# DELHI CLOTH AND GENERAL MILLS, ETC v. UNION OF INDIA, ETC

- **Citation:** [1983] 3 S.C.R. 438
- **Court:** Supreme Court of India
- **Decided:** 1983-07-21
- **Bench:** D. A. Desai, V. BAl.AKRISHNA BRAD!, R. B. Misra Jj
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/delhi-cloth-and-general-mills-etc-v-union-of-india-etc-8371
- **Pages:** 32

## Headnote

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·..._ . Companies Act, 1956-S. 58A-Companies (Acceptance of De1Josit) Ri.les,
1975-R 3A-Imposition of obligation on Companies inviting/accepting deposits
froni public to deposit or invest 10 per cent of dePosits maturing during the year
C
with q Scheduled bank or in governmeiit securities, etc.
Constitutiona{ validity of.
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Section SSA of the Companies Act, 1956 confers power on thC Central
Government to prescribe inter alia the condi'tions subject to which deposits
ma'.y be invited or accepted by a company either from public or from its
members. Sub-rule (1) of r. 3A of the Companies (Acceptance cf Deposits)
Rules, 1975 obligates a company inviting deposits to deposit of'in•rest, before
the 30th day of April of each year, a sum which shall not be less than 10 pyr
cent of the amount of its deposits m·aturing during the year ending on the 31st
day of March next following, a·ccording to any one or more of the n1ethods
set out in that sub-rlile. Sub-rule (2) of r. 3A Jays down that the amount so
deposited or invested shall not be used for any purpose other than for repayment of deposits maturing during the year referred to in sub-r. (1).
The petitioners{appellants challenged the conStitutional validity of both
s. 5~A and r. 3A mainly on the ground that the, obligation impose·:! by r. 3A
contravened the rights guaranteed under Arts. 14 and 19(1) (g).
The respondents raised a preliminary objection to the maintainability of
the writ petitions on the ground that an incorporated company, being not a
citizen, could.not complain of denial or deprivation_ of the fundamental right
guaranteed by Art. 19.(1) (g) and that the situation was not improved by joining
either a shareholder or a director as co-petitioner.
Dismissing the petitions and appeals,
\
HELD: I. (a) Rule 3A which makes it obligatory to keep 10 percent
of the deposits maturing in a year provides one of the conditions liUbject to
which deposits can be invited- or accepted and, indi~putably, s. 5811. confers
power on the- Central' Government to prescribe by rules the
c·Jnditions
subject to which deposits can be invited· or accepted by companies. This
provision of 10 per cent deposit
ensures. repay1nent of deposits maturing
in the year and in ·order to enable the companyto meet its obligation,
a provision is made in sub-r. (2) of r. 3A itself that the amount deposited or invested under sub-r. (1) shall not be utilised for.any purpose
qtber than for reparn1ent of deposits maturing during the year referred
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DELHI CLOTH MILLS v. UNION (Desai, J.)
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 th~ company with liquid finance to meet its obligation, the provisionof compulsory depo,it is introduced. The contention that the protection afforded to the depositors by rule 3A.is neither adequate _nor su~cient and therefore of doubtful utility and accordingly must be rejected as arbitrary cannot
be accepted. It is true that the provision is not .so effective as to ensure every
depositor whose deposit is maturing in the year to be fully paid· out of the
deposit amount. But no regulatory or protective measure can be rejected as
arbitrary on the short ground that it fails to fully protect the person for whose
benefit it is enacted. Nor can the contention that ·having regard to the .
numerous in-built safeguards ins. 58A, the in1position of 10 .per cent compul-.
sory deposit under r. 3A is in excess of requiren1ents of protection to depositors
and is therefore unnecessary be accepted. No legal step can be said to be
-final or unnecessary because social control has inevitably to follow to defuse
abuses of economic power. Undoubtedly, depositors with a company, unless
otherwise indicated, would be unsecured creditors and in the event of winding
up of the co1npany, secured creditors and preferential creditors would score a
march over the1n in the distribution of th

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438
DELHI CLOTH AND GENERAL MILLS, ETC.
v.
UNION OF INDIA, ETC.
July 21, 1983
(D. A. DESAI, V. BAl.AKRISHNA BRAD! AND R. B. MISRA JJ.J
•
·..._ . Companies Act, 1956-S. 58A-Companies (Acceptance of De1Josit) Ri.les,
1975-R 3A-Imposition of obligation on Companies inviting/accepting deposits
froni public to deposit or invest 10 per cent of dePosits maturing during the year
C
with q Scheduled bank or in governmeiit securities, etc.
Constitutiona{ validity of.
E
F
G
H
Section SSA of the Companies Act, 1956 confers power on thC Central
Government to prescribe inter alia the condi'tions subject to which deposits
ma'.y be invited or accepted by a company either from public or from its
members. Sub-rule (1) of r. 3A of the Companies (Acceptance cf Deposits)
Rules, 1975 obligates a company inviting deposits to deposit of'in•rest, before
the 30th day of April of each year, a sum which shall not be less than 10 pyr
cent of the amount of its deposits m·aturing during the year ending on the 31st
day of March next following, a·ccording to any one or more of the n1ethods
set out in that sub-rlile. Sub-rule (2) of r. 3A Jays down that the amount so
deposited or invested shall not be used for any purpose other than for repayment of deposits maturing during the year referred to in sub-r. (1).
The petitioners{appellants challenged the conStitutional validity of both
s. 5~A and r. 3A mainly on the ground that the, obligation impose·:! by r. 3A
contravened the rights guaranteed under Arts. 14 and 19(1) (g).
The respondents raised a preliminary objection to the maintainability of
the writ petitions on the ground that an incorporated company, being not a
citizen, could.not complain of denial or deprivation_ of the fundamental right
guaranteed by Art. 19.(1) (g) and that the situation was not improved by joining
either a shareholder or a director as co-petitioner.
Dismissing the petitions and appeals,
\
HELD: I. (a) Rule 3A which makes it obligatory to keep 10 percent
of the deposits maturing in a year provides one of the conditions liUbject to
which deposits can be invited- or accepted and, indi~putably, s. 5811. confers
power on the- Central' Government to prescribe by rules the
c·Jnditions
subject to which deposits can be invited· or accepted by companies. This
provision of 10 per cent deposit
ensures. repay1nent of deposits maturing
in the year and in ·order to enable the companyto meet its obligation,
a provision is made in sub-r. (2) of r. 3A itself that the amount deposited or invested under sub-r. (1) shall not be utilised for.any purpose
qtber than for reparn1ent of deposits maturing during the year referred
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DELHI CLOTH MILLS v. UNION (Desai, J.)
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 th~ company with liquid finance to meet its obligation, the provisionof compulsory depo,it is introduced. The contention that the protection afforded to the depositors by rule 3A.is neither adequate _nor su~cient and therefore of doubtful utility and accordingly must be rejected as arbitrary cannot
be accepted. It is true that the provision is not .so effective as to ensure every
depositor whose deposit is maturing in the year to be fully paid· out of the
deposit amount. But no regulatory or protective measure can be rejected as
arbitrary on the short ground that it fails to fully protect the person for whose
benefit it is enacted. Nor can the contention that ·having regard to the .
numerous in-built safeguards ins. 58A, the in1position of 10 .per cent compul-.
sory deposit under r. 3A is in excess of requiren1ents of protection to depositors
and is therefore unnecessary be accepted. No legal step can be said to be
-final or unnecessary because social control has inevitably to follow to defuse
abuses of economic power. Undoubtedly, depositors with a company, unless
otherwise indicated, would be unsecured creditors and in the event of winding
up of the co1npany, secured creditors and preferential creditors would score a
march over the1n in the distribution of the assets of the company. But every
measure cannot be viewed ·or interpreted in the event of a catastrophy overtaking the company.. One has to view the immediate object in view to achieve
which the prpvision is made and not its remote consequences.
[459 F-460 A; 460 DJ
(b) There cannot be any quarrel with the proposition that where power
is conferred to effectuate a purpose and for that end in view to impose conditions, the conditions to be valid must fairly and reasonably relate to the
object sought to be achieved. The power conferred by s. SBA on the Central
Government to prescribe the limits upto which, the manner in which and the
conditions subject to which deposits may be invited or accepted by non-banking
companies bad a definite object, namely, to check the abuse of economic power
by the corporate sector and to protect the depositors. It cannot.be said that
the conditions prescribed by the Deposit RuleS are so ·irrelevant or have no
reasonable nexus to the objects sought to be achieved as to be arbitrary. These
rules do operate to extend a measure of protection against the notorious abuses
of economic power by the corporate sector. [463 E-HJ
Pyks Granaide Co. v. Ministry of Housing and Local Govt. & Anr. [1958]
I All.England Reports 625~ and Chertsey Urban District Council v. Mixnam's
Properties Ltd., [1965) A.C. 735 referred to.
(c) Jt is clearly discernible from the marginal note of r. 3A that the
requirement of 10 _per cent deposit is a measure to C:Qsure that part of the funds
of a company are kept as liquid assets available for use for speciti.Cd purpose.
Even when the money is kept in deposit, it remains the property of the
company and available for its use albeit as provided in the statute. It is wellknown that economic planning may provide for earmarked funds and if by
vol~nt~y self-discipline arid sound economic planning financii:ll viability is not
maintained, a Welfare State, with planned economy may impose statutory
discipline in larger public interest. Such disciplinary measures cannot be
termed deprivatory in character. (461 C-EJ
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SUPREME COURT REPORTS
(1983] 3 S.C .• ll..
(d) The contention that since r.' 3A cannot extend even a semblance
.of protection to the depositor ·has to be viewed in the wider spectrum of
regulation of credit system ·of the country, control of circulation of money in
the economy and imposition of financial discipline on the corporate sector and
that when so viewetfit would be clearly ultra vires s. 58A being far in exceas
of the requirements of that section, ought to be rejected on the short .grou~d
that r. 3A does extend some protection to the depositor howsoever minimal
it may be. When viewed in t~e context -0f various other provisions devised
to ~xtend protection to depositors it does play a small but effective part.
[464 F-HJ
(e) The contention that . the proviso to r. 3A (l) is retrospective in
operation inasmuch as it requires that in relation to deposits maturing durin&
the year ending 31~3-1979 the sun1 required to be deposited under that subrule'shall be derosited before 30-9-1978 irrespective of "the fact that such
• deposits might have been accepted prior to the coming into f6rce of r. 3A and
hence r. 3A is ultra vires s. 58A cannot be accepted. A statute is not Properly
. called a retroactive statute because a part of the requisites for its action is
drawn from ·a time antecedent to its passing. Viewed from this angle tl;te
provision can be properly called prospective and not retroactive. [466 C·G)
. D. S. Nakara v. Union of India, (1983! 1 S.C.C. 305 referred to.
(f) The contention that the exclusion".lry clause to the definition of
'deposit' contained in the Rules has been so widely worded that only private
sector companies have been arbitrarily singned out for regulatory treatn1ent
overlooks the object and purpose underlying _the enactment of s. 58A and the
. Rules 111ade thereunder. It is regulatory measure to checkmate the abuses to
which private sector corporations are prone to. If this object is kept in view,
the exclusionary clause explains itself. [468 H-469 B]
2,, (a) Even prior to the introduction of s. 58A, the Reserve. Bank of
India had been empowered to regulate the acceptance and repayment of
deposits by hon-banking companies. It is manifest from the Statement of
Objects and Reasons appended to the 1974 Amendment Act which incorporated
s. SSA in the Companies Act that the legislature, having become aware that
the regulatory measures introduced by the Reserve Bank had not effectively
protected the depositors, felt that the needs of the time necessitated introduction of statutory prov-isions enabling the Central Government to take effective
measures. Experience had shown that deposits taken by con1panies were not
being refunded on due dates and in many cases either the companies had gone
into liquidation or had no funds to refund tl~e 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 mCet cases of abuse or distortion of the system.
The section n1ust receive its legitimate construction· in the back~drop of this
fact situ"ation. The interpretation has to be such as to achieve the purp~se of
iinposing a measure of social control to remedy the mischief, to suppress which
the provisioffwas enacted. Company is not a. field of legislation in which
finality i:> to be expected, as the law falls to be applied to a growing and
~h~llen~iD$ sub~ect matter and t?rowins use Qf the company· system as an
y
DELHI ci,orn MiLLS v. UNION (Desai, J.)
Mi
instrument of business and finances and the possibilities of abuse fnherent in·
that system. A vigilant Parliament keeping a close watch over this corporate·
A
sector wielding considerate economic power has to take steps by doses to
eradicate the abuses of economic power. [458 D-459 E; 462 E]
(b) The charge of excessive delegation of essential legislative functions
is-wholly untenable. The policy is do definite and the guidelines are available.
from the histqry of the legislation and the Co1npanies Act taken as a whole.
The policy is the gradual, 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 abuse~ of economic power by that sector. The wisdom
of the policy is not for the Court to examine.· And in econon1ic legislation,
the Cotirt should feel more inclined to judicial deference t'o legislative judgment. The Deposit Kules hav~ been framed in exercise of power conferred
under ss. 58A and 642, ands. 642 requires that every rule framed in exercise
of the power conferred by it must be placed before each House of Parliament
for a period of thirty days and both Hous.Js have power to suggest modification in the. proposed rules. This control of Parliament is sufficient to ch"eck
any transgression of permissible limits of delegated legislation by the delegate.
[466 A, D, 465 G, 466 E-F]
R. K. Garg etc. v. Union of lndia, [1982] 1S.C.R.947; Prag lee & Oil
Mills & Anr. v. Union of lndia, [1978] 3 S.C.R. 292; R. C. Cooper v. Union of
lndi"a, [1970] 3 S.C.R. 530; D. S. Garewa/ v. State of Punjab & Anr., [1959]
Supp. S.C.R. 792, referred to.
(c) Parliament had the legislative competence- to enacts. 58A. Applying
the doctrine of pith and substance, s. - 58A Which is
iqcorpor~ted in the
Companies Act is r·ererable to Entries 43 and 44 in the Union List and the
enactment vi~wed as a whole cannot be said to be legislation on "moneylenders and money-lending" or being referable to Entry 30 in the State List.
.
[466 B, A]
A. S. Krishna v. State of Madras, [1957] S.C.R. 3.99; lshwari
K~aitan
Sugar Millsy. U. P. State, [1980] 3 S.C.R. 33i; Union of lndia v. H. S. Dhillon,
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[1972] 2 S C.R. 33; Kerafa State Electricity Board v. Indian Aluminium Conipany,
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[1976] 1 S.C.R. 552; and State of Karnataka v. Ranganath Reddy, [1978] l 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 oftrepeated'"'contention whenever the petitioner is an incorporated company but
the law in this be"half is in -a nebulous state; that apart, the trend is in the
direction of holding that in the matter of fundamental freedoms guaranteed by
Art. 19 the rights of a shareholder and the company which the shareholders
have formed are rather co.extensive and the denial to one of the fundamental
freedom would be denial to the other. It is time to put an end to this controversy but in the present state of law the petitions cannot be thrown out at the
thresh.old. [451 C·G, 453 A·E]
.
State Trading Corporation of India Ltd. v. Commercial Tax Officer,
Vishakliapatnan1 [1964] 4 S.C.R. 99; Tata Engineering and Locomotive Company v.
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442 .
SUpjl.EME COURT REPORTS
[1983) 3 s.c.R..
State of Bihar, [1964] 6 S.C.R. 885; R. C. Cooper v. Union of India, (1970] 3
S.C.R. 530; and Bennelf Coleman and Co. v. Union of lndia, [1973] 2 S.C.R. 757,
referred to.
·
Divisional Forest Officer v. Bishwanath Tea Co., A.IR. 1981 S.C 1368;
and Western Coal Fields Ltd. v. Special Area Development Authority, A.LR.
1982 S.C. 697 not relevant to the contention raised.
ORIGINAL JURISDICTION : W.P. Nos. 1637, 1733, 1933-35,
1952, 1961-62, 1963-64, 2002-03, 2007, 2021, 2085, 2109-12, 2114,
2189, 2837, 3131, 3354, 3643, 4233, 4681,
~723, 7447, 7624 of
1981 & 2628, 2835,.3471, 4310, 4382, 4385, 8513, 2404, 2748, 5507,
5508, 2499, 2748 & 9341 of 1982.
AND
C.A. Nos. 747-68, 850-52, 769-73, 854, 941, 1091 & 1417 of
1981.
From the Judgment and Order dated the 5th December, 1980
of the Gujarat High Court in Special Civil Application Nos. 1138 to
1148, 1150, 1151, 1153-1155, 1166-67, 1170, 1928 of 1978, 868-869 of
1980, 1152, 2503of1978, 1252/80 and 1186, 1863, 1149, 1187, 1185,
1128, 1188, 1184 & 1190 of 1978.
AND
Civil Appeal No. 1535of1981
From the Ji.idgment and Order dated the 15th April, 1981 of
the Gujarat High Court in Special Civil Application No. 1281 of
1981.
AND
Civil Appeal No. 3013of1981.
•
Appeal by Special leave from the Judgment and Order dated
the 9th July, 1979 of the Allahabad High Court in Civil Mis. W.P.
No. 8426 of 1978.
WITH
Special Leave Petition (Civil) No.4454 of 19~2.
DELHI CLOTH MILLS v. ,UNION (Desai,!.)
443
From the Judgment and Order dated the 21st April
1982 of
the Delhi High Court in C.W.P. No. 1165 of 1982.
A
The 21st Day of July, 1983.
For the Petitioners :
Mr. S.S. Ray, H.K Puri and V.K. Bhal in W.P. 1637/81".
B
H.K. Puri in WP. No. 851.3 of 81.
O.P. Malhotra, Harish Salve,
P.H. Parekh and Divyang
K. Chhaya in WP. Nos. 2085 and 3131 of 1981.
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R.P. Bhatt, Ravinder Narain, O.C. Mathur, Mrs. A.K. Verma,
Talat Ansari, D.N. Mishra, Miss Meera Mathur and Sukumaran in
WP. No. 1935 of 1981.
Harish Salve, Ravinder Narain, O.C. Mathur and D. N. Misra
in WP. No. 1733/81.
O.'C. Mathur, D.N. Mishra, Sukumaran, Sanjay, Mrs.
A.K.
Verma and Miss Meera Mathur in WP. Nos. 1933, 1934, 1952, 2002,
· 3643, 7643, 7624 of 1981.
A.N. Haksar, O.C. Mathur, Mrs. A.K. Verma, Sukumaran,
Miss Meera Mathur, Ravinder Narain and Sanjay in WP. No. 2021 of
1981.
P.C. Gokhale, B.R. Agarwa/a and Miss Vijaya/akshmi Menon
in WP. No. 2007 of 1981.
P.C. Bhartari in WP. Nos. '1961-64 of 1981.
A. Subba Rao in WP. Nos. 2003/81 and 2404/82.
G.A. Shah, Srikumar and Mr. M.N. Shroff in WP. Nos. 21092112/81, 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.
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SUI'kEME co\JR.t REPORTS
(1983 j j s.C.R.
S.K. Gambhir in WP. No. 4681/81.
M.G. Ramachandran in WP. No: 3471 of 1982
R.P. Kapur in WP. Nos. 4310, 4382 and 4385 of 1982.
P.K. Mukherjee in WP. No. 2748 of 1982.
O.C. Mathur and D.N. Misra in WP. No. 5723/81.
Shri Narain in WP. No. 2835/82.
M.N. Shroff in WP. Nos. 2499 and 9341/82
For the Appellants in Appeals
S.T. Desai, Harish Salve, Ravinder Narain, O.C. Mathur, Mrs.
A.K. Verma, G.C. Gandhi, Talat Ansari, Sukumaran, Miss Meera
· D
Mathur and D.N. Mishra in C.A. Nos. 747-68 of 1981.
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D.N. Mishra in CA. Nos. 850-52 and 1535 and 1091 of 1981.
t...
P.C. Bhartariin CA. Nos. 769-773, 854, 941and1417/81.
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Ashok Grover in SLP No: 4454 of 1982.
S.T. Desai and Ani/ Sharma in CA. No. 3013 of 1981.
For the Respond~nts in all the matters :
L.N. Sinha, Attorney General, Ms A. Subhashini and P.P. Singh.
The Judgment of the Court was delivered by
DESA), J. In 'this group of writ petitions under Art. 32 and
appeals by special leave nuder Art. 136 of the Constitution, constitutional validity of Rule 3A of the Companies (Acceptance of Deposit)
Rules, 1975 ('Deposits Rules' for short) introduced by Companies
(Acceptance of Deposits) Amendment Rules, 1978 which became·
operative from April I, 1978 an,d incidentally of sec. 58A of the
Companies Act, 1956 ('Act' for short) inserted by Companies
(Amendment) Act, 1974 which came into force on February I, 1975
is challenged. The challenge proceeds on diverse grounds which
may be briefly summarised.
bELi!I CLOTH MILLS v. UNION (Desai. ':)
At the very outset, it must be noticed that -the factual matrix
has little or practically no relevance in this case.
The contention put in the forefront was that in the absence of
guidelines both sec.
58A and the Rule 3A of the Deposits Rules
enacted in exercise of the power conferred by sec.
58A confer
arbitrary and uncanalised powers and hence are violative of Art. 14.
Contravention of Art. 14 was canvassed 'for the additional reason
that the power to exempt from the. application of the rule co~fers
wide discretion so that it c.an be used arbitrarily to pick and choose
. with the result that ·equality before law is denied. Further the
obligation to deposit 10% of the deposits maturing during the year
ending 31st March next following has no rational nexus to the object
sought to be achieved by the provisions and is either in excess of
the requirement or irrelevant and in' any case arbitrary. , The next
in order of priority came the. challenge that having regard to the.
numerous inbuilt safeguards provided in sec. SSA, the imposition
of a liability to deposit 10 Yo of the total deposits maturing in a year
in the manner as repuired by the impugned rule, if it was enacted
for the protection of tho deposi(ors, the protection is illusory and
does not subserve the purpose for which it is enacted and therefore,
requirement is wholly unreasonable and imposes an unreasonable
restriction on the freedom to carry on business conferred by Art.
19 (!} (g).
As a corrolary, it was submitted that if Rule 3A is
enacted not for the limited purpose of protecting depositors, but has
a wider aim particularly with regard to the regulation of credit
system of the country, control of circulation of money in India's
economy and imposing financial discipline, it is clearly ultra viris sec.
· 58A. As a second string to the bow, it was contended that if sec.
58A enacts a legislatiye policy, a rule framed to carry out .the policy
must be relevant to the implementation of the policy so laid down,
but the provision contained in Rule 3A is neither relevant nor. capable of being regarded as relevant for implementation of the policy
and therefore, it is ultra vires sec. 5,8A.
Mr. S.T. Desai, who appeared in . soine ·matters further
contended that if sec. 58A is widely construed to encompass the
mode or manner of utilisation of the funds of the company which
will include the deposists made with the company, obviously sec.
58A itself will be rendered unconstitutional ·as transgressing the
, permissible limits of delegateμ legislation and it would appear that
the Legislature was guilty of abdication of its essential legislative
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SUPREME COURT REPORTS
iJ983j 3 s.c.Ii.
functions. It was said that Rule 3A cannot be saved as a regulatory measure because the regulatory measure must subserve some
purpose which Rule 3A fails to achieve, namely, protection of
depositors and in examining the matter, the Court should eschew a
dogmatic or doctrinaire approach.
Mr. O.P. Malhbtra, learned counsel appearing in some matters
raised an additional contention that Parliament did not have
legislative competence to enact sec.
58A and ipso facto Rule 3A
because the legislation is referable to Entry 30 in the State List :
Money lending and money lenders; relief to agricultural indebtnees
and not to Entries 43 and 44 of the Union List.
Mr. G.A. Shah, appearing in sorrie matters raised an additional
contentio.n that to the extent limited retrospectivity is given to Rule
3A, it is ultra vires sec. 58A and the Constitution.
Mr. A. Subba Rao, learned counsel appearing in some other
matters canvassed one more contention when he urged that the
obligation to deposit 10 I. of the amount of deposits maturing in the
year constitutes te1nporary deprivation of property without any
countervailing obligation or b~nefit and therefore it is ultra Vires the
Constitution.
The learned Attorney General appearing for the Union of
India raised a preliminary objection that the writ petitions under
. Art. 32 or those filed in the High Court under Art. 226 were not
maintainable because the incorporated company being not a citizen, .
freedom guaranteed by Art. 19 (I) (g) is not secured to it, and
situation would not be improved by merely impleading a Director or
a shareholder as one of the petitioners because company has a
juris!ic personality independent of the shareholders ~nd the D'irectors
and trade or business carried on by the company cannot be said to
be the trade or business carried on by the Director· or Shareholders ..
And to keep Art. 14 out of the way, it was urged that it is merely a
facade to invoke the jurisdiction of this Court. It was next urged
that sec. 58A enacts a legislative policy, and wisdom or necessity
of the policy is in the domain of the Legislature and the Court
never undertakes to examine the wisdom or otherwise of the
legislative policy.
Proceeding along this line, it was said that·if Rule
3A is enacted for the implementation of· the legislative policy, the
Court is precluded from examining the wisdom or
otherwi~e of the
......
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DELHI CLOTH MILLS v. UNION (Desai, J.)
policy; because legislature is the be1t Judge in this behalf. It was
urged that the charge of excessive delegation is unsustainable because
the legislative policy underlying the provision was devised after
consulting and obtaining guidance of an expert ·body like the
Reserve Bank of India and the relevant rules were placed before the
Parliament which had complete control over the rules and. exemption
or exclusionary clause can be properly implemented because of the
guidance available from the scheme of the Act as also the purpose
and object underlying the impugned provision. An alternative
submission was that the Court need.not undertake the examination
of the validity of the exemption provision because it is severable and
· its invalidity will not affect the rest of the scheme if it, was otherwise
valid. In answer to the contention whether the impugned rule has
nexus to the objects sought to be achieved and the effeqiveness of
the rule, it was supmitted that firstly sec.
58A must receive such
interpretation as . would suppress the mischief and adv;mce the
remedy. It was pointed out that the mischief which was sought to
be remedied is clearly discernible from tr.e Statement of Objects and
Reasons as also the notes on cl!luses published while 'introducing
1974 Amendment Act. It was next urged that if the rule imposes a
restriction on the fundamental freeedom to carry on trade or
business, the same is reasonable because it is of a regulatory nature
enacted with a view to protecting depositors coming from a socially
and economically weaker section who may be tempted by the ·
alluring promises made in an advertisement inviting depoists with
no umbrella of protection when the company folds up its tent;
becomes sick and in winding-up, the depositor has io stand in a
qneue as an unsecured creditor. It w·as lastly submitted that even if
it can be said that there was limited retrospectivity, the same is permissible because the mere fact that a part of the requisite for the
application of tb.e rule is derived from an anterior date by itself will
not make it retrospective.
Before we examine the -various contentions summarised here,
a brief review of the relevant provisions of the Act and the Deposit~
Rules would be advantageous. The Companies Act. 1956 was enacted
to ·consolidate and amend the law relating to companies and certain
other associations.
Sec. 58A was introduced by the Companies
(Amendment)' Act, 1974. The relevant portion of sec.
58A is
extracted hereunder :-
"58A : Deposits not to be invited without issuing an
advertisement : (1) ........... .
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(2) No company shall invite, or allow any other person
to invite or cause to be invited on its behalf any
deposit unless :-
(a) such deposit is· invited or is caused to be invited in
accordance with the rules
made . under
sub-sec.
(I) and
(b) an advertisement, including herein a statement showing the financial position of the company, has been
issued by the company in such form and in such
manner as may be prescribed.
(~) (a) Every deposit accepted by a company at any
time before the commencement of the Companies (Amendment Act,
i974
in
accordance with tbe. directions
made .by the Reserve Bank of Indian under Chapter
IIIB of the Reserve Bank of India Act, 1934 (2 of
1934); shall, unless renewed. in acc.ordance with clause
(b) be repaid in accordance with ihe terms of such
deposit.
(b) No deposit referred to in clause (a) be renewed
by the company after the expiry of the term ther.eof unless the deposit is. such that it could have been accepted if
the rules made under sub-sec. (l) were in force at the time·
when the deposit was initially accepted by the Company.
(c) Where, before the commencement of the compa·
nies (Amendment) Act, !974, any deposit.was received by
a company in contravention of any direction made under
Chapter III B of the Reserve Bank of India Act, 1934
· (2 of 1934), repayment of such deposit shall be made
in full on or before the 1st day of April, 197 5 and such
repayment shall be without prejudice to any action that
may be taken under the Reserve Bank of India Act; 1934
for the acceptance. of such deposit
in contravention of
such ·direction.
(4) Where any deposit is accepted by a
Company
after the commencement o[ the Companies (Amendment
Act, 1974, in contravention of the rules made under sub-
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DELHI CLOTH MILLS v. UNION (Desai, J.)
seciion dl. repayment of such deposit shall be made by
the company within thirty days from the date of acceptance of siich deposit or within such further time, not
exceeding thirty days, as the Central Government may,
on sufficient cause being shown by the company, allow.
\
(7) (a} Nothing contained in this section shall apply
to:-
(i) a banking company, or
449
(ii) such other company ias the Central Government, may, after consultation with the Reserve
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(b) Except the provisions relating to advertiseme)lt
contained in clause (b} of sub-section (2), 1lothing in this
section shall apply to such classes of financial companies
as the Central Government .may, after consultation with
the Reserve Bank of India, specify in this behalf." •
Jn exercise of power conferred by sec. 58A read with sec. 642
of the Act, Central Government enacted and promulgated the Companies (acceptance of Deposits) Rules, 1975. Rule 2B defines 'deposit'
to mean any deposit of money with, and include\! any amount borrowed by a company; but does not include what is set out in subclauseos (il to (x}. Rule 3 prescribes conditions subject to which
the deposits may be accepted. Deposits against unsecured debentures or deposits from share-holders of a public company or deposits
guaranteed by any person, who at the time of giving the guarantee,
is a director of the company, together with short-term deposits;· if
any, accepted shall not exceed 10% of the paid-up capital and free
reserves of the company. Any deposit other than those mentioned
herein before shall not exceed 25% of the paid-up capital and free
reserves of the company. No deposit for a term less than six months
and exceeding thirty-six months can be accepted save what is called
short-term deposit as set out in the proviso to rule 3(J}(b). · A
ceiling on the rate of int~rest was imposed at 15% per annum (See
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rule 3). Then comes Rule 3A which is the centre of this fierce controversy. It may be reproduced in extenso :
"3A. Maintenance of liquid assets:
. (1) Every company shall, before the 30th day of April of
each year deposit or. invest, as the case may be, a sum
· which shall not be Jess then ten percent of the
amount of its deposi!s maturing during the year ending on the 31st day of March next following, in any
one .or more of the following methods, namely :
•
(a) in a current or other deposit account with any
scheduled bank, free from charge or' lien;
(b) in unencumbered
securities of ~he Central
Government or of any State Government;
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(c) in unencumbered securities mentioned in clauses
(a) to (d) and (ee) of section 20 of the Indian
Trusts Act, 1882 (2 of 1882).
Provifled that with relation. to the deposits maturing
during the year ending on the 31st day of March, 1979,
the sum required to be deposited or invested under this
sub-rule shall be deposited or invested before the 30th day
of September, 1978.
Explanation : For the purposes of this sub-rule, the
securities referred to in clause (b) or clause (c) shall not
be reckoned at t)leir market value.
(2) The amount deposited or invested, as the case
may be, under sub-rule (!),.shall not be utilised for any
purpose other than for the repayment of deposits maturing during the year referred to in that sub-rule, provided
that the amount remaining deposited or _invested, as the
case may be, shall not at any time fall below ten percent
of the amount of deposits maturing until the 31st day of
March of that year."
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DELHI CLOTH MILLS v. UNION (Desai, J.)
451
Rule 4 prescribes form and pa;ticulars of advertisement which
must be issued for inviting deposits.
Rule 5 prescribes the form of
applicatio.n to be made for deposits and Rule 6 makes it obligatory
to furnish a receipt for the deposit. Rule 7 obligates the company
to maintain register of deposits.
Rule 10 requires the compa.ny to
file a .r~turn of deposits with the R0gistrar. These are the conditions
prescribed by rules subject to which deposits can be invited and
accepted. The challenge is confined to Rule 3A only which obligates
the company to deposit 10% of the deposits maturing during the
prescribed year in the manner set out in cl. (a), (b) and (c) of subrule 1 of rule 3A.
·, ..
The learned Attorney General raised a preliminary objection
to the maintainability of the writ.petitions filed in this Court under
Art. 32 and those filed in .the High Court under Art. 226 of the
Constitution. The submission was founded on the ground that an
incorporated company being not a citizen for the purposes of Art.
t 9 and therefore it cannot complain of the denial or deprivation of
fundamental freedom guaranteed by Art. 19(l)(g) of the Constitution
and the situation is not improved by, joining either a share-holder
or a Director as co-petitioner. It was said that the company has a
juristic personality independent of the Director or a shareholder and
the business or trade carried on by the company is not that of
either the shareholder or the Director. As the corrolary, it was
urged that even if the impugned Rule 3A imposes an unreasonable
restriction on the fundamental freedom to carry on trade or business,
this Court cannot entertain a petition under Art. 32 nor the High
Court can entertain one under Art. 226 of the Constitution. Frankly
speaking,
this is an
oft repeated
contention whenever the
petitioner is an incorporated company but the law in this behalf is
in a nebulous state and therefore, it is not possible to throw out the
petition at the threshold.
More so because a petition under Art.
226 of the Constitution can be filed by the company for any other
purpose and also the petitioners complain of violation .of Art. 14
of the Constitution .. The reasons· for stating that the Jaw is in a
nebulous state miy briefly be mentioned. In State Trading Corporation
of India Ltd. v. The Commercial Tax Officer. Visakhapatnam(') and
Tata Engineering & Locomotive Co. v. State of Bihar,(') this Court
. held that a Corporation was not a citizen within the coniprehens1on
{I) (1964] 4 S.C R. 99.
(2) [1964] 6 S.C.R. 885.
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·of Art. 19 and therefore, could- not complain of denial of fundamental freedom guaranteed ·by Art. l 9 to a citizen of this country.
These two decisions are an .authority for the proposition that an
incorporated company being not a citi-zen could not complain of
violation of fundamental freedom guaranteed to citizens under Art.
19. But a different note was struck in R.C Cooper v. Union of
India, (1) when it was held that 'a- measure executive or legislative
may impair the rights of the company alone, and not -of its shareholders; it may impair the rights of the shareholders as well as of
the company. It was further held that jurisdiction of the Court to
grant relief cannot be denied, when by State action !ht: rights of the
individual shareholder are impaired, if that action impairs the rights
of the company as well. In that case, the Court entertained the
petition under Art. 32 of the Constitution at the instance of a·
Director and the shareholder of a company and granted relief. The
two confiictitig trends in this behalf were noticed by this Court in
Bennett Coleman & Co. & Ors. v. Union of India & Ors.(') where
after review of the afore-mentioned decisions and several others,
it was held as under :-
"As a result of the Bank Nationalisation case (supra)
it follows that the Court fihds out whether the legislative
measure directly touches the company of which th~
petitioner is a shareholder.
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shareholder is entitled
to protection of Art. 19. That invidiual right is not lost
by reason of the fact that he is a shareholder of the company.
The Bank Nationalization case (supra) has
established the view that the fundamental rights ot shareholders as citizens are not lost when they associate to
form a company. When their fundamental rights as shareholders are impaired by State action their rights as shareholders are protected. The reason is that the shareholders'
rights are equally and necessarily affected if the rights of
the company are affected. The rights, of shareholders
with regard to Article 19 (l)(a) are projected and manifested by the the newspapers owned and controlled by the
shareholders through the medium of the corporation."
(1) [19701 3 S.C.R. 530.
(2) [19731 2 S.¢.R. 757.
. ii--
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DELHI CLOTH MILLS v. UNION (Desai, J.)
453
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Our attention was, however, invited to two later decisions : (1) The
Divisional Forest Officer v. Bishwanath Tea Co. Ltd.(1) and (2) Western
Coalfields Ltd. v. Special Area Development Authority, Korba and
another(').
But we can draw no assistance from ihe aforementioned
two cases bec~use in the first case the question this Court considered
was whether a petition merely for refund of a tax paid under a
mistaken impresstion at the instance of a campany can be entertained
under Art. 226 and the question in the second case was whether the
properties of a Govt company are exempt from levy of tax imposed
by state or its delegate under Art. 285( 1 ). The contention raised in
these two cases does not touch the question under examination.
Thus apart from the law being in a nebulous state, the trend is in the
directtion of holding that in the matter of fundamental freedoms
guaranteed by Art. 19, the rights of a shareholder and the company
which the shareholders have formed are rather co·ex.tensive and the
denial to one of the fundamental freedom would be denial to the
other. It is time to put an end to this controversy but in the present
state of law we ar~ of the opinion that the petitions should not be
thrown out at the threshold. We reach this conclusion for the
additional reasons that apart from the complaint of denial of
. fondumental right to carry on trade or business, numerous other
contentions have been raised which the High Court had to examine
in a petition under Art. 226.
Ana there is a grievance of denial of
equality before law as guaranteed by Art. 14.
We accordingly overrule the preliminary objection and proceed to examine the contentions
on merits.
Let the camouflage of alleged violation of fundamental right
in these petitions not deceive any one; let no one be in doubt that
the petitions are filed to vindicate some fundamental rights encroachment on which is resenfed.
At the root lies the fierce and unending
battle royal between political power and economic power to gain
ascendance one over the other. Piercing the veil of legalese ·the
core-question is the degree of soda! control imposed by the State
a~d 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 adv~ntageous,
(!) A.I.R. 1981 S.C. 1368.
(2) A.l.R. 1982 S.C. 097.
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Any scientific attempt at presenting the · history. of company
law in our country inevitably telescopes into the history of company
law in U.K. because more or less the framers of the company law
in lndia followed in the shadow of the development of the law in.
U ;K. Corporate sector wields tremendous economic power and this
organised sector has throughout challenged by all the means at its
command, social control by political institutions and more particularly
the State. The law developed in the footsteps of abuse by the
corporate sector of its economic power .and dominatmg influence in
the world of national and international industry, trade and commerce: If uncontrolled, the result is disastrous and the infamous
South-Sea Bubble should be an eye-opener. The first and second
decades of the 18th century were marked by an almost frenetic boom
i~ company flotations. When the flood of speculative enterprises
·was at its height, Parliament 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
of the public trade and commerce of the kingdom.(1)
That which
governs the least, governs the best, the laissez faire doctrine was
firmly entrenched. Since then at regular intervals, the State control
became more or less discernible in successive company acts.
The State intervention into the functioning of the corporate
sector initially took the form of the prosecution for breach of some
· of the laws, the first notable case being the one in November, 1807:
, The Attorney General at the instance of a private relator sought
criminal information against two unincorporated . companies both of
which had freely transferable shares and advertised that the liability
of the members would be limited. Lord Ellenboro ugh in R. v.