dedol-hf/india-case-legal-rag huggingface dataset:
which  the shareholders of other companies governed  by  the
Indian Companies Act are not subject to:-:
    "(a) It shall not be lawful for the shareholders of  the
company  or  any  other person to nominate  or  appoint  any
person to be a director of the company.
    (b)  No resolution passed at any meeting of  the  share-
holders  of  the  company shall be given  effect  to  unless
approved by the Central Government.
    (c)  No proceeding for the winding up of the company  or
for  the appointment of a receiver in respect thereof  shall
lie  in  any  court unless by or with the  sanction  of  the
Central Government."
    Primafacie, the argument appears to be a plausible  one,
but it requires a careful examination, and, while  examining
it,  two principles have to be borne in mind :--(1)  that  a
law may be constitutional even though it relates to a single
individual, in those cases where on account of some  special
circumstances or reasons applicable to him and not  applica-
ble to others,
     879
that single individual may be treated as a class by himself;
(2) that it is the accepted doctrine of the American courts,
which  I consider to be well-founded on principle, that  the
presumption is always in favour of the constitutionality  of
an  enactment, and the burden is upon him who attacks it  to
show  that  there has been a clear  transgression   of   the
constitutional  principles.   A clear  enunciation  of  this
latter  doctrine is to be found in Middleton v. Texas  Power
and Light Company(1), in which the relevant passage runs  as
follows :--
    "It must be presumed that a legislature understands  and
correctly  appreciates the need of its own people, that  its
laws  are directed to problems made manifest  by  experience
and  that  its  discriminations  are  based  upon   adequate
grounds."
    The onus is therefore on the petitioner to show that the
legislation which is impugned is arbitrary and  unreasonable
and  there are other companies in the country  which  should
have  been subjected to the same disabilities,  because  the
reasons  which led the Legislature to impose  State  control
upon  the Sholapur company are equally applicable  to  them.
So  far as article 14 is concerned, the case of  the  share-
holders is dependent upon the case of the company and if  it
could  be held that the company has been  legitimately  sub-
jected to such control as the Act provides without violation
of  the  article,  that would be a complete  answer  to  the
petitioner's complaint.
Now, the petitioner has made no attempt to discharge the
burden of proof to which I have referred, and we are  merely
asked to presume that there must necessarily be other compa-
nies also which would be open to the charge of mismanagement
and negligence. The question cannot in my opinion be treated
so lightly. On the other hand, how important the doctrine of
burden of proof is and how much harm can be caused by ignor-
ing  it or tinkering with it, will be fully illustrated,  by
referring  to  the proceedings in the Parliament in  connec-
tion with the enactment of the
(1) 248 U.S.  1152,157.
880
Act,  where  the  circumstances which  necessitated  it  are
clearly  set out.  I am aware that  legislative  proceedings
cannot  be referred to for the purpose of construing an  Act
or  any  of  its provisions, but I  believe  that  they  are
relevant  for the proper understanding of the  circumstances
under which it was passed  and the reasons which necessitat-
ed it.
    A reference to the Parliamentary proceedings shows  that
some  time  ago, a representation was made  on behalf  of  a
section  of the shareholders of the Sholapur company to  the
Registrar  of Joint Stock Companies in Bombay, against   the
conduct of the managing agents, and the Government of Bombay
was   moved to order a special inquiry into the  affairs  of
the  company.  For the purpose of this inquiry, two  special
inspectors were appointed by the Bombay Government and their
report  revealed "certain astounding facts" and showed  that
the mill had been grossly mismanaged by the Board of  Direc-
tors  and  the managing agents. It also  revealed  that  the
persons  who  were responsible for  the  mismanagement  were
guilty  of  certain acts and omissions  which  brought  them
under the purview of the law.  The Bombay Government accept-
ed the report of the inspectors and instructed the  Advocate
General of Bombay to take legal proceedings against  certain
persons  connected  with  the  management  of  the  company.
Thereafter,  the Government of India was approached  by  the
Provincial Government and requiested to take special  action
in  order  to  secure the early opening of  the  mill.   The
Government  of  India found that they had no power  to  take
over the management of a particular mill, unless its working
could  be  ensured through the  existing  management  acting
under  the  direction of a Controller  appointed  under  the
Essential Supplies Act, but they also found that a  peculiar
situation  had  been created in this case  by  the  managing
agents  themselves being unable or unwilling to conduct  the
affairs  of  the  company in a  satisfactory  and  efficient
manner.  The  Government of India, as a matter of precaution
and lest it should be said that they were going to interfere
unnecessarily in the affairs
     881
of the company and were not allowing the existing provisions
of the law to take their own course, consulted other  inter-
ests and placed the matter before the Standing Committee  of
the  Industrial  Advisory Council where a  large  number  of
leading  industrialists  of the  country were  present,  and
ultimately  it was realized that this was a case  where  the
Government  could rightly and properly intervene  and  there
would  be  no  occasion for any criticism  coming  from  any
quarter. It appears from the discussion on the floor of  the
House  that the total number of weaving and  spinning  mills
which were closed down for one reason or other was about  35
in number.  Some of them are said to have closed for want of
cotton, some due to overstocks, some for want o[ capital and
some  on account of mismanagement.  The Minister for  Indus-
try,  who  sponsored the Bill, in  explaining  what  distin-
guished  the case of the Sholapur mill from the other  mills
against  whom there might be charges of mismanagement,  made
it  clear in the course of the debate that  "certain  condi-
tions  had  to be fulfilled before the  Government  can  and
should  intervene", and he set out these conditions as  fol-
lows :--
    "(1) The undertaking must relate to an industry which is
of  national  importance.  Not each  and  every  undertaking
which  may have to close down can be taken charge of  tempo-
rarily by Government.
(2)  The  undertaking must be an economic unit.   If  it
appears  that  it  is completely uneconomic  and  cannot  be
managed  at  all,  there is no sense  in  Government  taking
charge of it.  If anything, it will mean the Government will
have  to  waste money which belongs to the  taxpayer  on  an
uneconomic unit.
    (3)  There  must be a technical report  as  regards  the
condition  of  the plants, machinery, etc. which  either  as
they  stand, or after necessary repairs  and  reconditioning
can be properly utilised.
    (4)  Lastly,--and  this is of  considerable  importance-
there  must be a proper enquiry held before Government  take
any action.  The enquiry should show that
113
882
managing  agents have so misbehaved that they are no  longer
fit and proper persons to remain in charge of such an impor-
tant undertaking."(1)
    It appears from the  same proceedings that the  Sholapur
mill is one of the largest mills in Asia and employs  13,000
workers.   Per  shift, it is capable of producing 25  to  30
thousand  pounds of yarn, and also one lakh yards of  cloth.
It  was  working two shifts when it was closed down  on  the
29th  August, 1949. The closure of the mill meant a loss  of
25  lakhs yards of cloth and one and a half lakhs pounds  of
yarn  per month.  Prior to 1947, the  highest dividend  paid
by the company was Rs. 525 per share and the lowest Rs. 100,
and,  in  1948, when the management was taken  over  by  the
managing  agents who have been removed by the impugned  Act,
the  accounts  showed a loss of Rs. 30  lakhs,  while  other
textile  companies  had been able to show  very  substantial
profits during the same period.
    Another fact which is brought out in the proceedings  is
that  the.  managing agents had acquired  control  over  the
majority of the shares of the company and a large number  of
shareholders  who were dissatisfied with the management  had
been rendered powerless and they could not make their  voice
heard.   By reason of the preponderance of  their  strength,
the  managing  agents made it impossible  for  a  controller
under  the Essential Supplies Act to function and they  also
made it difficult for the company to run smoothly under  the
normal law.
    It was against this background that the Act was  passed,
and  it is evident that the facts which were  placed  before
the Legislature with regard to the Sholaput mill were of  an
extraordinary  character.  and fully justified  the  company
being  treated as a class by itself. There were  undoubtedly
other mills which were open to the charge of  mismanagement,
but  the  criteria adopted by the Government  which,  in  my
opinion, cannot be said to be arbitrary or unreasonable,  is
not applicable
(1) parliamentary Debates,  Volume III, No. 14;  31st  March
1950, pp.2394 5
883
to  any  of them. As we have seen, one of the  criteria  was
that a mere allegation of mismanagement should not be enough
and  no drastic step such as is envisaged in the Act  should
be  taken  without there being a complete enquiry.   In  the
case of the Sholapur mill, a complete enquiry had been  made
and  the  revelations which were made as a  result  of  such
enquiry were startling.
    We are familiar with the expression "police power" which
is in vogue in the United States of America. This expression
simply  denotes that in special cases the State can step  in
where  its intervention seems necessary and  impose  special
burdens  for  general  benefit.  As one of  the  judges  has
pointed  out, "the regulations may press with more  or  less
weight upon one than upon another, but they are designed not
to  impose unequal or unnecessary restrictions upon  anyone,
but  to promote, with as little individual inconvenience  as
possible,  the general good."(1)  It need not be  emphasized
that the principles underlying what is known as police power
in  the  United States of America are not peculiar  to  that
country, but are recognized in every modern civilized State.
Professor Willis dealing with the question of classification
in  exercise  of police power makes the  following  observa-
tions:
    "There  is no rule for determining  when  classification
for  the  police power is reasonable.  It is  a  matter  for
judicial  determination, but in determining the question  of
reasonableness the Courts must find some economic, political
or other social interest to be secured, and some relation of
the classification to the objects sought to be accomplished.
In  doing  this the Courts may consider  matters  of  common
knowledge,  matters  o[ common report, tile history  of  the
times,  and  to sustain it they will assume every  state  of
facts  which can be conceived of as existing at the time  Of
legislation. The fact that only one person or one object  or
one  business  or one locality is affected is not  proof  of
denial of the equal protection of the laws.  For such
(1) Per Field J. in Barbier v. Connally. 113 U S. 27.
884
proof it must be shown that there is no reasonable basis for
the classification."
    In  this particular case, the Government initially  took
control  of  the Sholapur Company by means of  an  Ordinance
(Ordinance  No. II of 1950), of which the preamble  runs  as
follows :-
    "Whereas  on  account  of mismanagement  and  neglect  a
situation has arisen in the affairs of the Sholapur Spinning
and  Weaving Company, Limited, which has  prejudicially  af-
fected  the  production of an essential  commodity  and  has
caused serious unemployment amongst a certain section of the
community;
    And  whereas  an emergency has arisen which  renders  it
necessary  to make special provision for the proper  manage-
ment and administration of the aforesaid Company;
    Now, therefore,........................  "
 In  the course of the Parliamentary debate,  reference  was
made to the fact that the country was facing an acute  cloth
shortage, and one of the reasons which apparently influenced
the promulgation of the Ordinance and  the  passing  of  the
Act  was that the mismanagement of the company  had  gravely
affected  the  production of an  essential  commodity.   The
facts relating to the mismanagement of this mill were  care-
fully collected and the mischief caused by the sudden  clos-
ing of the mill to the shareholders as well as to the gener-
al public were fully taken into consideration. Therefore, it
seems  to me that to say that one particular mill  has  been
arbitrarily   and   unreasonably selected and  subjected  to
discriminatory treatment, would be an entirely wrong  propo-
sition.
Article 14 of the Constitution, as already stated,  lays
down an important fundamental right, which should be closely
and vigilantly guarded, but, in construing it, we should not
adopt  a doctrinaire approach which might choke all  benefi-
cial legislation.
    The facts to which I have referred are to be found in  a
public document, and, though some of them may
(1) Constitutional Law by Prof. Willis (1st Edition) p. 580.
885
require  further investigation forming as they do part of  a
one-sided  version,  yet  they  furnish  good  prima,  facie
grounds  for the exercise of the utmost caution in  deciding
this case and for not departing from the ordinary rule as to
the burden of proof.  In the last resort, this petition  can
be disposed of on the simple ground that the petitioner  has
not discharged the onus which lies upon him, and I am  quite
prepared to rest my judgment on this ground alone.
I  think that the petitioner has failed to make out  any
case for granting the writs or directions asked for, and the
petition should therefore be dismissed with costs.
PATANJALI SASTRI J.--This is an application under article 32
of the Constitution seeking relief against alleged infringe-
ment of certain fundamental rights of the petitioner.
    The petitioner is a shareholder of the Sholapur Spinning
and  Weaving  Company, Limited, Sholapur, in  tim  State  of
Bombay,  (hereinafter referred to as "the Company  ").   The
authorised  share capital of the Company consisted  of  1590
fully  paid up ordinary shares of Rs. 1,000 each,  20  fully
paid  up ordinary shares of Rs. 500 each and :32,000  partly
paid  up redeemable cumulative preference shares of Rs.  100
each,  of  which  Rs. 50 only was paid up.   Of  these,  the
petitioner  held one ordinary share in his own name  and  80
preference  shares which, however, having been pledged  with
the Bank of Baroda Ltd., now stand registered in the  Bank's
name.
    The company was doing flourishing business till disputes
arose recently between the management and the employees, and
in or about August, 1949, the mills were temporarily  closed
and  the company, which was one of the largest producers  of
cotton  textiles, ceased production.  Thereupon, the  Gover-
nor-General  intervened by promulgating on the 9th  January,
1950, an Ordinance called the Sholapur Spinning and  Weaving
Company (Emergency Provisions) Ordinance (No. II' of  1950),
which empowered tim Government of India to
886
take over the control and management of the company and  its
properties and effects by appointing their own Directors and
to  delegate  all or any of their powers to  the  Provincial
Government.   In exercise of the powers thus delegated,  the
Government of Bombay appointed respondents 3 to 9 as  Direc-
tors to take charge of the management and administration  of
the properties and affairs of the company.  Subsequently, on
10th  April, '1950, the Ordinance was repealed and  was  re-
placed by an Act of Parliament containing similar provisons,
namely the Sholapur Spinning and Weaving Company  (Emergency
Provisions)  Act (No. XXVIII of 1950) (hereinafter  referred
to as the "impugned Act").
    The  petitioner complains that the impugned Act and  the
action  of  the Government of Bombay pursuant  thereto  have
infringed  the fundamental rights conferred on him by  arti-
cles 11, 19 and 31 of the Constitution with the result  that
the  enactment is unconstitutional and void, and the  inter-
ference  by the Government in the affairs of the company  is
unauthorised and illegal. He accordingly seeks relief by way
of  injunction and mandamus against the Union of  India  and
the State of Bombay impfended as respondents 1 and 2 respec-
tively  in these proceedings and against respondents a to  9
who are now in management as already stated. The company  is
irapleaded proforma as the 10th respondent.
    Before  discussing the issues involved, it is  necessary
to  examine the relevant provisions of the impugned  Act  in
order to see in what manner and to what extent the petition-
er's  rights have  been  affected thereby.   The preamble to
the  repealed Ordinance stated  that  "on account  of   mis-
management and neglect a situation has arisen in the affairs
of  the  Sholapur Spinning and   Weaving  Company,  Limited,
which has prejudicially affected the production of an essen-
tial  commodity and has caused serious unemployment  amongst
a   certain  section of the community and that an  emergency
has arisen which renders it necessary to make special provi-
sion  for  the proper management and administration  of  the
aforesaid
   887
Company."  This preamble was not reproduced in the  impugned
Act.  Section a empowers  the  Central Government to appoint
as  many  persons as it thinks fit to be  directors  of  the
company  "for the purpose of taking over its management  and
administration."  Section 4 states the effect of  the  order
appointing directors to be that (1) the old directors  shall
be  deemed  to have vacated their office, (2)  the  contract
with the managing agents shall be deemed to have been termi-
nated,  (3) that the properties  and effects of the  company
shall  be deemed to be in the custody of the  new  directors
who are to be "for all purposes" the directors of the compa-
ny  and "shall alone be entitled to exercise all the  powers
of  the  directors of the company whether  such  powers  are
derived   from  the Companies Act or from the memorandum  or
articles of association or otherwise." Section 5 defines the
powers  of the new directors.  They are to manage the  busi-
ness  of the company "subject to the control of the  Central
Government" and shall have the power to raise funds offering
such  security  as they think fit, to  carry  out  necessary
repairs to the machinery or other property in their  custody
and to employ the necessary persons and define the necessary
conditions  of  their service. Section 12 provides  for  the
restoration of the management to directors nominated by  the
shareholders when the purpose of the Government's  interven-
tion has been fulfilled.  Section 13 is important and  reads
thus:  "13. Application of the Companies Act.--(1)  Notwith-
standing  anything contained in the Companies Act or in  the
memorandum or articles of association of the company (a)  it
shall  not be lawful for the shareholders of the company  or
any  other person to nominate or appoint any person to be  a
director  of  the company; (b) no resolution passed  at  any
meeting  of the shareholders of the company shall 'be  given
effect to unless approved by the Central Government; (c)  no
proceeding  for  the winding up of the company  or  for  the
appointment  of a receiver in respect, thereof shall lie  in
any  Court  unless by or with the sanction  of  the  Central
Government.  (2) Subject.
888
to  the provisions contained in sub-section (1) and  to  the
other  provisions  of this Act. and subject to  such  excep-
tions,  restrictions and limitations as the Central  Govern-
ment  may,  by notified order, specify,  the  Companies  Act
shall continue to apply to the company in the same manner as
it  applied thereto before the issue of the  notified  order
under  section 3." By section 14 the provisions of  the  Act
are  to have effect "notwithstanding  anything  inconsistent
therewith  contained in any other law or in  any  instrument
having  effect  by virtue of any law other than  this  Act."
Section 16 provides for delegation of powers to the  Govern-
ment of Bombay to be exercised subject to the directions  of
the  Central Government, and section 17 bars suits or  other
proceedings against the Central Government or the Government
of  Bombay or any director "for any damage caused or  likely
to  be  caused by anything which is in good  faith  done  or
intended to be done in pursuance of this Act."
    As  a result of these provisions all the properties  and
effects  of the company passed into the absolute  power  and
control  of the Central Government or its delegate the  Gov-
ernment of Bombay, and the normal functioning of the company
as  a corporate body came to an end.  The shareholders  have
been   reduced to the position of interested,  if  helpless,
onlookers  while  the business is carried on  against  their
will and, may be, to their disadvantage by the  Government's
nominees.  The  declared purpose of  this  arrangement  was,
according to the Preamble of the repeated Ordinance to  keep
up  the  production of an essential commodity and  to  avert
serious unemployment amongst a certain section of the commu-
nity.
    The  question  accordingly arises whether  the  impugned
Act. which thus affects the petitioner and his co-sharehold-
ers,  while leaving untouched the shareholders of all  other
companies,  including  those engaged in  the  production  of
essential  commodities, denies to the petitioner  the  equal
protection of the laws under article 14 of the Constitution.
The correct approach to
889
this  question  is first to see what rights have  been  con-
ferred or protection extended to persons similarly situated.
The relevant protection is to be found in the provisions  of
the  Indian  Companies Act which regulates  the  rights  and
obligations of the shareholders of incorporated companies in
India.   Section 21 of the Act assures to  the  shareholders
the protection of the stipulations contained in the memoran-
dum  and  articles of association by  constituting.  them  a
binding contract, so that neither the company nor the share-
holders have the power of doing anything inconsistent there-
with.   The  basic right of the shareholders to  have  their
undertaking managed and conducted by the directors of  their
own  choice is ensured by section 83B. Their right to  exer-
cise  control  and supervision over the  management  by  the
directors by passing resolutions at their general meeting is
regulated  by various provisions of the Act.  The  important
safeguard of winding up the company in certain  unfavourable
circumstances  either through court or by  the  shareholders
thems elves voluntarily is provided for in sections 162  and
203. All these rights and safeguards, on the faith of  which
the  shareholders embark their money in  their  undertaking,
are abrogated by the impugned Act in the case of the  share-
holders of this company alone.  In fact, the Central Govern-
ment  is empowered to exclude, restrict or limit the  opera-
tion of any of the provisions of the Companies Act in  rela-
tion to this company. It is thus plain that the impugned Act
denies  to the shareholders of this particular  company  the
protection  of the law relating to incorporated joint  stock