1983 (7) TMI 205 - SC - Companies Law

Court Upholds Companies Act Provisions, Rules Valid

The court upheld the constitutional validity of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, and Section 58A of the Companies Act, 1956. ... Constitutional validity of rule 3A of the Companies (Acceptance of Deposits) Rules, 1975 ('Deposits Rules' for short), introduced by the Companies (Acceptance of Deposits) Amendment Rules, 1978, which became operative from April 1, 1978, and incidentally of section 58 A of the Companies Act, 1956 inserted by the Companies (Amendment) Act, 1974, which came into force on February 1, 1975 challenged? Held that:- Appeal dismissed. Not a single contention canvassed on behalf of the petitioners, individually or collectively, bears scrutiny and, therefore, the petitions and the appeals must fail and are dismissed with costs in each matter. A detailed analysis of the provisions, in the light of the submissions, would clearly negative any contention of the violation of articles 14 and 19(1)(g) and we must reject the challenge to the constitutionality of section 58A and the rules made thereunder. Issues Involved:1. Constitutional validity of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975.2. Constitutional validity of Section 58A of the Companies Act, 1956.3. Alleged violation of Article 14 of the Constitution.4. Alleged violation of Article 19(1)(g) of the Constitution.5. Legislative competence of Parliament to enact Section 58A.6. Alleged excessive delegation of legislative power.7. Retrospective application of Rule 3A.Detailed Analysis:1. Constitutional Validity of Rule 3A:The petitioners challenged Rule 3A on the grounds that it conferred arbitrary and uncanalised powers, violating Article 14. They argued that the rule imposed an unreasonable obligation to deposit 10% of the deposits maturing during the year, which had no rational nexus to the object sought to be achieved. The court held that the rule was a regulatory measure aimed at ensuring the availability of liquid assets to meet the obligation of repaying deposits. The court found that the rule was not arbitrary and had a reasonable nexus to the object of protecting depositors.2. Constitutional Validity of Section 58A:The petitioners contended that Section 58A was unconstitutional as it conferred wide discretionary powers without guidelines, thus violating Article 14. The court noted that Section 58A was enacted to protect depositors and to regulate the acceptance of deposits by companies. The court held that the section laid down a definite legislative policy and provided sufficient guidelines for the exercise of power by the Central Government. Therefore, the section was not unconstitutional.3. Alleged Violation of Article 14:The petitioners argued that both Section 58A and Rule 3A violated Article 14 as they conferred arbitrary powers and lacked rational nexus to the object sought to be achieved. The court held that the provisions were enacted to protect depositors and to regulate the acceptance of deposits by companies, which was a reasonable classification with a rational nexus to the object sought to be achieved. Therefore, there was no violation of Article 14.4. Alleged Violation of Article 19(1)(g):The petitioners contended that the obligation to deposit 10% of the deposits maturing in a year imposed an unreasonable restriction on the freedom to carry on business, violating Article 19(1)(g). The court held that the rule was a regulatory measure aimed at protecting depositors and ensuring the availability of liquid assets to meet repayment obligations. The restriction was found to be reasonable and in the interest of the general public, thus not violating Article 19(1)(g).5. Legislative Competence of Parliament:The petitioners argued that Parliament did not have the legislative competence to enact Section 58A, as the subject matter fell under Entry 30 of the State List. The court held that the legislation was referable to Entries 43 and 44 of the Union List, which pertain to the incorporation, regulation, and winding-up of trading corporations. Therefore, Parliament had the legislative competence to enact Section 58A.6. Alleged Excessive Delegation of Legislative Power:The petitioners contended that Section 58A involved excessive delegation of legislative power without sufficient guidelines. The court held that the section laid down a definite legislative policy and provided sufficient guidelines for the exercise of power by the Central Government. The rules framed under Section 58A were also placed before Parliament, ensuring control over the delegated legislation. Therefore, the charge of excessive delegation was found to be untenable.7. Retrospective Application of Rule 3A:The petitioners argued that Rule 3A was retrospective as it required deposits maturing during the year ending on March 31, 1979, to be deposited or invested before September 30, 1978. The court held that the rule was prospective and not retroactive, as it applied to deposits maturing after the rule came into force. Therefore, the rule was not ultra vires Section 58A.Conclusion:The court dismissed the petitions and appeals, holding that Section 58A and Rule 3A were constitutionally valid. The provisions did not violate Articles 14 and 19(1)(g) and were within the legislative competence of Parliament. The court found no excessive delegation of legislative power and held that Rule 3A was not retrospective. The petitions and appeals were dismissed with costs.