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Timestamp: 2019-04-24 18:52:04+00:00

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

References: Art. 19
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