shareholders through the medium of the corporation." 453 Our attention
was, however, invited to two later decisions:
(1) The Divisional Forest officer v
Bishwanath Tea Co. Ltd.(1) and (2) Western Coalfields Ltd. v. Special Area
Development Authority, Korba and another(2). But we can draw no assistance from
the aforementioned two cases because in the first case the question this Court
considered was whether a petition merely for refund of a tax paid under a
mistaken impression at the instance of a company can be entertained under Art.
226 and the question in the second case was whether the properties of a Govt.
company are exempt from levy of tax imposed by state or its delegate under Art.
285(1). The contention raised in these two cases does not touch the question
under examination. Thus apart from the law being in a nebulous state, the trend
is in the direction of holding that in the matter of fundamental freedoms
guaranteed by Art. 19, the rights of a shareholder and the company which the
shareholders have formed are rather coextensive and the denial to one of the
fundamental freedom would be denial to the other. It is time to put an end to
this controversy but in the present state of law we are of the opinion that the
petitions should not be thrown out at the threshold. We reach this conclusion
for the additional reasons that apart from the complaint of denial of
fundamental right to carry on trade or business, numerous other contentions
have been raised which the High Court had to examine in a petition under Art.
226. And there is a grievance of denial of ' equality before law as guaranteed
by Art. 14. We accordingly over-rule the preliminary objection and proceed to
examine the contentions on merits.
Let the camouflage of alleged violation of
fundamental right in these petitions not deceive any one; let no one be in
doubt that the petitions are filed to vindicate some fundamental rights encroachment
on which is resented. At the root lies the fierce and unending battle royal
between political power and economic power to gain ascendance one over the
other. Piercing the veil of legalese the core- question is the degree of social
control imposed by the State and resisted at every turn by the corporate sector
in the internal administration of corporate sector. Therefore, a bird's
eye-view of the development of company law which represents the State
intervention in management of companies would be advantageous.
454 Any scientific attempt at presenting the
history of company law in our country inevitably telescopes into the history of
company law in U.K. because more or less the framers of the company law in
India followed in the shadow of the development of the law in U.K. Corporate
sector wields tremendous economic power and this organised sector has
throughout challenged by all the means at its command, social control by
political institutions and more particularly the State. The law developed in
the footsteps of abuse by the corporate sector of its economic power and
dominating influence in the world of national and international industry, trade
and commerce. If uncontrolled, the result is disastrous and the infamous
South-Sea Bubble should be an eye-opener. The first and second decades of the
18th century were marked by an almost frenetic boom in company flotations. When
the flood of speculative enterprises was at its height, Parliament in U.K.
decided to intervene to check the gambling mania when it drew attention to the
numerous undertakings which were purporting to act as corporate bodies without
legal authority, practices which manifestly tend to the prejudice of the public
trade and commerce of the kingdom.(1) That which governs the least, governs the
best, the laissez faire doctrine was firmly entrenched. Since then at regular
intervals, the State control became more or less discernible in successive
company acts.
The State intervention into the functioning
of the corporate sector initially took the form of the prosecution for breach
of some of the laws, the first notable case being the one in November, 1807.
The Attorney General at the instance of a private relator sought criminal
information against two unincorporated companies both of which had freely
transferable shares and advertised that the liability of the members would be
limited. Lord Ellenborough in R. v. Dad(2) dismissed the application because of
the lapse of 87 years, since the Act was previously invoked but he issued a
stern warning that no one in the future could pretend that the statute was
obsolete aud indicated that 'a speculative project founded on joint stock or
transferable shares' was prohibited.
Returning to the native soil, the first
legislative measure to regulate the companies in India was the enactment of the
Joint Stock 455 Companies Act of 1850. It was amended in 1857, a notable
feature of the amendment being extension of limited liability benefit to
insurance and banking companies. The Amending Acts, one in 1866 and the other
in 1913 followed.
The Indian Companies Act of 1913 was a fairly
comprehensive measure taking into its stride the amendments in U.K. Companies
Act till then made. This Act was extensively amended in 1936 and again at
regular intervals thereafter.
The Government of India appointed a Committee
in 1950 under chairmanship of Shri Bhabha to consider amongst other things the
extent to which it was possible to adjust the structure and methods of the
corporate form of business management with a view to weaving an integrated
pattern of relationships as between promoters, investors and the management,
principal among them being the legitimate rights of investors and the interest
of creditor, labour and other partners in production and distribution may be
duly safeguarded and the attainment of the ultimate end of social policy
towards which the corporate sector must work. A comprehensive statute being Companies
Act of 1956 was enacted pursuant to the recommendations of the Bhabha Committee.
The two notable features of the 1956 Act from the point of view of the present
discussion are compulsory maintenance and audit of company accounts, and power
of inspection and investigation by the Central Government When the Act of 1956
functioned for a period of about a year and some difficulties surfaced in its
actual implementation, the Government of India appointed a committee under the
chairmanship of Justice A V. Vishwanatha Sastri, retired Judge of the Madras
High Court in May 1957 to examine the working of the Companies Act, 1956. The
terms of reference of the committee were quite wide. This Committee submitted
its Report in 1957, which led to the Companies (Amendment) Act, 1960. This
amendment was specifically directed to the safeguarding of the private
investment in the corporate sector. The Government of India acquired extensive
powers for regulation of the financial management of the private sector
companies, under the 1960 (Amendment) Act. In the meantime, the Government of
India having received numerous complaints of fraud, embezzlement of funds and a
gross irregularities in the companies controlled and managed by Dalmia-Jain
combine, appointed a Commission of Enquiry first presided over by Justice S.R.
Tendulkar and subsequently by Shri Vivian Bose, a retired Judge of the Supreme
Court of India. This Commission submitted its report in the fall of 1962.
Vivian Bose Enquiry Commission Report unearths the intrigue, abuse of trust
jugglery of company funds, misuse and abuse of positions of power 456 in the
management of the affairs of Dalmia-Jain Group of Companies as also criminal
breach of trust in respect of the funds of the Company reposed in the promoters
and controllers of the private companies and how they utilised the corporate
finances for their personal advancement. This report, led to the enactment of
Companies (Amendment) Act, 1965 which vastly increased the Governmental control
of the private sector companies. The Companies (Amendment) Act, 1974 which
inter alia introduced sec. 58A simultaneously ushered in vast changes in the
1956 Act making greater inroads by Central Government in the management of
companies governed by 1956 Act. A step by step study of the various amendments
would unmistakably reveal the greater and greater intervention and control by
State and this control was in direct proportion to the abuse of the economic
power wielded by the corporate sector.
The Companies Act of 1956 to some extent also
attempts to translate into action Art. 38 and 39 in Part IV of the Constitution
by which the State was directed that the ownership and control of the material
resources of the community are so distributed a best to subserve the common
good and the operation of the economic system does not result in concentration
of wealth and means of production to the common detriment. Further Art. 46
mandates the State to promote economic interests of weaker sections of the
people from. all forms of exploitation. A fortiori every provisions of the Companies
Act must receive such interpretation as to supress the mischief to remedy which
it was enacted and advance the object as also to achieve and translate into
action the underlying intendment of the enactment for the realisation of the
constitutional goals as set out in Part IV of the Constitution.
As a high priority promise of independence
laws directed to agrarian reforms rolled out from State legislatures in quick succession
Urban elite found it disadvantageous to invest their savings in agricultural
land. It is said that rent Restriction Acts were a disincentive for investment
in urban house property. Gold control measure dried up gold as a venue of
investment of savings. Bank. interests were discouraging. Social security in
old age being niggardly or nonexistent there was fascinating attraction for
deposits in non-banking companies. There was such tremendous rush in this
direction that even Banks stood aghast at this phenomenon. This point can be
457 buttressed by a mere reference to the fact that in the year 1973-74
deposits of non-banking companies rose from 747.8 crores to Rs. 1028 crores and
by 1978 it rose to 1313.0 crores.(1) And failure to meet obligation by
companies the consequent misery of middle and lower middle classes as
tragically illustrated by Sanchaita syndrome attracted the attention of
Parliament. This additional aspect has to be kept- in view while examining the
contentions canvassed in these petitions and appeals.
Before we turn to s. 58A and the rules framed
there under, a reference to the earlier attempts to exercise some degree of
control over non-banking companies attracting and inviting deposits from public
would be advantageous.
Chapter III-B was introduced in the Reserve
Bank of India Act, 1934 by Act No. 55 of 1963 which came into force on Feb. 1,
1964. Fasciculus of sections in Chapter III-B bears the title 'Provisions
relating to non-banking institutions receiving deposits and financial
institutions.' Sec. 45 (1) defined company to mean a company as defined in sec.
3 of the Companies Act and includes a foreign company within the meaning of s.
591 of that Act. Deposit was defined to include any money received by a
non-banking institution by way of deposit etc. There was an exclusionary clause
in pari materia with the exclusionary clause in sec. 2 (b) of the Deposit Rules
of 1975. Sec. 45 J conferred power on the Reserve Bank to regulate or prohibit
the issue by any non- banking institution of any prospectus or advertisement
soliciting deposits of money from the public and to specify the conditions
subject to which any such prospectus or advertisement if not prohibited may be
issued. Sec. 45 K conferred power on the Reserve Bank to collect information
from non-banking institution as to deposits and also to give directions in this
behalf. There were other provisions incidental to these substantive provisions.
In exercise of this power, Reserve Bank issued various directions upto and
inclusive of 1977 which included ceiling of maximum deposits that can be
accepted, the minimum and maximum period for which the same can be accepted and
other incidental provisions. These legal provisions are the prelude to the
provisions impugned in these petitions and they would unravel the intendment, object,
purpose, the mischief prevalent and attempt at remedying the same by sec. 58A
and the Deposit Rules of 1975.
(1) Project Report on Government Regulation
of Financial Management of the Private Sector Companies in India by V. D.
Kulshrestha.
458 Sec 58A conferred power on the Central
Govt. to be exercised in consultation with the Reserve Bank of India to
prescribe the limits upto which, the manner in which and the conditions subject
to which the deposits may be invited or accepted by a company either from
public or from its members. The challenge is directed to Rule 3A which
obligates the company inviting deposits to deposit or invest, as the case may before
the 30th day of April of each year, a sum which shall not be less than ten
percent of the amount of its deposits maturing during the year ending on the
31st day of March next following according to any one or more of the methods
set out in the rule. Sub-rule (2) imposes a fetter on the power of the company
to use the amount so deposited and invested for any purpose other than for the
repayment of deposits maturing during the year referred to in sub-rule (1). And
this is subject to a further condition that deposit shall not any time fall
below ten percent of the amount or deposits maturing until the 31st day of
March next following. The deposit herein contemplated is to be made with any
scheduled bank free from charge or lien or in unencumbered securities of the
Central Government or of any State Government or in unencumbered securities
mentioned in clauses (a) to (d) and (ee) of sec. 20 of the Indian Trust Act,
1882.
The first contention is that having regard to
the numerous inbuilt sefeguards provided in Sec. 58A and the rules made there under,
the imposition of 10% deposit under Rule 3A is unreasonable and arbitrary
particularly because the provision does not effectively protect the depositors
if that was the underlying intendment. Even prior to introduction of sec. 58A,
the Reserve Bank of India was empowered to regulate the acceptance and repayments
of deposits by the non-banking companies. The legislature having become aware
that the regulatory measures introduced by the Reserve Bank of India have not
effectively protected the depositors, felt needs of the time necessitated
introduction of statutory provisions enabling the Central Government to take
effective measures for the protection of the depositors. This becomes manifest
from the Statement of Objects and Reasons wherein it was stated that:
'experience has shown that in many cases deposits so taken by the companies
have not been refunded on the due dates. In many such cases, either the
companies have gone into liquidation or the funds with the companies are
depleted to such an extent that the companies are not in a position to refund
the deposits. it is accordingly considered necessary to control companies
inviting deposits from the public.' The Legislature conferred wide power on the
Central Government to introduce regulatory and remedial measures by which the
depositors can be given some protection. To say that the protection is neither
adequate nor sufficient and therefore of doubtful utility and accordingly must
be rejected as arbitrary is to put a premium on these practices which
necessitated a further measure of social control, taking more effective steps
to checkmate the abuse of this powerful corporate sector and to leave the
mischief unrepaired. Any interpretation of sec. 58A has to be such as to
achieve the purpose of imposing a measure of social control to remedy the
mischief, to suppress which the provision was enacted.
To revert to the language of sec. 58A, the
Central Government was authorized to prescribe the limits subject to which, the
manner in which and the conditions subject to which the deposits may be invited
or accepted by the company. The Deposit Rules viewed as a whole amongst others
prescribe the limits upto which a company can invite and accept deposits (rule
3 (1) & (2)). The obligation to issue an advertisement on par with the
prospecutus (Rule 4, obligation to furnish receipt to the depositors (Rule 7),
all necessarily prescribe the manner in which deposits may be invalid or
accepted. Rule 3A makes it obligatory to keep 10% of the deposits maturing in a
year, and it thus provides one of the conditions subject to which deposits can
be invited or accepted. And indisputably, sec. 58A confers power on the Central
Government to prescribe all the three things by rules made in this behalf.
It was, however, urged that this rule 3A is
arbitrary for more than one reason: (1) that it deprives the company the use of
1()% of its funds even though the company is obliged to pay interest to the
depositors as contracted between the parties and (2) if the rule was intended
to afford some safeguard in the interest of the depositors or protect them, the
protection is illusory because in winding- up proceedings, the depositors will
have to stand pari passu With other unsecured creditors while secured creditor
and preferential creditor , will score a march over them even in regard to the 10%
deposit because that would be treated as an asset of the company available for
distribution amongst various persons entitled to recover claims from the
company.
Undoubtedly, depositors with a company unless
otherwise indicated would be unsecured creditors. Secured creditors and
preferential creditors in the event of winding up of the company 460 would
score a march over them in distribution of the assets of the company. But every
measure cannot be viewed or interpreted in the event of a catastrophy over-taking
the company. The provision for deposit of 10% of deposits ensnares repayment of
deposits maturing in the year and in order to enable the company to meet its
obligation, a provision is made in sub-rule (2) of Rule 3A itself that the
amount deposited or invested, as the case may be, under sub- rule (1), shall
not be utilised for any purpose other than for the repayment of deposits
maturing during the year referred to in sub-rule (1). This necessarily implies
that this l0% deposit can be utilised for refunding the deposit maturing in a
year and that itself is an obligation of the company and in order provide the
company with liquid finance to meet its obligation, the provision of compulsory
deposit is introduced. The same cannot be questioned on the ground that it
constitutes deprivation of property of a company or is of a confiscatory
nature. The amount deposited to meet with the obligation of Rule 3A is and
remains the property of the company nor anyone else has any access to it. One
has to see the immediate object in view to achieve which the provision is made
and not its remote consequences. And it would be an interesting question of law
to be decided in an appropriate case as to the position and character of this
statutory 10% deposit in distribution of assets of a company in winding-up
proceedings. The argument that this provision was made for increasing the
deposits in Nationalised Banks or augmenting the investment in the Central and
State securities, is so farfetched that it leaves us unconvinced.
The second limb of the submission is that
this provision fails to accord reliable protection to the depositors. We are at
a loss to appreciate this submission.
Undoubtedly, it is not as effective as
admitted by the Minister of Law, Justice and Company Affairs while replying to
a question in Parliament on September 15, 1981 to ensure every depositor whose
deposit is maturing in the year to be fully paid out of the deposit amount. But
no regulatory or protective measure can be rejected as arbitrary on the short
ground that it fails to fully protect the person for whose benefit it is
enacted. It is an argument of despair that let there either be full protection
or no protection. This is the fatalist attitude which the court can neither
encourage nor appreciate. One has to keep in view the cumulative effect of
protective and regulatory measures.
Anything English has such an over-powering
attraction that without any attempt at assimilating the developmental stage of
two 461 wholly dissimilar societies, provisions of English Act were held out as
a model and the impugned provision attacked by impermissible comparisons.
Reference was made to Protection Of Depositors Act, 1963 of U.K. and it was
urged that to afford real protection, provision similar to U.K. Act should have
been enacted. The submission leaves us cold. What form a regulatory measure
must take is for the legislature to decide and the court would not examine its
wisdom or efficacy except to the extent that Art. 13 of the Constitution is
attracted. Having said this, it may be stated that except a little more
detailed provision there is nothing very useful or of such innovative nature as
would be impressive even for a recommendation.
Requiring the company to invest 10% of its
deposits maturing in a year in deposit with prescribed institutions or in trust
securities cannot be termed as deprivation of the funds of the company. It is a
measure to ensure that part of the funds of a company are kept as liquid assets
available for use for specified purpose. This is clearly discernible from the
marginal note of Rule 3A. Regulatory measure ensuring availability of liquid
asset cannot be termed as deprivation of property. It becomes an earmarked fund
and it is well-known that the economic planning may provide for earmarked funds
and if by voluntary self- discipline and sound economic planning financial
viability is not maintained, a Welfare State with planned economy may impose
statutory discipline in larger public interest. Such disciplinary measures
cannot be termed deprivatory in character. Even when the money is kept in
deposit, it remains the property of the company and available for its use
albeit as provided in the statute. The Legislature was not unaware of a known
malady that the private sector companies were becoming sick after incurring
huge debts, rendering small investors destitutes, heaping miseries on the
weaker sections of the society and therefore if by a measure a company which is
permitted to attract deposits from the public generally described as gullible
simultaneously, an obligation is imposed Lo keep an infinitesimally small
portion of assets as liquid finance available for meeting the obligations,
namely repayment of deposits maturing in a given year, it cannot be said that
this constitutes deprivation of company's fund. If a trust can be compelled to
deposit trust finds in a manner prescribed by the statute, if a nationalised or
scheduled bank is compelled to maintain requisite liquidity in respect of which
a charge of deprivation of property cannot be validly made, it is difficult to
entertain the submission that as a regulatory measure if a 462 company for the
benefit it enjoys of an enabling power to invite deposits from public is asked
to keep in deposit 10% of the deposits maturing in a year the same would be
deprivatory and therefore arbitrary.
In passing it was stated that having regard
to the numerous inbuilt safeguards in s. 58A of the Companies Act, the
imposition of 10% compulsory deposit under Rule 3A is in excess of the
requirements of the protection and therefore unreasonable and arbitrary. Having
had the legacy of the laissez faire doctrine imposed by foreign rulers till the
end of 19th century, and even with the tormenting experience of South-Sea
Bubbble, the State was least inclined to interfere with the working of the
incorporated companies.
But as noticed in the Statement of objects
and Reasons while introducing the 1974 Amendment Act which incorporated sec. 58A
in the Companies Act, it was designed to meet cases of abuse or distortion of
system which have, of late, assumed comparatively serious proportion and a
stringent measure of control has become inevitable. This is in accord with the
Deport of the Jenkin's Committee in the United Kingdom in which it was observed
that the Company is not a field of legislation in which finality is to be
expected, as the law falls to be applied to a growing and challenging subject
matter and growing use of the company system as an instrument of business and
finances and the possibilities of abuse inherent in that system. A vigilant
Parliament keeping a close watch over this corporate sector wielding considerable
economic power has to take steps by doses to eradicate the abuses of the
economic power by these corporations. More insidious the abuses of economic
power greater social control became unavoidable for the health of national
economy and protection of the persons dealing with corporations. No legal step
can be said final or unnecessary because social control has inevitably to
follow to defuse abuses of economic power. In such a situation, to say, that a
further measure of protection is arbitrary in view of the protection already
afforded is begging the issue and the contention must be negatived on this
short ground.
Having cleared the ground, we must now turn
to the main challenge posed on behalf of the petitioners to the constitutional
validity of Rule 3A. It was urged that when a regulatory measure imposes
conditions the same must fairly and reasonably relate to the objects sought to
be achieved.
Developing the argument it was submitted that
if Rule 3A enacted in exercise of power conferred by sec. 58A imposes a
statutory condition to deposit 10% of the amount collected by way of deposits
by a non-banking company and maturing in a given year in the manner prescribed,
this condition bears no relevance to the objects sought to be achieved, the object
being the protection of the depositors. And if it does not bear relevance to
the object it is arbitrary. Reliance was placed on Pyks Granaide Co. v.
Ministry of Housing and Local Govt. & Anr (1) Lord Denning posed the
question whether if the permission of the planning authority before breaking
fresh surface is necessary, what conditions can the planning authority lawfully
impose. Answering the question the learned Law Lord observed:
"The principles to be applied are not, I
think, in doubt. Although the planning authorities are given very wide powers
to impose "such conditions as they think fit", nevertheless the law
says that those conditions, to be valid must fairly and reasonably relate to
the permitted development. The planning authority are not at liberty to use
their powers for an ulterior object, however desirable that object may seem to
them to be in the public interest." Lord Reid in Chertsey Urban District
Council v. Mixnam's Properties Ltd.(2) approved the statement of law by Lord
Denning reiterating that the same was already approved in Faweett Properties
Ltd. v Buckingham County Council.(3) There cannot be any quarrel with the
proposition that where power is conferred to effective a purpose and for that
end in view to impose conditions, the conditions to be valid must fairly and
reasonably relate to the object sought to be achieved. In the absence of this
causal connection, the conditions may be rejected as superfluous or arbitrary
unrelated to purpose. The power conferred by sec. 58A on the Central Government
to prescribe the limits up to which, the manner in which and the conditions
subject to which deposits may be invited or accepted by non-banking companies
had a definite objeut; nameiy, to check the abuse by the corporate sector and
to protect the depositors/investors. Mischief was known and the regulatory
measure was introduced to remedy the mischief. The conditions which can be
prescribed to effectuate this pur- 464 pose must a fortiori, to be valid,
fairly and reasonably, relate to checkmate the abuse of juggling with the
depositors/investors' hard earned-money by the corporate sector and to confer
upon them a measure of protection namely availability of liquid assets to meet
the obligation of repayment of deposit which is implicit in acceptance of
deposit. Can it be said that the conditions prescribed by the Deposit Rules are
so irrelevant or have no reasonable nexus to the objects sought to be achieved
as to be arbitrary? The answer is emphatically in the negative. Even at the
cost of repetition, it can be stated with confidence that the rules which
prescribed conditions subject to which deposits can be invited and accepted do
operate to extend a measure of protection against the notorious abuses of
economic power by the corporate sector, to the detriment of
depositors/investors, a segment of the society which can be appropriately
described as weaker in relation to the mighty corporation. One need not go so
far with Ralph Nadar in 'America Incorporated' to establish that political
institutions may fail to arrest the control this ever- widening power of
corporations. And can one wish away the degree of sickness in private sector
companies ? To the extent companies develop sickness, in direct proportion the
controllers of such companies become healthy. In a welfare state, it is the
constitutional obligation of the state to protect socially and economically
weaker segments of the society against the exploitation by corporations. We
therefore, see no merit in the submission that the conditions prescribed bear
no relevance to the object or the purpose for which the power was conferred
under sec. 58A on the Central Government.
Basing the submission on the assumption that
Rule 3A cannot extend even a semblance of protection to depositor, it was urged
that if it was to be viewed in the wider spectrum of regulation of credit
system of the country, control of the circulation of the money in India's
economy and imposing financial discipline on corporate sector, rule 3A is
clearly ultra vires sec. 58A being far in excess of the requirements of rule
58A. The submission ought to be rejected on the short ground that Rule 3A does
extend some protection to a depositor howsoever minimal it may be. When Rule 3A
is viewed in the context of various other provisions devised to extend
protection to depositors and investors it does play a small but effective part
whereby liquid finance would be available to the company accepting deposits for
meeting its obligation of repaying the deposits maturing during the year. Therefore,
there is no merit in the submission.
465 lt was next contended that Rule 3A is
ultra vires the provision of sec. 58A of the Companies Act as it is beyond the
scope and ambit of the section. Developing this argument, it was submitted that
if sec. 58A is widely construed to encompass the mode or manner of utilisation
of the funds of the company which will include the deposits made with the
company, obviously sec. 58A itself will be rendered unconstitutional as
transgressing the permissible limits of delegated legislation. While tracing
the history of the gradually increasing' State control over the activities of
corporate sector, it was noticed that if the State would not effectively control
the activities checkmating the possible abuses' individuals dealing with these
economic giants would be at the mercy of the latter.
May be that this 'hands off' attitude was
respectable when laissez faire dictated the state approach, but a welfare state
cannot remain indifferent to this sensitive field of exploitation of the weaker
section. Sec. 58A amongst various other things was designed to introduce some
measure of control over the non-banking companies inviting and accepting
deposits in the ultimate interest of the depositors, and by compelling limited
liquidity in resources, the society at large was sought to be protected from
the ever haunting spectre of sickness in industry often conveniently resorted
to by the private sector companies.
Sec. 58A must receive its legitimate
construction in the back-drop of this fact situation. Viewed from this angle,
Sec. 58A will enable the Central Government to prescribe conditions subject to
which deposits can be accepted and one such condition would be how to readily
make, a small portion of the deposit, available for repayment because while
inviting and accepting deposits, it is implicit therein that repayment would be
assured on the date of maturity.
The next limb of the submission is: is there
an excessive delegation of essential legislative functions without prescribing
any guidelines? It is indisputable that the Companies Act as a whole and sec.
58A in part lays down a legislative policy, namely, gradual everwidening and
effective control of the corporate sector so as to ensure a measure of
protection to the persons dcaling with it. The wisdom of the legislative policy
is not for Court to examine. And in economic legislation, the Court should feel
more inclined to judicial deference to legislative judgment.
(See R. K Garg etc. v. Union of India &
ors. etc (1) Prug Ice & oil Mills & Anr. etc. v. Union of India(a) and
R. C. Cooper v. Union of India(3).
466 The charge of excessive delegation of
essential legislative functions is wholly untenable. The history of the Company
Law in India, the object and Reason Statement while introducing 1974 Amendment,
regulatory measures undertaken by the Reserve Bank of India prior to the
introduction of Sec. 58A, all point in the direction of taking gradual steps
with a view to introducing greater State intervention and control so as to
minimize the abuses by the corporate sector, an inescapable evil directly
attributable to concentration of economic power. The test which Prof. Willis
has set-down in his 'Constitutional Law' pages 586 & 587 may be recalled:
"If a statute declares a definite
policy, there is a sufficiently definite standard for the rule against the
delegation of legislative power, and also for equality if the standard is
reasonable. If no standard is set up to avoid the violation of equality, those
exercising the power must act as though they were administering a valid
standard." The policy is definite, guidelines are available from the
history of the legislation and Companies Act taken as a whole and one cannot
shut one's eye to articulated sickness in private sector undertakings all
around so that this feeble measure extending only a semblance of protection can
be struck down as arbitrary or a violating the permissible limits of delegated
legislation. Add to this the fact that Deposit Rules have been framed in
exercise of power conferred by sec. 58A and 642 of the Companies Act. Sec. 642
requires that every rule enacted in exercise of the power conferred by it, must
be placed before each House of Parliament for a period of Thirty days and both
Houses have power to suggest modification in the proposed rules. This control
of Parliament is sufficient to check any transgression of permissible limits of
delegated legislation by the delegate. In D.S. Garewal v. State of Punjab and
Another(1) the Constitution Bench of this Court observed that the requirement
that the rules are to be placed before both Houses of Parliament with power to
suggest modification would make it perfectly clear that Parliament has in no
way abdicated its authority, but is keeping strict vigilance and control over
its delegate.
Mr. O. P. Malhotra raised a contention as to
the legislative competence of the Parliament to enact sec. 58A and the Deposit
467 Rules enacted in exercise of the power conferred by sec. 58A read with Sec.
642 of the Companies Act, 1956. This is only to be mentioned to be rejected. Mr
Malhotra urged that when a company invites and accepts deposits, there comes
into existence a lender borrower relationship between the depositor and the
company, and therefore the legislation dealing with the subject squarely falls
under Entry 30 of the State List, money-lending and money lenders'. If this
submission were to carry conviction, every depositor in the bank would be a
moneylender and the transaction would be one of money-lending. Is the banking
industry to be covered under Entry 30 ? on the other hand, Entry 45 in Union
List is a specific Entry 'Banking' and therefore any legislation relating to
banking would be preferable to Entry 45 in the Union List. Entry 43 in the
Union List is: 'incorporation, regulation and winding-up of trading
corporations, including bank, insurance, financial corporation’s but not
including co-operative societies'. Entry 44 refers to 'incorporation.
regulation. and winding up of the corporation
whether trading or not when business is not confined to one State but not
including universities.' obviously the power to legislate about the companies
is preferable to Entry 44 when the objects of the company are not confined to
one state and irrespective of the fact whether it is trading or not. When a law
is impugned on the ground that it is ultra vires the powers of the legislature
which inacted it, what has to be ascertained is the true character of the
legislation. To do that one must have regard to the enactment as a whole, to
its objects and to the scope and effect of its, provisions (See A. S. Krishna
v. State of Madras(1). To resolve the controversy if it becomes necessary to
ascertain to which entry in the three lists, the legislation is referable, the
Court has evolved the doctorine of pith and substance. If in pith and
substance. the legislation falls within one entry or the other but some portion
of the subject-matter of the legislation incidentally trenches upon and might
enter a field under another list, then it must held to be valid in its
entirety, even though it might incidentally trench on matters which are beyond
its competence. (See Ishwari Khaitan Sugar Mills v U.P. State & Anr.(2),
Union of India v. H. S. Dhillon(3), Kerala State Electricity Board v. Indian
Aluminium Company(4) 468 and State of Karnataka and another etc. v. Ranganath
Reddy & Anr.(1). Applying this doctorine of pith and substance, sec. 58A
which is incorporated in the Companies Act is preferable to Entry 43 and 44 in
the Union List and the enactment viewed as a whole cannot be said to be
legislation on money- lenders and money-lending or being referable to Entry 3()
in the State List. Undoubtedly, therefore the Parliament had the legislative
competence to enact sec. 58A.
Mr. G.A. Shah canvassed one more contention.
After stating that Rule 3A became operative from April 1, 1978, he specifically
drew attention to the proviso to Rule 3A (1) which required that with relation
to the deposits maturing during the year ending on the 31st day of March, 1979,
the sum required to be deposited or invested under sub-rule 3A (1) shall be
deposited or invested before the 30th day of September, 1978. It was then
contended that this provision would necessitate depositing 10% of the deposits
maturing during the year ending with 31st March, 1979 which may have been
accepted prior to the coming into force of rule 3A and to this extent the rule
has been made retrospective and as there was no power conferred by sec. 58A to
prescribe conditions subject to which deposits can be accepted retrospectively
Rule 3A is ultra vires sec. 58A.
Unquestionably, Rule 3A became operative from
April 1, 1978.
The obligation cast by Rule 3A is to deposit
10% of the deposits maturing during the year in the manner prescribed in Rule
3. Some deposits would be maturing between April 1, 1978 and March 31. 1979. To
provide for such marginal situation, a proviso is inserted. Does it to make the
rule retroactive ? of course, not. In D.S. Nakara v. Union of India,(2) a
Constitution Bench of this Court has, in this context, observed as under:
"A statute is not properly called a
retroactive statute because a part of the requisites for its action is drawn
from a time antecedent to its passing." Viewed from this angle, the
provision can be properly called prospective and not retroactive. Therefore the
contention does not commend to us.
It was next contended that while giving
definition of the expression 'deposit in the dictionary clause of the Deposit
Rules, the 469 exclusionary clause is so widely worded that it has successfully
kept a large number of similarly situated corporations outside the purview of
the Act and the picking and choosing is so arbitrary that one can say with
confidence that only private sector companies are singled out for this
regulatory treatment. The submission overlooks the object and purpose under
lying enacting sec. 58A and the Rules made thereunder. As has been repeatedly
noted, it is a regulatory measure to checkmate the abuses, which private sector
corporations are prone to. If this object is kept in view, the exclusionary
clause explains itself. To enumerate briefly, the bodies excluded from the
operation of the rules are Central and State Govt., State Bank of India
Nationalised Banks, Industrial Finance Corporation of India, State Financial
Corporations established under the State Financial Corporations Act, Industrial
Development Bank of India, Electricity Boards constituted under the Electricity
(Supply) Act, Life Insurance Corporation of India and such other bodies which
if viewed properly disclose a perspective in enacting the exclusionary clause.
The perspective is that the bodies which are accountable to public and
Parliament as also those whose failure to meet with obligation is inconceivable
such as the Central and the State Govt. are excluded from the regulatory
measure. This perspective, in fact, reinforces the conclusion that the control
was to be exercised over those corporations which are prone to abuse the
economic power enjoyed by them. We therefore see nothing arbitrary or
unreasonable in the exclusionary clause.
A detailed analysis of the provisions, in the
light of submissions would clearly negative any contention of the violation of
Arts. 14 and 19 (1) (g) and we must reject the challenge to the
constitutionality of r sec. 58A and the rules made there under.
Not a single contention canvassed on behalf of
the petitioners, individually or collectively, bears the scrutiny and therefore
the petitions and the appeals must fail and are dismissed with costs in each
matter.
H.L.C. Petitions and Appeals dismissed.
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