Delhi Cloth and General Mills, Etc vs Union of India: The

Depositors should not be exploited

EQUIVALENT CITATIONS: 1983 AIR 937, 1983 SCR (3) 438.

BENCH: J. D.A. DESAI, J. V. BALAKRISHNA, J R.B. MISRA.
AUTHOR: J. D.A. DESAI.

1. BACKGROUND OF THE CASE

Section 58A of the Companies Act, 1956 confers power upon the Central Government to
prescribe inter alia the conditions subject to which the deposits may be invited or accepted by a
company either from public or from its members.1

Apart from that the Sub-rule (1) of r. 3A of the Companies (Acceptance of Deposits) Rules, 1975
obligates a company inviting deposits to deposit or invest, before the 30th day of April of each
year, a sum which shall not be less than 10 per cent 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 that sub-rule. 2 Sub-rule (2) of r. 3A further lays down that the amount so
deposited or invested shall not be used for any other purpose except for repayment of deposits
maturing during the year referred to in sub-r. (1).

Against this the petitioners/ appellants filed a group of writ petitions under Art. 32 and also vide
appeals by special leave under Art. 136 of the Constitution thereby challenging the constitutional
validity of Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975 and sec. 58A of the
Companies Act, 1956 ('Act' for short) inserted by Companies (Amendment) Act, 1974. 3

The Petitioners/ Appellants alleged that Section 58 A and Rule 3 A are violative of Article 14
and 19 of the Constitution of India. Whereas the Respondents rose an objection upon the
maintainability of the writ petitions itself in the preliminary stage. It is because an incorporated
1
Company Act, 1956, Sec. 58 A.
2
Companies (Acceptance of Deposits) Rules, 1975, R. 3 A.
3
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 1.
company, being not a citizen, cannot complain of deprivation of fundamental right guaranteed
under Art. 19(1)(g). Further the respondents also alleged that the situation will also not improve
by joining either a shareholder or a director as co-petitioner.

2. ARGUMENTS OF THE PARTY:

2.1 ARGUMENTS OF THE PETITIONER:

Mr. S.T. Desai on the part of Petitioners contended that if sec. 58A is widely construed to
encompass the manner of utilization of the funds of the company which will include the deposits
made with the company. Then in that case Section 58A will be rendered unconstitutional as
transgressing the permissible limits of delegated legislation. Mr. S.T. Desai further contended
that Rule 3A cannot be saved as a regulatory measure because the regulatory measure must sub
serve 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.4

Mr. O.P. Malhotra on the part of Petitioners raised an additional contention that Parliament did
not have the 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]; and not
to Entries 43 and 44 of the Union List.5

Mr. G.A. Shah, further raised an additional contention that to the extent limited retrospectively is
given to Rule 3A, it is ultra vires of sec. 58A and the Constitutions.6

Mr. A. Subba Rao, contended 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 and thus should be scrapped.7

2.2 ARGUMENTS OF THE RESPONDENT

4
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 4.
5
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 5.
6
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 6.
7
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 7.
 The learned Attorney General appearing for the Union of India raised a preliminary objection
upon the maintainability of the Writ Petition. The Attorney General contended that the
incorporated company being not a citizen cannot file a writ petition under Articles 32 and 226 of
the Constitution for the violation of Fundamental Rights. The Attorney General further
contended that the situation will not improve by merely adding the name of the Director or a
shareholder as one of the petitioners in the case as Company has a juristic personality
independent of the shareholders and the Directors.8

The Attorney General also urged that Section 58A enacts a legislative policy. The wisdom or
necessity of the policy lies in the domain of the Legislature and not with the Court. The Attorney
General further contended that the charges of excessive delegation is unsustainable because the
legislative policy underlying the provision was devised after consulting and obtaining guidance
from an expert body Reserve Bank of India. Apart from that the relevant rules in this case were
placed before the Parliament which had complete control over the rules and exemption or
exclusionary clause. 9

An alternative submission was also submitted by the Respondents 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.

At last the Attorney General pleaded that even though the present rule imposes restriction upon
the fundamental right to carry trade or business, but the same is reasonable because the condition
is of a regulatory nature and has been enacted with a view to protect the depositors coming from
a socially and economically weaker section who may be exploited by the rich and powerful
corporates.10

3. ISSUES BEFORE THE COURT

8
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 8.
9
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 8.
10
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 8.
1. Whether Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975 and sec. 58A of the
Companies Act, 1956 ('Act' for short) inserted by Companies (Amendment) Act, 1974 are
constitutionally valid?

2. Whether the legislature has the competency to enact Section 58A?

3. Whether an Incorporated Company complain of deprivation of fundamental right guaranteed

under Art. 19(1)(g) under Articles 32 and 226 of the Constitution? 11

4. JUDGMENT OF THE COURT

The court in this case held that the Central Government has acted within its regulatory power.
The objective of Rule 3 A is to prevent abuse and safeguard the interest of the depositors. Rule 3
A provide for liquid finances with the company which in return would enable the company to
meet its obligation on maturity of the deposits. Thus, it can be said that Rule 3 A is intra vires of
Section 58 A.12

The Court observed that the amount deposited under Rule 3 A continues to be the property of the
company. Thus, Rule 3 A is not confiscatory in nature. Further the Court also held that one
should look at the immediate objective of the provision and not at the remote consequences of
the provision. The Court thus dismissed the arguments of the petitioner which stated that
Provision was enacted for increasing the deposits in Nationalized Banks. The Court also
remarked that no exception can be taken on the ground that a better provision could have been
framed than the existing provision. It is because it is up to the legislature to decide that form of
regulatory measure can be taken and the Court would not examine upon the wisdom of the
Legislature except to the extent that Article 13 of the Constitution is attracted.13

The Court further held that Rule 3 A is not unrelated to the object or the purpose for which the
power was conferred under Section 58 A on the Central Government. In cases where power is
conferred to effectuate a purpose and for those certain conditions are imposed, the conditions
need to be fair and reasonable and must relate to the object which is sought to be achieved. In
11
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674.
12
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Paras 21, 27, 28, 29, 30.
13
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Paras 23, 25 & 26.
absence of such causal connections the conditions may be rejected on the grounds of
arbitrariness.14

However, in present case the power conferred by Section 58 A upon the Central Government to
prescribe the limits up to which, the manner in which and the conditions subject to which
deposits may be invited or accepted by non-banking companies has a definite objective. The
objective was to check the abuse by the corporate sector and to protect the depositors. The
Mischief was known and this Regulatory Measure was thus a remedy to this Mischief. The court
also remarked that it is the constitutional obligation of the State to protect socially and
economically weaker segments of the society against the exploitation of the rich.15

The Court also held that the rules for delegation of power have not been violated under the
Companies Act (Especially Section 58 A). The legislative policy in present case is definite and
clear in terms of affording protection against the might of the corporate sector.16

The Court further held that in cases of Pith and Substance if the legislation falls within one entry
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 be held to be valid in entirety, even
though it may trench upon matters which are beyond its competence. In the present case Section
58 A is referable to Entries 43 and 44 in Union List 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.17

The obligation cast by Rule 3 A was to deposit ten percent of the deposits maturing during the
year in the manner prescribed under Rule 3. In the present case some deposits would be maturing
between April 1, 1978 and March 31, 1979. To provide for such marginal situation a proviso
was inserted which according to the Court did not make the Rule retrospective.18

Upon the issue whether an Incorporated Company can complain of deprivation of fundamental
right guaranteed under Art. 19(1)(g) under Articles 32 and 226 of the Constitution, the Court
14
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 28.
15
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 28.
16
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 31.
17
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 33.

18
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 34.
held that the law in this regard is in a nebulous state. In present scenario the trend is in the
direction of holding that in the matter of fundamental freedoms guaranteed under Art. 19 the
rights of a shareholder and the company which the shareholders have formed are co-extensive
and the denial to one of the fundamental freedom would be denial to the other. It is thus time to
put an end to this controversy but in the present state of law the petitions cannot be thrown out at
the threshold.19

5. A CRITICAL APPRAISAL

It was a landmark judgment given by the three judge bench of the Apex Court in the matter of
company law. The court in this case by applying various principles and law have rightly held that
the Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975 and sec. 58A of the
Companies Act, 1956 ('Act' for short) inserted by Companies (Amendment) Act, 1974 are
constitutionally valid. It is because the conditions imposed by the Government were regulatory in
nature and were enacted with a view to protect the depositors coming from a socially and
economically weaker section who may be exploited by the rich and powerful corporates.. This
Amendment has proved to be too useful for the society that this very provision of Section 58 A
has been incorporated even in the 2013 Act under sections 73-76 of the Present Act.20

The Court in this case could have properly answered whether an Incorporated Company can
complain of deprivation of fundamental right guaranteed under Art. 19(1)(g) under Articles 32
and 226 of the Constitution which they failed to do so.

However, despite certain shortcomings in this judgment, on an overall basis both Judgment and
the Policy of the Government is a step taken in right direction because under Article 38 of the
Constitution of India, State shall strive to promote the welfare of the people by securing and
protecting as effectively as it may a social order in which justice, social, economic and political,
shall inform all the institutions of the national life.21 These rules only operate to extend a measure
of protection for the week and the marginalized against the notorious abuses of economic power
by the corporate sector.
19
Delhi Cloth And General Mills, Etc vs Union Of India, Etc, (1983) 54 Comp Cases 674, Para 12.
20
The Companies Act, 2013 Sec.73-76.
21
The Constitution of India, Art. 38