Delhi Cloth And General Mills & Ors. v.Union Of India & Ors. on 21st July 1983

Author: Khushi (University Institute of Legal Studies, Panjab University, Chandigarh)

ABSTRACT

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.

The apex court after looking upon facts and merits of the case Dismissed  the petitions and appeals.

CASE DETAILS

Judgement Cause TitleDECLARING s. 58 A and RULE 3A of companies( acceptance of deposit rules 1975) UNCONSTITUTIONAL IN VIOLATION OF ARTICLE 19(1) (g)
Case NumberCivil appeal 4832
Judgement Date21 July 1983
CourtHon’ble Supreme Court of India
Quorum3 bench judgement
AuthorHon’ble justice . DA DESAI
Citation1983 AIR 937 1983 SCC(4) 166
Legal Provisions InvolvedSection 58 A Rule 3A  ( companies – Acceptance of deposit rules, 1975)

FACTS OF THE CASE

The Central Government is authorized by Section 58A of the Companies Act, 1956 to establish, among other things, the terms and conditions under which a company may solicit or receive deposits from the general public or its members.In addition, a company inviting deposits is required by Sub-rule (1) of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975 to deposit or invest, by the 30th day of April of each year, a sum not to exceed 10% of the total amount of its deposits maturing during the year ending on the 31st day of March of the following year, using any one or more of the methods specified In that sub-rule. Furthermore, sub-rule (2) of r. 3A stipulates that the money invested or deposited may only be utilized to repay deposits that mature within the year mentioned in sub-rule (1).The petitioners/appellants claimed that Articles 14 and 19 of the Indian Constitution are violated by Section 58 A and Rule 3 A. In contrast, the Respondents raised a challenge at the preliminary phase against the maintainability of the writ petitions themselves. The reason for this is that an integrated corporation cannot claim that it has been denied a basic right protected by Article 19(1)(g) because it is not a citizen. Additionally, the replies claimed that adding a shareholder or director as a co-petitioner would not help the position.

LEGAL ISSUES RAISED

  1. Whether Section 58A of the Companies Act, 1956 (referred to as the “Act”) and Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975, as well as the Companies (Amendment) Act, 1974 are constitutionally valid?
  2. Whether the legislature possess the authority to implement Section 58A?
  3. Whether an incorporated company file a complaint alleging that its fundamental rights under Article 19(1)(g) and Articles 32 and 226 of the Constitution have been violated?

PETITIONER/ APPELLANT’S ARGUMENTS

  1. The counsels for Petitioner / Appellant ( Mr. ST desai) submitted that  if section 58A is broadly interpreted to cover how the firm’s money are used, then deposits made with the corporation will be included. Then, because Section 58A exceeds the permissible bounds of delegated legislation, it will be declared unconstitutional. Mr. S.T. Desai further argued that Rule 3A cannot be preserved as a regulatory measure since a regulatory measure needs to accomplish a goal that Rule 3A does not, namely, protect depositors, and the court should avoid taking a dogmatic or doctrinaire approach when reviewing the case.
  2. On behalf of the petitioners, Mr. O.P. Malhotra brought up yet another argument: since the legislation relates to Entry 30 in the State List (Money lending and money lenders) rather than Entries 43 and 44 of the Union List, Parliament lacked the legislative authority to enact Sec. 58A and ipso facto Rule 3A.
  3. Mr. G.A. Shah further brought up the further argument that Rule 3A is beyond the scope of section 58A and the Constitutions to the extent that it is limited retrospectively.
  4. Mr. A. Subba Rao argued that the requirement to deposit 10% of the total amount of deposits maturing in a given year is extra vires the Constitution and should be repealed since it amounts to a temporary deprivation of property without any balancing responsibility or benefit.

RESPONDENT’S ARGUMENTS

  1. The counsels for Respondent –  learned Attorney General  (UOI)  submitted that When it came to the maintainability of the Writ Petition,  made a preliminary objection. The Attorney General argued that because the incorporated firm is not a citizen, it is not entitled to bring a writ petition alleging fundamental rights violations under Articles 32 and 226 of the Constitution. The Attorney General further argued that as the Company has a legal personality separate from both the shareholders and the Directors, the situation will not improve simply by including the name of a shareholder or a director as one of the petitioners in the action. Additionally, the Attorney General requested Section 58A to implement legislative policy. The Legislature, not the Court, should decide whether the policy is wise or necessary. The Attorney General also argued that the legislative policy supporting the provision was created after seeking advice and consultation from the Reserve Bank of India, an expert organization, making the accusations of excessive delegation unsupportable. Aside from that, the Parliament, which had ultimate authority over the regulations and any exemptions or exclusionary clauses, was presented with the pertinent provisions in this case.
    1. The Respondents also made an alternative position, arguing that since the exemption clause is severable and its invalidity would not impact the remainder of the plan even if it were otherwise lawful, the Court does not need to investigate its validity.
    1. Ultimately, the Attorney General argued that even though the current rule restricts the fundamental right to conduct commerce or business, it is still reasonable because it is a regulatory measure designed to safeguard depositors from economically and socially disadvantaged backgrounds who might otherwise be taken advantage of by wealthy and powerful corporations.

JUDGEMENT

The Central Government has acted within its regulatory authority, the court ruled in this case. Protecting the interests of depositors and preventing misuse are the goals of Rule 3A. Rule 3 A requires the corporation to have liquid finances, which would allow it to fulfill its commitment when the deposits mature. As a result, Rule 3 A Is considered intra vires of Section 58 A.

The Court noted that the money placed in accordance with Rule 3 A is still the company’s property. Therefore, Rule 3 A is not inherently confiscatory. Additionally, the Court stated that one should consider the provision’s immediate goal rather than its long-term effects. As a result, the Court rejected the petitioner’s allegations, according to which the Act was passed to increase deposits in nationalized banks. The Court further stated that the argument that a better provision could have been drafted than the one in place does not allow for an exception to be made. The reason for this is that the legislative determines what kind of regulatory action is permissible, and the Court would not investigate wisdom of legislature except to Article 13 of constitution.

The Court further ruled that Rule 3 A is not irrelevant to the goal or intention for which the Central Government was granted authority under Section 58 A. When authority is granted to accomplish a goal and specific requirements are attached, the requirements must be just and reasonable and pertinent to the goal being pursued. In The requirements may be rejected on the grounds of arbitrariness in the absence of such causal linkages. Nonetheless, in this instance, the Central Government’s authority granted by Section 58 A to specify the conditions, methods, and upper bounds within which non-banking businesses may receive or solicit deposits has a clear goal. Preserving depositors and curbing corporate sector misuse were the main goals. Since the mischief was known, this regulatory measure served as a remedy. The court further stated that the State has a fundamental duty to defend the economically and socially vulnerable groups in society against the exploitation of the wealthy. Additionally, the Court decided that the Companies Act’s restrictions regarding authority transfer had not been broken (particularly Section 58 A). In this instance, the legislative policy is unambiguous and explicit with regard to providing safeguards against the power of the corporate sector.

The Court further held that in cases involving Pith and Substance, if a piece of legislation falls under one entry but incidentally touches on or may enter a field covered by another List, it must be deemed valid in its entirety even though it may touch on subjects outside of its purview. On this instance, Entries 43 and 44 on the Union List are relevant to Section 58 A and thus the enactment cannot be viewed as a legislation on Money Lenders and Money- Lending [Entry 30 of State List]. The Parliament has the competency to enact Section 58 A. Ten percent of the deposits maturing during the year had to be deposited in the way specified by Rule 3 A, as per the mandate. Certain deposits would mature in the current scenario between April 1, 1978, and March 31, 1979. A proviso was included to provide for such sporadic circumstances, and the Court ruled that this did not render the Rule retroactive.

In addressing the question of whether an Incorporated Company may file a complaint alleging that its fundamental rights under Article 19(1)(g) and Articles 32 and 226 of the Constitution have been violated, the Court declared that the law is unclear in this respect.

The current situation is moving toward the view that, when it comes to the fundamental freedoms protected by Article 19, a shareholder’s rights and the rights of the company that the shareholders have formed are coextensive, and that to deny one would be to deny the other. It is therefore time to settle this dispute, but the petitions cannot be rejected at the threshold under the current legal system.

CONCLUSION & COMMENTS

The Apex Court’s three-judge panel delivered a historic ruling in the area of corporate law. Applying a variety of legal grounds, the court in this case has correctly concluded that the Companies (Amendment) Act of 1974 introduced section 58A of the Companies Act, 1956 (referred to as the “Act”) and Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975 are constitutionally lawful. This is due to the fact that the government created regulations that were designed to safeguard depositors from economically and socially marginalized groups who may otherwise be taken advantage of by wealthy and influential corporations. The benefits of this amendment to society have outweighed the drawbacks of Section 58 A that has even now been incorporated in 2013 act under section 73-76 of the act. In this instance, the Court could have appropriately addressed whether an incorporated company could have filed a complaint alleging that its fundamental rights under Article 19(1)(g) and Articles 32 and 226 of the Constitution were violated, but they chose not to.

Nevertheless, even though this judgment has some flaws, overall, both the judgment and the government’s policy are positive steps because, according to Article 38 of the Indian Constitution, the state must work to advance the welfare of the populace by securing and defending a social order that ensures social, economic, and political justice permeates all facets of national life. These regulations merely serve to provide a semblance of security for the week and marginalized against notorious economic abuse of power by corporate sector.

REFERENCES

Important Cases Referred

D.S.NAKARA V UNION OF INDIA (1983) 1 SCC 305

R.K GARG V UNION OF INDIA (1982) 1 SCR 947

R.C .COOPER V UOI (1970)3 SCR 530

STATE TRADING CORPORATION OF INDIA V. COMMERCIAL TAX OFFICER ,VISHAKAPATNAM (1964) 4 SCR 99

BENNETT COLEMAN AND CO. V UNION OF INDIA (1973) 2 SCR 757 

Important Statutes Referred

Companies Act 1956

Companies(acceptance of deposit rules ) 1975

Constitution of India

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