Case Law Companies Act Delhi Cloth And General Mills Etc Vs Union of India Etc

Case Law Companies Act

Delhi Cloth And General Mills Etc

Vs Union of India Etc






CITATION: 1983 AIR  937    1983 SCR  (3) 438 1983 SCC  (4) 166  1983 SCALE  (2)16 CITATOR INFO : RF 1992 SC1033  (31)


ACT: Companies Act,  1956-S.  58A-Companies  (Acceptance  of Deposit)  Rules,   1975-R  3A-Imposition  of  obligation  on Companies inviting/accepting deposits from public to deposit or invest  10 per  cent of deposits maturing during the year with a  Scheduled bank  or in  government  securities,  etc. Constitutional validity of.

HEADNOTE: Section 58A of the Companies Act, 1956 confers power on the  Central   Government  to   prescribe  inter   alia  the conditions subject  to which  deposits  may  be  invited  or accepted by  a  company  either  from  public  or  from  its members. Sub-rule  (1) of r. 3A of the Companies (Acceptance of  Deposits)  Rules,  1975  obligates  a  company  inviting deposits to  deposit or invest, before the 30th day of April of each year, a sum which shall not be less than 10 per cent of the  amount of  its deposits  maturing  during  the  year ending on the 31st day of March next following, according to any one  or more  of the  methods set  out in that sub-rule. Sub-rule (2) of r. 3A lays down that the amount so deposited or invested shall not be used for any purpose other than for repayment of  deposits maturing  during the year referred to in sub-r. (1). The petitioners/appellants   challenged the constitutional validity  of both  s. 58A and r. 3A mainly on the ground  that the obligation imposed by r. 3A contravened the rights guaranteed under Arts. 14 and 19(1) (g). The respondents  raised a  preliminary objection to the maintainability of  the writ petitions on the ground that an incorporated  company,   being  not  a  citizen,  could  not complain of  denial or  deprivation of the fundamental right guaranteed by  Art. 19(1) (g) and that the situation was not improved by  joining either  a shareholder  or a director as co-petitioner. Dismissing the petitions and appeals, ^ HELD: 1.  (a) Rule 3A which makes it obligatory to keep 10 percent  of the  deposits maturing in a year provides one of the  conditions subject  to which deposits can be invited or accepted  and, indisputably, s. 58A confers power on the. Central Government  to prescribe  by  rules  the  conditions subject to  which deposits  can be  invited or  accepted  by companies. This  provision of  10 per  cent deposit  ensures repayment of  deposits maturing  in the year and in order to enable the  company to  meet its  obligation, a provision is made in sub-r. (2) of r. 3A itself that the amount deposited or invested  under sub-r.  (1) shall not be utilised for any purpose other than for repayment of deposits maturing during the year referred 439 to in  sub-r. (1).  This necessarily implies that the 10 per cent deposit  can be  utilised for  refunding  the  deposits maturing in  a year and that in order to provide the company with liquid finance to meet its obligation, the provision of compulsory deposit  is introduced.  The contention  that the protection afforded  to the depositors by rule 3A is neither adequate nor  sufficient and  therefore of  doubtful utility and accordingly  must be  rejected as  arbitrary  cannot  be accepted. It  is true that the provision is not so effective as to  ensure every  depositor whose  deposit is maturing in the year  to be fully paid out of the deposit amount. But no regulatory  or   protective  measure   can  be  rejected  as arbitrary on the short ground that it fails to fully protect the person  for whose  benefit it  is enacted.  Nor can  the contention that  having  regard  to  the  numerous  in-built safeguards  in  s.  58A,  the  imposition  of  10  per  cent compulsory deposit  under r. 3A is in excess of requirements of protection  to depositors and is therefore unnecessary be accepted.  No  legal  step  can  be  said  to  be  final  or unnecessary because  social control has inevitably to follow to defuse  abuses of economic power. Undoubtedly, depositors with  a   company,  unless  otherwise  indicated,  would  be unsecured creditors  and in  the event  of winding up of the company, secured  creditors and preferential creditors would score a march over them in the distribution of the assets of the  company.   But  every   measure  cannot  be  viewed  or interpreted in  the event  of a  catastrophe overtaking  the company. One  has to  view the  immediate object  in view to achieve which  the provision  is made  and  not  its  remote consequences.

[459 F-460 A; 460 D] (b) There cannot be  any quarrel  with the proposition that where  power is  conferred to  effectuate a purpose and for that end in view to impose conditions, the conditions to be valid  must fairly  and reasonably  relate to  the object sought to  be achieved. The power conferred by s. 58A on the Central Government  to prescribe  the limits upto which, the manner in which and the conditions subject to which deposits may be  invited or  accepted by  non-banking companies had a definite object,  namely, to  check the  abuse  of  economic power by the corporate sector and to protect the depositors. It cannot  be said  that the  conditions prescribed  by  the Deposit Rules  are so irrelevant or have no reasonable nexus to the  objects sought  to be  achieved as  to be arbitrary. These rules  do operate  to extend  a measure  of protection against the  notorious  abuses  of  economic  power  by  the corporate sector. [463 E-H] Pyks Granaide  Co. v.  Ministry of       Housing  and  Local Govt. &  Anr, [1958] I All England Reports 625; and Chertsey Urban District  Council v.  Mixnam’s Properties Ltd., [1965] A.C. 735 referred to. (c) It is clearly discernible from the marginal note of r. 3A  that the  requirement of  10 per  cent deposit  is  a measure to  ensure that  part of  the funds of a company are kept as  liquid  assets  available  for  use  for  specified purpose. Even  when the money is kept in deposit, it remains the property of the company and available for its use albeit as provided  in the  statute. It is well-known that economic planning may provide for earmarked funds and if by voluntary self-discipline  and   sound  economic   planning  financial viability is  not maintained,  a Welfare  State with planned economy may  impose statutory  discipline in  larger  public interest.  Such   disciplinary  measures  cannot  be  termed deprivatory in character. [461 C-E] 440 (d) The  contention that since r. 3A cannot extend even a semblance  of protection to the depositor has to be viewed in the  wider spectrum of regulation of credit system of the country, control  of circulation of money in the economy and imposition of  financial discipline  on the corporate sector and that  when so  viewed it would be clearly ultra vires s. 58A being far in excess of the requirements of that section, ought to  be rejected  on the  short ground  that r. 3A does extend some protection to the depositor howsoever minimal it may  be.  When  viewed  in  the  context  of  various  other provisions devised  to extend  protection to  depositors  it does play a small but effective part. [464 F-H] (e) The  contention that  the proviso  to r.

3A (1) is retrospective in  operation inasmuch  as it requires that in relation to  deposits maturing  during the year ending 31-3- 1979 the  sum required  to be  deposited under that sub-rule shall be deposited before 30-9-1978 irrespective of the fact that such  deposits might  have been  accepted prior  to the coming into force of r. 3A and hence r. 3A is ultra vires s. 58A cannot  be accepted.  A statute is not properly called a retroactive statute because a part of the requisites for its action is  drawn from  a time  antecedent  to  its  passing. Viewed from  this angle the provision can be properly called prospective and not retroactive. [466 C-G] D. S.  Nakara v.  Union of       India, [1983]  1 S.C.C. 305 referred to. (f) The  contention that the exclusionary clause to the definition of  ‘deposit’ contained  in the Rules has been so widely worded  that only  private sector companies have been arbitrarily signed  out for  regulatory treatment  overlooks the object  and purpose  underlying the  enactment of s. 58A and the  Rules made  thereunder. It is regulatory measure to checkmate the  abuses to  which private  sector corporations are  prone   to.  If  this  object  is  kept  in  view,  the exclusionary clause explains itself. [468 H-469 B] 2. (a)  Even prior       to the  introduction of s. 58A, the Reserve Bank  of India  had been  empowered to  regulate the acceptance  and   repayment  of   deposits  by   non-banking companies. It  is manifest from the Statement of Objects and Reasons  appended   to  the   1974   Amendment   Act   which incorporated  s.   58A  in   the  Companies   Act  that  the legislature,  having   become  aware   that  the  regulatory measures introduced  by the Reserve Bank had not effectively protected the  depositors, felt  that the  needs of the time necessitated introduction  of statutory  provisions enabling the  Central   Government  to   take   effective   measures. Experience had  shown that  deposits taken by companies were not being refunded on due dates and in many cases either the companies had  gone into  liquidation or  had  no  funds  to refund the  deposits. Section  58A,  amongst  various  other things, was  designed to  introduce some  measure of control over  the   non-banking  companies  inviting  and  accepting deposits in  the ultimate  interest of the depositors and to meet cases of abuse or distortion of the system. The section must receive its legitimate construction in the back-drop of this fact situation.


The interpretation has to be such as to achieve the  purpose of imposing a measure of social control to remedy  the mischief, to suppress which the provision was enacted. Company  is not  a field  of legislation  in  which finality is  to be  expected, as the law falls to be applied to a  growing and challenging subject matter and growing use of the company system as an 441 instrument of business and finances and the possibilities of abuse inherent in that system. A vigilant Parliament keeping a  close   watch  over   this  corporate   sector   wielding considerate economic  power has  to take  steps by  doses to eradicate the abuses of economic power. [458 D-459 E; 462 E] (b) The  charge of  excessive delegation  of  essential legislative functions  is wholly untenable. The policy is do definite and  the guidelines  are available from the history of the  legislation and  the Companies Act taken as a whole. The policy  is  the  gradual,  ever-widening  and  effective control of the corporate sector so as to ensure a measure of protection to  the persons  dealing with  it and to minimise the abuses  of economic  power by that sector. The wisdom of the policy  is not for the Court to examine. And in economic legislation, the Court should feel more inclined to judicial deference to  legislative judgment.  The Deposit  Rules have been framed in exercise of power conferred under ss. 58A and 642, and  s. 642 requires that every rule framed in exercise of the  power conferred  by it  must be  placed before  each House of  Parliament for  a period  of thirty  days and both Houses have  power to  suggest modification  in the proposed rules. This control of Parliament is sufficient to check any transgression of permissible limits of delegated legislation by the delegate. [466 A, D, 465 G, 466 E-F] R. K. Garg etc. v. Union of India, [1982] 1 S.C.R. 947; Prag Ice  & Oil  Mills &  Anr. v.  Union of  India, [1978] 3 S.C.R. 292;  R. C. Cooper v. Union of India, [1970] 3 S.C.R. 530; D.S.  Garewal v.  State of  Punjab & Anr., [1959] Supp. S.C.R. 792, referred to. (c) Parliament  had the legislative competence to enact s. 58A.

Applying the doctrine of pith and substance, s. 58A which is  incorporated in  the Companies Act is preferable to Entries 43 and 44 in the Union List and the enactment viewed as a  whole cannot  be said  to be  legislation  on  “money- lenders and money-lending” or being referable to Entry 30 in the State List. [466 B, A] A.S. Krishna  v. State  of Madras,       [1957] S.C.R.  399; Ishwari Khaitan  Sugar Mills  v. U.P. State, [1980] 3 S.C.R. 331; Union  of India  v. H.S.  Dhillon, [1972]  2 S.C.R. 33; Kerala State  Electricity Board v. Indian Aluminium Company, [1976] 1  S.C.R. 552;  and State  of Karnataka  v. Ranganath Reddy, [1978] 1 S.C.R. 641, referred to. 3. The  objection that  a company, being not a citizen, cannot complain of denial of the fundamental right conferred by Art.  19(1) (g), is an of treated contention whenever the petitioner is  an incorporated  company but  the law in this behalf is  in a  nebulous state; that apart, the trend is in the direction  of holding  that in the matter of fundamental freedoms guaranteed  by Art.  19 the rights of a shareholder and the  company which  the  shareholders  have  formed  are rather co-extensive and the denial to one of the fundamental freedom would  be denial  to the other. It is time to put an end to  this controversy but in the present state of law the petitions cannot  be thrown  out at the threshold. [451 C-G, 453 A-E] State Trading  Corporation of  India Ltd. v. Commercial Tax  Officer,   Vishakhapatnam  [1964]  4  S.C.R.  99;  Tata Engineering and Locomotive Company v. 442 State of  Bihar, [1964]  6 S.C.R. 885; R. C. Cooper v. Union of India,  [1970] 3  S.C.R. 530; and Bennett Coleman and Co. v. Union of India, [1973] 2 S.C.R. 757, referred to. Divisional Forest Officer v. Bishwanath Tea Co., A.I.R. 1981 S.C. 1368; and Western Coal Fields Ltd. v. Special Area Development Authority,  A.I.R. 1982 S.C. 697 not relevant to the contention raised.

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.

It was lastly submitted that even if it can be said that there was limited retrospectivity, the  same is  permissible because  the mere fact that a part of the requisite for the application of the rule is  derived from  an anterior  date by  itself will not make it retrospective. Before we       examine the  various contentions  summarised here, a  brief review  of the relevant provisions of the Act and the  Deposits Rules would be advantageous. The Companies Act. 1956  was enacted  to consolidate  and  amend  the  law relating to  companies and  certain other associations. Sec. 58A was  introduced by  the Companies (Amendment) Act, 1974. The relevant portion of sec. 58A is extracted hereunder:- “58A: Deposits  not  to  be  invited    without issuing an advertisement: (1) ……. 448 (2)   No company  shall invite, or allow any other person to  invite or    cause to  be invited on its behalf any deposit unless:- (a)   such deposit       is invited  or is caused to be invited in  accordance with  the  rules  made under sub-sec. (1) and (b)     an       advertisement,   including  herein   a statement showing  the financial  position of the company,    has been  issued by the company in such  form and  in such  manner as    may be prescribed. (3)(a) Every deposit accepted by a company at any time  before the commencement of the Companies (Amendment  Act,   1974  in  accordance  with  the directions made  by the  Reserve  Bank  of       Indian under Chapter  III B  of the Reserve Bank of India Act, 1934 (2 of  1934), shall,  unless renewed in accordance with clause


(b) be repaid in accordance with the terms of such deposit . (b) No deposit referred to in . clause (a) be renewed by  the company  after the  expiry of  the term thereof  unless the  deposit is  such that it could have   been accepted  if the rules made under sub-sec. (I)  were in  force at  the time when the deposit was initially accepted by the Company. (c) Where,  before the  commencement  of  the companies (Amendment)  Act, 1974,       any deposit was received by  a company  in  contravention  of  any direction made  under Chapter  III of  the Reserve Bank of  India Act, 1934 (2 of 1934), repayment of such deposit  shall be  made in  full on or before the 1st  day of  April, 1975  and  such  repayment shall be  without prejudice to any action that may be taken under the Reserve Bank of India Act, 1934 for   the         acceptance   of   such   deposit   in contravention of such direction. (4)  Where  any  deposit  is    accepted  by  a Company after  the commencement  of the  Companies (Amendment Act,  1974,  in  contravention  of  the rules made under sub- 449 section (1),  repayment of       such deposit  shall be made by  the company  within thirty  days from the date of  acceptance of such deposit or within such further time,  not exceeding  thirty days,       as the Central Government       may, on sufficient cause being shown by the company, allow.. (7) (a)  Nothing contained  in  this    section shall apply to:- (i) a banking company, or (ii) such  other company was the Central Government may,  after consultation with the  Reserve  Bank  of      India, specify in this behalf. (b)   Except the         provisions relating to advertisement contained in clause (b) of sub- section (2),


nothing in  this section  shall apply to  such classes of financial companies as  the   Central   Government   may,     after consultation with  the Reserve Bank of India, specify in this behalf.” In exercise  of power  conferred by  sec. 58A read with sec.  642   of  the  Act,  Central  Government  enacted  and promulgated the  Companies (acceptance  of Deposits)  Rules, 1975. Rule 2B defines ‘deposit’ to mean any deposit of money with, and  included any  amount borrowed  by a  company; but does not  include what  is set out in subclauses (i) to (x). Rule 3  prescribes conditions  subject to which the deposits may be  accepted. Deposits  against unsecured  debentures or deposits from  share-holders of a public company or deposits guaranteed by  any person,  who at  the time  of giving  the guarantee, is  a director  of  the  company,  together  with short-term deposits,  if any,  accepted shall not exceed 10% of the paid-up capital and free reserves of the company. Any deposit other  than those  mentioned herein before shall not exceed 25%  of the  paid-up capital and free reserves of the company. No  deposit for  a term  less than  six months  and exceeding thirty-six  months can  be accepted  save what  is called short-term  deposit as set out in the proviso to rule 3(1)(b). A  ceiling on  the rate  of interest was imposed at 15% per annum (See 450 rule 3).  Then comes  Rule 3A  which is  the centre  of this fierce controversy. It may be reproduced in extenso: “3A. Maintenance of liquid assets: (1)   Every company  shall, before the 30th day of April of  each year deposit or invest, as the case may  be, a  sum which  shall not be less then    ten   percent  of  the  amount  of  its deposits maturing  during the    year ending on the 31st  day of March next following, in any one or more of the following methods, namely: (a)     in a  current or  other deposit account with  any   scheduled  bank,  free  from charge or lien; (b)       in  unencumbered  securities  of  the Central Government   or  of  any  State Government;

(c)  in unencumbered securities mentioned in clauses (a)  to (d)  and (ee) of section 20 of  the Indian Trusts Act. 1882 (2 of 1882). Provided that    with relation  to the deposits maturing during  the year       ending on the 31 st day of March,       1979, the  sum required to be deposited or invested under this sub-rule shall be deposited or invested  before the  30th  day       of  September, 1978. Explanation: For  the purposes  of this  sub- rule, the       securities referred to in clause (b) or clause (c)       shall not  be reckoned at their market value. (2) The  amount deposited or invested, as the case may  be, under  sub-rule (1),       shall  not  be utilised  for  any       purpose  other  than  for  the repayment of  deposits maturing  during  the  year referred to  in that  sub-rule, provided  that the amount remaining  deposited or  invested,       as  the case may  be, shall not at any time fall below ten percent of       the amount  of deposits maturing until the 31st day of March of that year,” 451 Rule 4 prescribes form and particulars of advertisement which  must   be  issued   for  inviting  deposits.  Rule  5 prescribes the  form of  application to be made for deposits and Rule  6 makes it obligatory to furnish a receipt for the deposit. Rule  7 obligates  the company to maintain register of deposits.  Rule 10  requires the company to file a return of deposits  with the  Registrar. These  are the  conditions prescribed by rules subject to which deposits can be invited and accepted.  The challenge  is confined  to Rule  3A  only which obligates  the company  to deposit 10% of the deposits maturing during the prescribed year in the manner set out in cl. (a), (b) and (c) of sub-rule 1 of rule 3A. The  learned  Attorney  General  raised  a       preliminary objection to the maintainability of the writ petitions filed in this  Court under  Art. 32  and those  filed in  the High Court under Art. 226 of the Constitution. The submission was founded on the ground that an incorporated company being not a citizen for the purposes of Art. 19   and   therefore   it cannot complain  of the denial or deprivation of fundamental freedom guaranteed  by Art.

19(1)(g) of the Constitution and the situation  is not  improved by  joining either  a share- holder or  a Director as co-petitioner. It was said that the company  has  a  juristic  personality  independent  of  the Director or  a shareholder and the business or trade carried on by  the company  is not that of either the shareholder or the Director.  As the  corrolary, it  was urged that even if the impugned  Rule 3A imposes an unreasonable restriction on the fundamental  freedom to carry on trade or business, this Court cannot entertain a petition under Art. 32 nor the High Court can  entertain one under Art. 226 of the Constitution. Frankly  speaking,   this  is  an  oft  repeated  contention whenever the F petitioner is an incorporated company but the law in  this behalf is in a nebulous state and therefore, it is not  possible to throw out the petition at the threshold. More  so   because  a   petition  under   Art.  226  of  the Constitution can  be filed  by the  company  for  any  other purpose and  also the  petitioners complain  of violation of Art. 14  of the  Constitution. The  reasons for stating that the law  is in a nebulous state may briefly be mentioned. In State Trading  Corporation of  India Ltd.  v. The Commercial Tax  Officer,   Visakhapatnam(1)  and   Tata  Engineering  & Locomotive Co.  v. State of Bihar,(2) this Court held that a Corporation was not a citizen within the comprehension 452 of Art.  19 and  therefore, could  not complain of denial of fundamental freedom  guaranteed by  Art. 19  to a citizen of this country.  These two  decisions are an authority for the proposition that an incorporated company being not a citizen could not  complain  of  violation  of  fundamental  freedom guaranteed to  citizens under  Art. 19. But a different note was struck  in R.C. Cooper v. Union of India,(1) when it was held that ‘a measure executive or legislative may impair the rights of  the company  alone, and not of its share-holders; it may  impair the  rights of the shareholders as well as of the company.  It was  further held  that jurisdiction of the Court to grant relief cannot be denied, when by State action the rights  of the  individual shareholder  are impaired. if that action  impairs the  rights of  the company as well. In that case,  the Court entertained the petition under Art. 32 of the  Constitution at  the instance  of a Director and the shareholder  of  a  company  and  granted  relief.  The  two conflicting trends in this behalf were noticed by this Court in Bennett  Coleman &  Co. & Ors v. Union of India & Ors.(2) where after  review of  the  afore-mentioned  decisions  and several others, it was held as under:-

“As a result of the Bank Nationalisation case (supra)  it  follows  that       the  Court  finds  out whether the  legislative measure  directly touches the  company   of       which   the  petitioner   is  a shareholder.  A   shareholder   is        entitled   to protection of Art. 19. That invidiual right is not lost  by        reason  of   the  fact  that  he  is  a shareholder   of         the    company.    The    Bank Nationalization case  (supra) has       established the view that       the fundamental  rights of shareholders as citizens  are not  lost when  they associate to form a  company. When  their fundamental rights as shareholders are  impaired by  State action  their rights as       shareholders are  protected. The reason is that  the shareholders’       rights are equally and necessarily affected  if the rights of the company are affected.  The       rights  of  shareholders  with regard to       Article 19  (1)(a)  are  projected  and manifested       by   the  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.


This becomes manifest from the Statement of Objects and  Reasons wherein it was stated that: ‘experience has shown  that in  many cases  deposits  so  taken  by  the companies have  not been  refunded on the due dates. In many such cases,  either the companies have gone into liquidation or the  funds with  the companies  are depleted  to such  an extent that  the companies  are not  in a position to refund the deposits.  lt is  accordingly  considered  necessary  to control companies  inviting deposits  from the  public.’ The Legis 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 the protection is  neither adequate nor sufficient and therefore of doubtful  utility and  accordingly must  be  rejected  as arbitrary is  to put  a premium  on  these  practices  which necessitated a  further measure  of social  control,  taking more effective steps to checkmate the abuse of this powerful corporate sector  and to  leave the mischief unrepaired. Any interpretation of  sec. 58A has to be such as to achieve the purpose of  imposing a  measure of  social control to remedy the mischief,  to suppress  which the provision was enacted. To  revert   to  the  language  of  sec.  58A,  the  Central Government was authorized to prescribe the limits subject to which, the  manner in  which and  the conditions  subject to which the  deposits  may  be  invited  or  accepted  by  the company. The  Deposit Rules viewed as a whole amongst others prescribe the  limits upto  which a  company can  invite and accept deposits  (rule 3 (1) & (2)). The obligation to issue an advertisement  on  par  with  the  prospecutus  (Rule  4, obligation to  furnish receipt  to the  depositors (Rule 7), all necessarily  prescribe the  manner in which deposits may be invalid  or accepted. Rule 3A makes it obligatory to keep 10% of the deposits maturing in a year, and it thus provides one of  the conditions  subject to  which  deposits  can  be invited or  accepted. And  indisputably,  sec.  58A  confers power on  the Central  Government to prescribe all the three things by rules made in this behalf. It was,  however, urged  that this rule 3A is arbitrary for more  than one  reason: (1) that it deprives the company the use  of 1()%  of its  funds even  though the  company is obliged to  pay interest  to the  depositors  as  contracted between the  parties and


(2) if  the rule  was intended  to afford some  safeguard in  the interest of the depositors or protect them, the protection is illusory because in winding- up proceedings, the depositors will have to stand pari passu With other  unsecured creditors  while secured  creditor and preferential creditor , will score a march over them even in regard to  the 10%  deposit because that would be treated as an asset  of the  company available for distribution amongst various persons entitled to recover claims from the company. Undoubtedly, depositors with a company unless otherwise indicated would  be unsecured  creditors. Secured  creditors and preferential creditors in the event of winding up of the company 460 would score  a march over them in distribution of the assets of the  company. But  every  measure  cannot  be  viewed  or interpreted in  the event  of a  catastrophy over-taking the company. The  provision  for  deposit  of  10%  of  deposits ensnares repayment  of deposits  maturing in the year and in order to  enable the  company  to  meet  its  obligation,  a provision is made in sub-rule (2) of Rule 3A itself that the amount deposited or invested, as the case may be, under sub- rule (1),  shall not  be utilised for any purpose other than for the  repayment of  deposits  maturing  during  the  year referred to  in sub-rule


(1). This necessarily implies that this l0%  deposit can  be utilised for refunding the deposit maturing in  a year  and that itself is an obligation of the company and in order provide the company with liquid finance to meet  its obligation, the provision of compulsory deposit is introduced. The same  cannot be  questioned on the ground that it  constitutes deprivation of property of a company or is of  a confiscatory  nature. The  amount deposited to meet with the  obligation of  Rule 3A is and remains the property of the company nor anyone else has any access to it. One has to see  the immediate  object in  view to  achieve which the provision is  made and  not its  remote consequences. And it would be  an interesting question of law to be decided in an appropriate case  as to  the position  and character of this statutory 10% deposit in distribution of assets of a company in winding-up  proceedings. The argument that this provision was made  for increasing  the deposits in Nationalised Banks or augmenting  the  investment  in  the  Central  and  State securities, is so 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.

13  of  the Constitution is  attracted. Having  said  this,  it  may  be stated that except a little more detailed provision there is nothing very useful or of such innovative nature as would be impressive even for a recommendation. Requiring the  company to       invest 10%  of its  deposits maturing in  a year  in deposit with prescribed institutions or in  trust securities  cannot be  termed as deprivation of the funds  of the  company. It  is a  measure to ensure that part of  the funds  of a  company are  kept as liquid assets available for  use for  specified purpose.  This is  clearly discernible from  the marginal  note of  Rule 3A. Regulatory measure ensuring  availability of  liquid  asset  cannot  be termed as  deprivation of  property. It becomes an earmarked fund and  it is  well-known that  the economic  planning may provide for  earmarked  funds  and  if  by  voluntary  self- discipline and  sound economic  planning financial viability is not  maintained, a Welfare State with planned economy may impose statutory  discipline in larger public interest. Such disciplinary  measures   cannot  be  termed  deprivatory  in character. Even  when the  money  is  kept  in  deposit,  it remains the  property of  the company  and available for its use albeit  as provided  in the statute. The Legislature was not unaware  of a  known  malady  that  the  private  sector companies were  becoming sick  after incurring  huge  debts, rendering small  investors destitutes,  heaping miseries  on the weaker  sections of  the society  and therefore  if by a measure a  company which  is permitted  to attract  deposits from   the    public   generally   described   as   gullible simultaneously,  an   obligation  is   imposed  Lo  keep  an infinitesimally small  portion of  assets as  liquid finance available for  meeting the  obligations, namely repayment of deposits maturing  in a  given year,  it cannot be said that this constitutes  deprivation of  company’s fund. If a trust can  be  compelled  to  deposit  trust  finds  in  a  manner prescribed by  the statute,  if a  nationalised or scheduled bank is compelled to maintain requisite liquidity in respect of which  a charge  of deprivation  of  property  cannot  be validly made,  it is  difficult to  entertain the submission that as a regulatory measure if a 462 company for  the benefit  it enjoys  of an enabling power to invite deposits  from public is asked to keep in deposit 10% of the  deposits maturing  in  a  year  the  same  would  be deprivatory and therefore arbitrary. In passing

it was  stated that  having regard  to  the numerous inbuilt  safeguards in s. 58A of the Companies Act, the imposition of 10% compulsory deposit under Rule 3A is in excess of  the requirements  of the protection and therefore unreasonable and  arbitrary. Having  had the  legacy of  the laissez faire  doctrine imposed  by foreign  rulers till the end of 19th century, and even with the tormenting experience of South-Sea  Bubbble,  the  State  was  least  inclined  to interfere with  the working  of the  incorporated companies. But as noticed in the Statement of objects and Reasons while introducing the  1974 Amendment  Act which incorporated sec. 58A in  the Companies  Act, it was designed to meet cases of abuse or  distortion of  system which have, of late, assumed comparatively serious  proportion and a stringent measure of control has  become inevitable.  This is  in accord with the Deport of  the Jenkin’s  Committee in  the United Kingdom in which it  was observed  that the  Company is  not a field of legislation in  which finality is to be expected, as the law falls to  be applied  to a  growing and  challenging subject matter  and   growing  use  of  the  company  system  as  an instrument of business and finances and the possibilities of abuse inherent in that system. A vigilant Parliament keeping a  close   watch  over   this  corporate   sector   wielding considerable economic  power has  to take  steps by doses to eradicate  the   abuses  of  the  economic  power  by  these corporations. More  insidious the  abuses of  economic power greater social  control became unavoidable for the health of national economy  and protection of the persons dealing with corporations. No legal step can be said final or unnecessary because social  control has  inevitably to  follow to defuse abuses of  economic power. In such a situation, to say, that a further  measure of protection is arbitrary in view of the protection already  afforded is  begging the  issue and  the contention must be negatived on this short ground. Having cleared the ground, we must now turn to the main challenge  posed   on  behalf  of  the  petitioners  to  the constitutional validity of Rule 3A. It was urged that when a regulatory measure  imposes conditions  the same must fairly and reasonably  relate to the objects sought to be achieved. Developing the  argument it  was submitted  that if  Rule 3A enacted in 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.

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 referable to Entry 44 when the objects of the company are not confined to one state and irrespective of  the fact whether it is trading or not. When a law  is impugned  on the ground that it is ultra vires the powers of  the legislature  which inacted it, what has to be ascertained is  the true character of the legislation. To do that one  must have  regard to  the enactment as a whole, to its objects  and to  the scope and effect of its, provisions (See A.  S. Krishna  v. State  of Madras(1).  To resolve the controversy if  it becomes  necessary to  ascertain to which entry in  the three lists, the legislation is referable, the Court has evolved the doctorine of pith and substance. If in pith and  substance. the  legislation falls within one entry or the  other but  some portion of the subject-matter of the legislation incidentally  trenches upon  and might  enter  a field under  another list,  then it must held to be valid in its entirety,  even though  it might  incidentally trench on matters  which  are  beyond  its  competence.  (See  Ishwari Khaitan Sugar  Mills v  U.P. State & Anr.(2), Union of India v. H.  S. Dhillon(3),  Kerala  State  Electricity  Board  v. Indian Aluminium Company(4) 468 and State of Karnataka and another etc. v. Ranganath Reddy & Anr.(1). Applying this doctorine of pith and substance, sec. 58A which  is incorporated in the Companies Act is referable to Entry  43 and  44 in  the Union  List and  the  enactment viewed as a whole cannot be said to be legislation on money- lenders and money-lending or being referable to Entry 3() in the State  List. Undoubtedly,  therefore the  Parliament had the legislative competence to enact sec. 58A. Mr. G.A.  Shah canvassed  one  more  contention.  After stating that Rule 3A became operative from April 1, 1978, he specifically drew  attention to  the proviso  to Rule 3A (1) which required  that with  relation to the deposits maturing during the  year ending  on the 31st day of March, 1979, the sum required  to be  deposited or invested under sub-rule 3A (1)

shall  be deposited  or invested  before the 30th day of September, 1978.  It was  then contended that this provision would necessitate  depositing 10%  of the  deposits maturing during the  year ending with 31st March, 1979 which may have been accepted  prior to the coming into force of rule 3A and to this  extent the  rule has been made retrospective and as there was  no power  conferred  by  sec.  58A  to  prescribe conditions  subject   to  which  deposits  can  be  accepted retrospectively  Rule   3A  is   ultra   vires   sec.   58A. Unquestionably, Rule 3A became operative from April 1, 1978. The obligation  cast by  Rule 3A  is to  deposit 10%  of the deposits maturing  during the  year in the manner prescribed in Rule  3. Some deposits would be maturing between April 1, 1978 and  March 31.  1979.  To  provide  for  such  marginal situation, a  proviso is  inserted. Does it to make the rule retroactive ?  of course,  not. In  D.S. Nakara  v. Union of India,(2) a  Constitution Bench  of this  Court has, in this context, observed as under: “A  statute     is  not   properly   called   a retroactive  statute   because  a        part  of   the requisites for  its action is drawn  from a  time antecedent to its passing.” Viewed from this angle, the provision can be properly called prospective and  not retroactive.  Therefore the contention does not commend to us.

It was  next contended  that while giving definition of the expression  ‘deposit in  the dictionary  clause  of  the Deposit Rules, the 469 exclusionary  clause   is  so  widely  worded  that  it  has successfully kept  a  large  number  of  similarly  situated corporations outside  the purview of the Act and the picking and  choosing   is  so  arbitrary  that  one  can  say  with confidence that  only private  sector companies  are singled out for  this regulatory treatment. The submission overlooks the object and purpose under lying enacting sec. 58A and the Rules made thereunder. As has been repeatedly noted, it is a regulatory measure  to checkmate  the abuses,  which private sector corporations  are prone to. If this object is kept in view, the  exclusionary clause explains itself. To enumerate briefly, the bodies excluded from the operation of the rules are  Central   and  State   Govt.,  State   Bank  of   India Nationalised Banks, Industrial Finance Corporation of India, State Financial  Corporations established  under  the  State Financial Corporations  Act, Industrial  Development Bank of India, Electricity  Boards constituted under the Electricity (Supply) Act,  Life Insurance  Corporation of India and such other bodies which if viewed properly disclose a perspective in enacting the exclusionary clause. The perspective is that the bodies which are accountable to public and Parliament as also  those   whose  failure  to  meet  with  obligation  is inconceivable such  as the  Central and  the State Govt. are excluded from  the regulatory  measure. This perspective, in fact, reinforces  the conclusion  that the control was to be exercised over  those corporations  which are prone to abuse the economic power enjoyed by them. We therefore see nothing arbitrary or unreasonable in the exclusionary clause. A detailed       analysis of the provisions, in the light of submissions would  clearly negative  any contention  of  the violation of  Arts. 14 and 19 (1) (g) and we must reject the challenge to  the constitutionality  of r  sec. 58A  and the rules made 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.

Petitions and Appeals dismissed. 470

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