• A

DELHI CLOTH AND GENERAL MILLS, ETC.

UNION OF INDIA, ETC.

July 21, 1983

(D. A. DESAI, V. BAl.AKRISHNA BRAD! AND R. B. MISRA JJ.J

• ·..._ . Companies Act, 1956-S. 58A-Companies (Acceptance of De1Josit) Ri.les, 1975-R 3A-Imposition of obligation on Companies inviting/accepting deposits froni public to deposit or invest 10 per cent of dePosits maturing during the year C with q Scheduled bank or in governmeiit securities, etc.

Constitutiona{ validity of.

Section SSA of the Companies Act, 1956 confers power on thC Central Government to prescribe inter alia the condi'tions subject to which deposits ma'.y be invited or accepted by a company either from public or from its members. Sub-rule (1) of r. 3A of the Companies (Acceptance cf Deposits) Rules, 1975 obligates a company inviting deposits to deposit of'in•rest, before the 30th day of April of each year, a sum which shall not be less than 10 pyr 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 n1ethods set out in that sub-rlile. Sub-rule (2) of r. 3A Jays 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. 5~A and r. 3A mainly on the ground that the, obligation impose:! 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: I. (a) Rule 3A which makes it obligatory to keep 10 percent of the deposits maturing in a year provides one of the conditions liUbject to which deposits can be invitedor accepted and, indiputably, s. 5811. confers power on the- Central' Government to prescribe by rules the cJnditions subject to which deposits can be invited or accepted by companies. This provision of 10 per cent deposit ensures. repay1nent of deposits maturing in the year and in order to enable the companyto 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 qtber than for reparn1ent of deposits maturing during the year referred

to in subr. (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 th~ company with liquid finance to meet its obligation, the provisionof compulsory depo, it is introduced. The contention that the protection afforded to the depositors by rule 3A.is neither adequate _nor sucient 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 ins. 58A, the in1position of 10 .per cent compul-. sory deposit under r. 3A is in excess of requiren1ents 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 co1npany, secured creditors and preferential creditors would score a march over the1n in the distribution of the assets of the company. But every measure cannot be viewed or interpreted in the event of a catastrophy overtaking the company.. One has to view the immediate object in view to achieve which the prpvision is made and not its remote consequences.

[459 F-460 A; 460 DJ

(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. SBA 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 bad 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-HJ

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) Jt is clearly discernible from the marginal note of r. 3A that the requirement of 10 _per cent deposit is a measure to C:Qsure that part of the funds of a company are kept as liquid assets available for use for speciti.Cd 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 wellknown that economic planning may provide for earmarked funds and if by

volnty self-discipline arid sound economic planning financii:ll 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-EJ

SUPREME COURT REPORTS (1983] 3 S.C .• ll..

(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 viewetfit would be clearly ultra vires s. 58A being far in exceas of the requirements of that section, ought to be rejected on the short .groud that r. 3A does extend some protection to the depositor howsoever minimal it may be. When viewed in te context -0f various other provisions devised to xtend protection to depositors it does play a small but effective part.

[464 F-HJ

(e) The contention that . the proviso to r. 3A (l) is retrospective in operation inasmuch as it requires that in relation to deposits maturing durin& the year ending 31~3-1979 the sun1 required to be deposited under that subrule'shall be derosited before 30-9-1978 irrespective of "the fact that such • deposits might have been accepted prior to the coming into f6rce 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 tl; te provision can be properly called prospective and not retroactive. [466 CG)

. D. S. Nakara v. Union of India, (1983! 1 S.C.C. 305 referred to.

(f) The contention that the exclusion".lry clause to the definition of 'deposit' contained in the Rules has been so widely worded that only private sector companies have been arbitrarily singned out for regulatory treatn1ent overlooks the object and purpose underlying _the enactment of s. 58A and the . Rules 111ade 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 hon-banking companies. It is manifest from the Statement of Objects and Reasons appended to the 1974 Amendment Act which incorporated s. SSA 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 prov-isions enabling the Central Government to take effective measures. Experience had shown that deposits taken by con1panies were not being refunded on due dates and in many cases either the companies had gone into liquidation or had no funds to refund tle deposits: Section 58A, amongst various other things, was designed to introduce some measure of control over the nonbanking companies inviting and accepting -depoSits in the ultimate interest of the depositors and to mCet cases of abuse or distortion of the system.

The section n1ust receive its legitimate construction in the backdrop of this

fact situ"ation. The interpretation has to be such as to achieve the purpse of iinposing a measure of social control to remedy the mischief, to suppress which the provisioffwas enacted. Company is not a. field of legislation in which finality i:> to be expected, as the law falls to be applied to a growing and

hlleniD$ subect matter and t?rowins use Qf the company system as an

DELHI ci, orn MiLLS v. UNION (Desai, J.) Mi

instrument of business and finances and the possibilities of abuse fnherent in that system. A vigilant Parliament keeping a close watch over this corporate A 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 histqry of the legislation and the Co1npanies Act taken as a whole.

The policy is the gradual, everwidening 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 abuse~ of economic power by that sector. The wisdom of the policy is not for the Court to examine.· And in econon1ic legislation, the Cotirt should feel more inclined to judicial deference t'o legislative judgment. The Deposit Kules hav~ been framed in exercise of power conferred under ss. 58A and 642, ands. 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 Hous.Js have power to suggest modification in the. proposed rules. This control of Parliament is sufficient to ch"eck 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 lndia, [1982] 1S.C.R.947; Prag lee & Oil Mills & Anr. v. Union of lndia, [1978] 3 S.C.R. 292; R. C. Cooper v. Union of lndi"a, [1970] 3 S.C.R. 530; D. S. Garewa/ v. State of Punjab & Anr., [1959] Supp. S.C.R. 792, referred to.

(c) Parliament had the legislative competenceto enacts. 58A. Applying the doctrine of pith and substance, s. - 58A Which is iqcorported in the Companies Act is rererable to Entries 43 and 44 in the Union List and the enactment viwed as a whole cannot be said to be legislation on "moneylenders and money-lending" or being referable to Entry 30 in the State List. .

[466 B, A]


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 oftrepeated'"'contention whenever the petitioner is an incorporated company but the law in this be"half 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 thresh.old. [451 CG, 453 AE] .


442 .

SUpjl.EME COURT REPORTS [1983) 3 s.c.R..


Divisional Forest Officer v. Bishwanath Tea Co., A.IR. 1981 S.C 1368; and Western Coal Fields Ltd. v. Special Area Development Authority, A.LR. 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, ~723, 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, 2503of1978, 1252/80 and 1186, 1863, 1149, 1187, 1185, 1128, 1188, 1184 & 1190 of 1978.

AND

Civil Appeal No. 1535of1981

From the Ji.idgment and Order dated the 15th April, 1981 of the Gujarat High Court in Special Civil Application No. 1281 of 1981.

AND

Civil Appeal No. 3013of1981. •

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 19~2.

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 Day 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. 851.3 of 81.

O.P. Malhotra, Harish Salve, P.H. Parekh and Divyang K. Chhaya in WP. Nos. 2085 and 3131 of 1981.

C ·

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. Gokhale, B.R. Agarwa/a and Miss Vijaya/akshmi 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.

G.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 SUI'kEME co\JR.t REPORTS (1983 j j s.C.R.

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 1982.

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, G.C. Gandhi, Talat Ansari, Sukumaran, Miss Meera

 D 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. t...

P.C. Bhartariin CA. Nos. 769-773, 854, 941and1417/81. --,..·

Ashok Grover in SLP No: 4454 of 1982.

S.T. Desai and Ani/ Sharma in CA. No. 3013 of 1981.

For the Respondnts in all the matters :

L.N. Sinha, Attorney General, Ms A. Subhashini and P.P. Singh.

The Judgment of the Court was delivered by

DESA), J. In 'this group of writ petitions under Art. 32 and appeals by special leave nuder 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 I, 1978 an, d incidentally of sec. 58A of the Companies Act, 1956 ('Act' for short) inserted by Companies (Amendment) Act, 1974 which came into force on February I, 1975 is challenged. The challenge proceeds on diverse grounds which may be briefly summarised.

bELi!I CLOTH MILLS v. UNION (Desai. ':)

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 cofers

wide discretion so that it c.an 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 in sec. SSA, the imposition of a liability to deposit 10 Yo of the total deposits maturing in a year in the manner as repuired by the impugned rule, if it was enacted for the protection of tho deposi(ors, 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 (!} (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 viris sec. 58A. As a second string to the bow, it was contended that if sec. 58A enacts a legislatiye 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. 5,8A.

Mr. S.T. Desai, who appeared in . soine 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 deposists made with the company, obviously sec. 58A itself will be rendered unconstitutional as transgressing the , permissible limits of delegateµ legislation and it would appear that the Legislature was guilty of abdication of its essential legislative

SUPREME COURT REPORTS iJ983j 3 s.c.Ii.

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. Malhbtra, 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 sorrie matters raised an additional contentio.n that to the extent limited retrospectivity is given to Rule 3A, it is ultra vires sec. 58A and the Constitution.

Mr. A. Subba Rao, learned counsel appearing in some other matters canvassed one more contention when he urged that the obligation to deposit 10 I. of the amount of deposits maturing in the year constitutes te1nporary deprivation of property without any countervailing obligation or bnefit 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 (I) (g) is not secured to it, and situation would not be improved by merely impleading a Director or a shareholder as one of the petitioners because company has a juris!ic personality independent of the shareholders nd the D'irectors

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 never undertakes to examine the wisdom or otherwise of the legislative policy.

Proceeding along this line, it was said thatif Rule 3A is enacted for the implementation of the legislative policy, the Court is precluded from examining the wisdom or otherwie of the

......

policy; because legislature is the be1t 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 effeqiveness of the rule, it was supmitted that firstly sec. 58A must receive such interpretation as . would suppress the mischief and adv; mce the remedy. It was pointed out that the mischief which was sought to be remedied is clearly discernible from tr.e Statement of Objects and Reasons as also the notes on cl!luses published while 'introducing

1974 Amendment Act. It was next urged that if the rule imposes a restriction on the fundamental freeedom 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 depoists with no umbrella of protection when the company folds up its tent; becomes sick and in winding-up, the depositor has io stand in a qneue 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 tb.e 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 Deposit~ 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) ........... .

SUPREME COURT Rlil>ORTS (198313 s.C.R..

(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. (I) 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.

(~) (a) Every deposit accepted by a company at any time before the commencement of the Companies (Amendment Act, i974 in accordance with tbe. directions made .by the Reserve Bank of Indian under Chapter IIIB of the Reserve Bank of India Act, 1934 (2 of 1934); shall, unless renewed. in acc.ordance with clause

(b) be repaid in accordance with ihe terms of such deposit.

(b) No deposit referred to in clause (a) be renewed by the company after the expiry of the term ther.eof unless the deposit is. such that it could have been accepted if the rules made under sub-sec. (l) were in force at the time when the deposit was initially accepted by the Company.

(c) Where, before the commencement of the compa nies (Amendment) Act, !974, any deposit.was received by a company in contravention of any direction made under Chapter III B 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, 197 5 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 o[ the Companies (Amendment Act, 1974, in contravention of the rules made under sub-

seciion dl. repayment of such deposit shall be made by the company within thirty days from the date of acceptance of siich 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 ias the Central Government, may, after consultation with the Reserve

Bank of India, specify in this behalf.

(b) Except the provisions relating to advertiseme)lt contained in clause (b} of sub-section (2), 1lothing 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." •

Jn 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 include\! any amount borrowed by a company; but does not include what is set out in subclauseos (il 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(J}(b). A ceiling on the rate of intrest was imposed at 15% per annum (See

450 ,

SUPREME COURT REPORTS

(1983] 3 S.C.R.

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 Jess then ten percent of the amount of its deposi!s 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 he 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).

Provifled 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 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 t)leir market value.

(2) The amount deposited or invested, as the case may be, under sub-rule (!),.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."

Rule 4 prescribes form and pa; ticulars of advertisement which must be issued for inviting deposits.

Rule 5 prescribes the form of applicatio.n 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 compa.ny to file a .rturn of deposits with the R0gistrar. 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 subrule 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. t 9 and therefore it cannot complain of the denial or deprivation of fundamental freedom guaranteed by Art. 19(l)(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 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 Jaw is in a nebulous state miy briefly be mentioned. In State Trading Corporation of India Ltd. v. The Commercial Tax Officer. Visakhapatnam(') and Tata Engineering & Locomotive Co. v. State of Bihar,(') this Court . held that a Corporation was not a citizen within the coniprehens1on

{I) (1964] 4 S.C R. 99.


(1983) 3 S.C.R.

of Art. 19 and therefore, couldnot complain of denial of fundamental freedom guaranteed by Art. l 9 to a citizen of this country.

These two decisions are an .authority for the proposition that an incorporated company being not a citi-zen 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 'ameasure executive or legislative may impair the rights of the company alone, and not -of its shareholders; 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 !ht: 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 confiictitig trends in this behalf were noticed by this Court in Bennett Coleman & Co. & Ors. v. Union of India & Ors.(') 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 fihds out whether the legislative measure directly touches the company of which th~ petitioner is a shareholder. k 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 ot 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 (l)(a) are projected and manifested by the the newspapers owned and controlled by the shareholders through the medium of the corporation."

(1) [19701 3 S.C.R. 530.

(2) [19731 2 S.¢.R. 757.

. ii--


DELHI CLOTH MILLS v. UNION (Desai, J.) 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(').

But we can draw no assistance from ihe aforementioned two cases becuse in the first case the question this Court considered was whether a petition merely for refund of a tax paid under a mistaken impresstion at the instance of a campany 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 directtion 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 coex.tensive 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 ar~ 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 . fondumental 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.

Ana there is a grievance of denial of equality before law as guaranteed by Art. 14.

We accordingly overrule 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 resenfed.

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 soda! control imposed by the State

ad 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 advntageous,

(!) A.I.R. 1981 S.C. 1368.

(2) A.l.R. 1982 S.C. 097.

SUPREME COURT REPORTS [1983) 3 s.c.R.

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 lndia 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 dominatmg 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

i~ company flotations. When the flood of speculative enterprises was at its height, Parliament inU.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 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 Ellenboro ugh in R. v. Dad(') 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 and indicated that 'a speculative project founded on joint stock or trans-· ferable 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

(I) (See Modern Company Law by Gover 4th Edn. pase 28-29)

(2) 1808(9) East 565.

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 comprehen 'iVe 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 aiid 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 o_f socia_l 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 AV. 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 commtttee were quite wide. This Committee submitted its Report in 1957, which led to the Companies ·(Amendment) Act, 1960." This amendment \vas specifically directed to the safeguarding of the private investment in the corporate sector. The Government of India acquired extensive powers for rt:gu1ation 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 gross irregularities in the companies controlled and managed by Dal, mia-Jain combine, appointed a Commission of Enquiry first presided over by Justice S.R. Tendulkar and subequently 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

.A,


(1983) 3 S.C.R.

in the management of the affairs ofDalmiaJain 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 a/ia 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 Constilution.

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. directio.n that eveµ ]3anks stood ahast at this phenomenon. This point can be

OEtHI CLOTH MILLS v. UNION (Desai, J.) 457

buttressed by a mere reference to ihe 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 .

• Be fore we turn to s. 58A and the rules framed thereunder, -a reference to the earlier attempts to exercise some degree of control over non-banking companies attracting and inviting deposists 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. !, 1964.

Fasciculus of sections in Chapter lll-B bears the title 'Provisions relating to non-banking institutions receiving depos.its and financial institutions.' See. 45 (!) 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 nonbanking 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 advertisment 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 pciwer, 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.

B '

.SUPREME COURT REPORTS [l 983] 3 s.c.it.

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 be, before the 30th day of April of each year, a sum wkich shall not be less than ten percent of the amount of its deposits maturing <luting 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 invcste\l for any purpose other than for the repayment of deposits maturing during the year referred to in sub-rule (1): And thisis subject to a further condition that . deposit shall not any time fall below ten percent of the amount of

. deposits maturing until the 31st day of March next following.

The deposit herein contemplated is to be made with any schedulded 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 thereunder, the imposition of.10% deposit under Rule 3A is unreasonable and arbitrary partictilarly because the provision does not effectively proiect 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 repaymens of deposits by the non, banking companies.

The legislature having become aware that the reguiatory 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 b_ecomes 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 Legis-

; \ '

i>ELHJ CLOTH MILLS v. UNION (Desai, J.) 459

lature 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 tne protection is neither adequate nor sufficient and therefore of doubtful utility and accordingly must be rejected as arbitrary is to put a prem1um 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.

Ariy 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 autbo rised 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 compauy can invite and accept deposits (rule 3 (I) & (2) ).

The obligation to issue an advertisement on par with.the prospecutus (Rule 4, obliga tion to furnish receipt to the depositors (Rule 7), all necessarily precribe the manner in which deposits may be invited 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 : (I) that it deprives the company the use of I 0% 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 sonie safeguard in the . interest of the depositolS or protect them, the protection is illusory because in winding-up proceedings, the depositors will have to stand pari 'passu with other unsecursd 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 I indicated would be unsecured creditors. Secured creditors and preferen\ial creditors in the event of winding up of the company

' A

460 StlPMMI! COURT REPORTS [1983} 3 s.c.R..

would score a march over them in distribution of the assets of the company. But every measure canuot be viewed or interpreted in the event of a catastrophy over-taking the company. The provision for deposit of 10% of deposits 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-rule (2) of Rule 3A itself that the amount deposited or invested, as the case may be, under sub-rule (I), sh, all not be utilised for any purpose other than for the repayment of deposits maturing during the year referred to in sub-rule (!). This necessarily implies that this I 0% 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 compauy 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 riot its remote consequences. And it would be an interesting question of law to be decided in an appropriate case as to the postilion and character of this statutory I 0% 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 far fetched that .jt.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 so 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 grouq.d 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

>--

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, pro¥ision 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 spcified 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 measur.es 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 des" cribed as gullible simultaneously, an obligation is imposed to 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 funds 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 \-alidly made, it is difficult to entertain the submission that as_ a regulatory measure if a

4~2

SUPREME COURT REPORTS [l 9S3) 3 s, C, R.

company for the benefit it enjoys of an enabling power to invit; 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

IQ/~ compulsory deposit under Rule 3A is in excess of the requirements of the protection and tl!erefore 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 compani_rs.

But as noticed in the Statement of Objects and Reasons while introducing the 19~4 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. report of the Jen kin's Comm.ittee 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 fails 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 th"t 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 coutrol 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 cons titutional 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. Devefop- . ing the ar!; lument 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 1amount 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 he 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(') Lord Denning posed the question whether if the permission of the p Janning 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 arc 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 Lrd.(') approved the statement of law by Lord Denning reiterating that the same was already approved in Fawcett Properties Ltd. v Buckingham County Cowicil.( 3) 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.

In the absence of this' causal connection, the coaditions may be rejected as superfluous or arbitrary unrelated to purpose. The power con(erred 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-

.(l) [1958] I All England Reports page 625 a't 633.

(2) [l 9651 Appeal Cases 735.

(3) [1961] A.C. 636.

SUPREME COURT REPoRTS [i98JJ J s.c.R.

pose must a fortiori, to'be valid, fairly and reasonably, relate to checkmate the abuse of juggling with the depositors/investor.s' 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 prescrlbed conditions subject to which deposits can be invited and aecepted do operate to extend a measure of protection against the notorious abuses of economic power by the corporate sector, to the detriment of depsitors/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 sicknes_s, 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 con• ferred 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, contrl 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 boing 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 howsoeYer 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.

•• ' '

lllJ

DELHI ClOTH MILLS v. UNION (Desai, J.) 465

It was next contended that Rule 3A is ultra vires the prov1S1on of sec. 58A of the <;:ompanies Act as it is beyond the scope and ambit of ihe section. Developing this argument, it was submitted that if sec. :>SA is widely construed to encompass the mode or manner of utilisation of the funds of the company which will include the depo sits made with the company, obviously sec. 58A itself will be rende red unconstitutional as transgressing the permissible limits of delega ted "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 checkma "ting 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 sensi tive field of exploitation of the weaker section. Sec. 58A amongst various other things was designed to introduce some measure of con trol 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 conveni• ently resorted to by the private sector compani<'.s.

Sec. 58A must receive its legitimate construction in the back-drop of tbis fact situa• tion. 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 portioO: 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 s.ubmission is : is there an excessive dele gation of essential legislative functions without prescribing any guide lines ? It is indisputable that the Companies Act as a whole and sec. 58A in part lays down a legislative policy, namely, gradual ever widening and effective control of the corporate sector so as to ensure a measure of protection to the persons dealing 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 defe rence to. legislative judgment. (See R. K. Garg etc. v. Union of India & Ors. etc.(1) Prag Ice & Oil Mills & Anr. etc. v. Union of India(') and R. C. Cooper v. Union of India(').

(I) [1982] I S.C.R. 947.


(3) {1970] 3 S.C.R. 530,


(1983] 3 S.C.R.

The charge of excessive delegation of essential legislative func- J tions is wholly untenable. The history of th.e Company Law ih I India, the Object and Reason Statement while introducing i 974 Amendment, regulatory measures undertaken by the Reserve Bank of India prior to the introduction of Sec. 58A, all point in the direc- . tion of taking gradual steps with a view to introducing greater State .. intervention and control so as to minimise the abuses by the corpo rate 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 dele gation 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 asthough they were administering a valid standard."

I I

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 eve to articulated sickness in private sector undertakings . . all around so that this feeble measure extending only a semblance of protectiol} can be struck down as arbitrary or a violating the permissible limits of delegated , lcgislatin." 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. 6~2 requires that every rule eacted 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 sufficie.nt to check any transgression of permissible limits of delegated legislation by the delegate. In D. S.

Gareival v. State of Punjab and Another(') the Constitqtion Bench of this Court .observed that tlie 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. 0. P. Malhotra raised a contention as to the legislative competence of the Parliament to enact. sec. SSA and the Deposit

(I) (1959] Suppl. S.C.R. 792 at 803,

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 co)llpany, and therefore the legislation dealing with 'the subject squarely fal)s under Entry 30 of .the State List, moneylending and money lenders'. If this submission were to carry conviction, every depositor in the bank would be a money lender and the transaction would be one of moneylending. 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 referable 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 corporations 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

eferable 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(').

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 ihe subject-matter of the legislation incidentally trenches upon and might enter a field under another list, then it must held to bo valid in its entirety, even though it might incidentally trench on matters which are beyond its co.mpetence. (See lshwari Khaitan Sugar Mills v. U.P. State & Anr.('). Union of India v. H. S. Dhillon('), Kera/a State Electricity Board v.. Indian Aluminium Company(')

(I) [19571 S.C.R. 399 at 410.

(2) [1980] 3 S.C .. R 331 at 343.


(4) [1976] I S.C.R. 552.


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 referable to Entry 43 ' and 44 in the Union List and the enactment viewed as a whole can not be said to be legislation cm money-lenders and money-lending or being referable to Entry 30 in the State List.

Undoubtedly, there fore the Parlfament 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 I, 1978, he specifically drew attention to the proviso to Rule 3A ·(I) 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 (!) 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 3 lst March, 1979 which may have been accepted prior to the coming into force of rule 3A and to this extent the rule has been niade 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 viries sec. 58A.

Unquestionably, Rule 3A became operative from April I, 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,(') 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 cammed to us.

It was next contended that while givmg definition of the H expl'!:ssion 'deposit in the dictionary clause of the Deposit Rules, the

(I) [1978] l S.C.R. 641.

(2) (1983] I S.C, C. 3Q5.

~ ,.

DELHI CLOTH MI.LLS v. UNIOI'! (Desai, J.) 469

exclusiouary 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 underlying 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 .ixplains 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 Coporation 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 thot the bodies which are accountable to public and Parliament a1 also those whose failure to meet with obligation is inconceivable such as the Central and the State Govt. are exch1ded from the regulatory measure. This perspective, in fact, reinforces the conclusion that the control was to be exercised over those cor porations 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 o"f the violation of Arts. 14 and 19 (!) (g) and we must reject the challenge to the constitutionality of sec. 58A and the rules made thereunder.

Not 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 co.sis in each maher.

H.L.C •.

Petitions and Appeals dismissed.