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Delhi Cloth & General Mills Co. Ltd.
V.
Union of India
[AIR 1983 SC 937]
Case Presentation
Corporate Finance
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INTRODUCTION
The case raised a mixed question ofConstitutional law and commercial law.
In this case the substantial question
relating to law was raised before theHonble Supreme Court of India.
The Honble Judges presiding over the case
were Honble Mr. Justice D. A. Desai
Honble Mr. Justice R.B. Mishra
Honble Mr. Justice Balakrishna Eradi
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FACTS
In this group of writ petitions under Article32 and appeals by special leave under
Article 136 of the Constitution,
constitutional validity of Rule 3A of theCompanies (Acceptance of Deposit) Rules,
1975 introduced by Companies
(Acceptance of Deposits) Amendment
Rules, 1978 and incidentally of Section58A of the Companies Act, 1956 is
challenged.
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PROVISIONS CHALLENGED IN THIS
CASE
Section 58A of the Companies Act, 1956
Sec 58A confreres power on the Central Govt.
to be exercised in consultation with the
Reserve Bank of India to prescribe the limitsupto 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.
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PROVISIONS CHALLENGED IN THIS
CASE
In exercise of power conferred by Section 58A Central
Government enacted and promulgated the Companies
(acceptance of Deposits) Rules, 1975.
Rule 3A of the said rules is principally challenged in this
case.
Rule 3 prescribes conditions subject to which the deposits
may be accepted.
Rule 3A which obligates the company inviting deposits to
deposit or invest, as the case may be, before the 30th day ofApril 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.
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PROVISIONS CHALLENGED IN THIS
CASE
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 depositsmaturing during the year referred to in
Sub-rule (1).
And this is subject to a further conditionthat deposit shall not any time fall below
10% of the amount of deposits maturing
until the 31st day of March next following.
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THE GROUNDS FOR CHALLENGE
ISSUE 1: Section 58A and rules made thereunder, inparticular rule 3A, is arbitrary and unreasonable in so far
as it deprives the company the use of 10% of its funds even
though the company is obliged to pay interest to the
depositors as contracted between the parties and
ISSUE 2: That when a regulatory measure imposesconditions the same must fairly and reasonably relate to
the objects sought to be achieved. Rule 3A 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.
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THE GROUNDS FOR CHALLENGE
ISSUE 3: That Rule 3A is ultra vires the provision ofSection 58A of the Companies Act as it is beyond the
scope and ambit of the section.
ISSUE 4: That while giving definition of the expression'deposit in the dictionary clause of the Deposit Rules, the
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 aresingled out for this regulatory treatment.
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JUDGMENT
ISSUE 1
It was contended that Rule 3A is arbitrary and unreasonable
in so far as it deprives the company the use of 10% of its
funds even though the company is obliged to pay interest to
the depositors as contracted between the parties and
The Court rejecting the contention held that R. 3A does not
deprive the company the use of 10% of its funds.
The Court observed that 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 itsobligation, a provision is made in Sub-rule (2) of Rule 3A
itself that the amount deposited or invested under Sub-
rule (1), shall not be utilized for any purpose other than for
the repayment of deposits maturing during the year referred
to in Sub-rule (1).
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JUDGMENTISSUE 1
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.
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. 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 financial viability is not maintained, a
Welfare State with planned economy may impose statutory discipline
in larger public interest. Such disciplinary measures cannot betermed deprivatory in character.
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JUDGMENT
ISSUE 2
That when a regulatory measure imposes conditions the
same must fairly and reasonably relate to the objects
sought to be achieved. Rule 3A bears no relevance to the
objects sought to be achieved, the object being the
protection of the depositors. And if it does not bearrelevance to the object it is arbitrary.
The Court rejected this contention and held that when
Rule 3A is viewed in the context of various other
provisions devised to extend protection to depositors andinvestors 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.
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JUDGMENT
ISSUE 3
That R. 3A is ultra vires the provision of S. 58A of the
Companies Act as it is beyond the scope and ambit of the
section. In this connection it was contended 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 theState List, "money-
lending and money lenders'. Therefore Parliament is not
empowered to make laws on this subject. Hence the Companies
(Acceptance of Deposits) Amendment Rules, 1978 made by the
parliament are liable to be struck down.
The Court rejected this contention and held that power to
make rules for acceptance of deposits fall under Entry 44 of
the Union List. Because acceptance of the deposits by the
companies is not necessarily a money lending function.
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JUDGMENT
ISSUE 3: THE PITH & SUBSTANCE TEST APPLIED
Entry 44 refers to incorporation, regulation, and windingup 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 isreferable 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 enacted it whathas to be ascertained is the true character of the
legislation.
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JUDGMENT
ISSUE 3: THE PITH & SUBSTANCE TEST APPLIED
If in pith and substance, the legislation falls within oneentry 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.
Section 58A which is incorporated in the Companies Act
is referable to Entry 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 beingreferable to Entry 30 in the State List. Undoubtedly,
therefore the Parliament had the legislative competence
to enact Section 58A.
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JUDGMENT
ISSUE 4:
That while giving definition of the expression 'deposit inthe dictionary clause of the Deposit Rules, the
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
underlying enacting Section 58A and the Rules madethereunder. 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.
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JUDGMENT
ISSUE 4
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 InsuranceCorporation 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 excludedfrom 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.
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JUDGMENT
Accordingly the court upheld the constitutional
validity of Companies (Acceptance of Deposit)
Rules, 1978.
The Court held that the impugned rules were not
violative of Article 14 and 19(1)(g) of theConstitution of India
Therefore the petition was dismissed.
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CONCLUSION
Many interesting question of law concerning
Constitutional Law and Company Law arose in this case.
The Court rightly upheld the constitutional validity of the
Companies (Acceptance of Deposit) Rules, 1978.
In doing so the Court referred to the entire history of the
Company Act and also the object sought to be achievedby way of Section 58A.
The Court applied mischief rule of construction of statue
so as to come to the conclusion these conclusion.
This judgment of the Hon;ble Supreme Court isappreciable.