TaxTMI 
TaxTMI 
1983 (7) TMI 205
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..... Singh, for the appearing parties. JUDGMENT Desai, J. - In this group of writ petitions under article 32 and appeals by special leave under article 136 of the Constitution, 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 ("Act" for short), inserted by the 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. 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 section 58A and rule 3A of the Deposits Rules enacted in exercise of the power conferred by section 58A confer arbitrary and uncanalised powers and hence are violative of article 14. Contravention of article 14 was canvassed for the additional reason that the power to exempt from the application of the rule confers wid....
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....c 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 section 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 indebtedness 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 section 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% 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 article 32 or those filed in the High Court under article 226 were not maintainable because the incorporated company being not a c....
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....s 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 deposits 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. Section 58A was introduced by the Companies (Amendment) Act, 1974. The relevant portion of section 58A is extracted hereunder : "58A. Deposits not to be invited without issuing an advertisement :........... (2) No company shall invite, or allow any other person t....
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....y, after consultation with the Reserve Bank of India, specify in this behalf." In exercise of power conferred by section 58A read with section 642 of the Act, the 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 sub-clause (i) to (x). Rule 3 prescribes conditions subject to which the deposits may be accepted. Deposits against unsecured debentures or deposits from shareholders 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 hereinbefore 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....
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....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 article 32 and those filed in the High Court under article 226 of the Constitution. The submission was founded on the ground that an incorporated company being not a citizen for the purposes of article 19 and, therefore, it cannot complain of the denial or deprivation of fundamental freedom guaranteed by article 19(1)(g) of the Constitution and the situation is not improved by joining either a shareholder 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 corollary, 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 article 32 nor the High Court can entertain one under article 226 of the Constitution. Frankly speaking, this is an oft repeated contention whenever the petitioner is an incorp....
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....er of the. Company. The Bank Nationalisation case [1970] 40 Comp. Cas. 325 (SC), 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 newspapers owned and controlled by the shareholders through the medium of the corporation." Our attention was, however, invited to two later decisions : (1) Divisional Forest Officer v. Bishwanath Tea Co. Ltd. AIR 1981 SC 1368, and (2) Western Coalfields Ltd. v. Special Area Development Authority, Korba, AIR 1982 SC 697. 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 article 226 and the question in the second case was whether t....
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....y 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 floatations. 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 (See Modern Company Law by Gower, 4th Edn., pages 28-29). 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....
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....mine 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 Govt. of India acquired extensive powers for the regulation of the financial management of the private sector companies, under the 1960 Amendment Act. In the meantime, the Govt. of India having received numerous complaints of fraud, embezzlement of funds and gross irregularities in the companies controlled and managed by Dalmia-Jain combine, appointed a commission of enquiry first presided over by Justice S.R. Tendolkar 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 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 controlle....
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....on-banking companies rose from 747.8 crores to Rs. 1,028 crores, and by 1978 it rose to 1,313 crores (Project Report on Government Regulation of Financial Management of the Private Sector Companies in India by V.D. Kulshrestha.) 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. Before we turn to section 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 February 1, 1964. Fasciculus of sections in Chap. III-B bears the title "Provisions relating to non-banking institutions receiving deposits and financial institutions". Section 45(1) denned "company" to mean a company as defined in section 3 of the Companies Act and includes a foreign company within the meaning o....
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....ontemplated is to be made with any scheduled bank free from charge or lien or in unencumbered securities of the Central Govt. or of any State Govt. or in unencumbered securities mentioned in clause (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882. The first contention is that having regard to the numerous in-built safeguards provided in section 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 the introduction of sec. 58A, the RBI was empowered to regulate the acceptance and repayment of deposits by the non-banking companies. The Legislature having become aware that the regulatory measures introduced by the RBI have not effectively protected the depositors, felt that the needs of the time necessitated introduction of statutory provisions enabling the Central Govt. 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....
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....tand pari passu with other unsecured creditors while a secured creditor and a 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 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 overtaking the company. The provision for deposit of 10% of deposits 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-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 10% deposit can be utilised for refunding the deposits matur....
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....e Legislature to decide and the court would not examine its wisdom or efficacy except to the extent that article 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 c....
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....e 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. Dev....
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....ose must a fortiori, to be valid, fairly and reasonably, relate to check-mate 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 condititons prescribed by the Deposits 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 or control this ever-widening power of corporations. And can one wish away ....
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....t a welfare state cannot remain indifferent to this sensitive field of exploitation of the weaker section. 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 by compelling limited liquidity in resources, the society at large was sought to be protected from the ever haunting specter of sickness in industry often conveniently resorted to by the private sector companies. Section 58A must receive its legitimate construction in the back-drop of this fact-situation. Viewed from this angle, section 58A will enable the Central Govt. 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 section 58A in....
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....sgression of permissible limits of delegated legislation by the delegate. In D.S. Garewal v. Slate of Punjab [1959] Suppl. 1 SCR 792, 803; AIR 1959 SC 512, 518, 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 Parliament to enact section 58A and the Deposits Rules enacted in exercise of the power conferred by section 58A read with section 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 money-lender and the transaction would be one of m....
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....refore, Parliament had the legislative competence to enact section 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 section 58A to prescribe conditions subject to which deposits can be accepted retrospectively rule 3A is ultra vires section 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. T....