This case analysis is written by Aniket Kumar Singh, pursuing a BBA LLB (3^rd year) from Kristu Jayanti College of Law, Bengaluru. During my Internship at Ledroit India.

1.       Case name & Citations –

• Title of the case: Delhi Cloth and General Mills Co Ltd V/s UOI
  • Court: Supreme Court of India
  • Year: 1983
  • Citation: 1983 AIR 937

2.       Facts of the case

• Section 58A of the Companies Act, 1956 empowers the Central Government to determine the terms and conditions that apply to a company’s ability to solicit or accept deposits from the general public or its members, among other things. Furthermore, a company that accepts deposits must deposit or invest, by the 30th day of April each year, a sum not to exceed 10% of the total amount of its deposits maturing during the year ending on the 31st day of March of the following year, using any one or more of the methods specified in that sub-rule of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975. Additionally, r. 3A’s subrule (2) states that the funds deposited or invested can be used solely to pay back deposits that mature in the year specified by subrule

• The petitioners/appellants argued that Rule 3 A and Section 58 A violate Articles 14 and 19 of the Indian Constitution. On the other hand, the Respondents contested the maintainability of the writ petitions themselves during the preliminary phase. This is because, as an integrated company, it is not a citizen and hence cannot claim that it has been denied a fundamental right guaranteed by Article 19(1)(g). The responses further asserted that the position would not be strengthened by including a director or shareholder as a co-petitioner.

3.       Issue of the Case

Are the Companies (Amendment) Act of 1974, Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975, and Section 58A of the Companies Act, 1956 (referred to as the “Act”) constitutionally valid?

Does the Legislature have the power to Implement Section 58A?

Is it possible for an incorporated corporation to bring a complaint claiming that it has been infringed in violation of Article 19(1)(g) and Articles 32 and 226 of the Constitution?

4.       Petitioner’s Contentions

• The petitioner argued that deposits made with the company will be covered if section 58A is liberally interpreted to encompass the usage of the firm’s funds. Section 58A will then be ruled illegal since it goes beyond what is allowed under delegated legislation. They went on to say that Rule 3A cannot be maintained as a regulatory measure because a regulatory measure must safeguard depositors, which is an objective that Rule 3A does not, and the court should not analyze cases in a dogmatic or doctrinaire manner.

• Parliament lacks the legislative capacity to adopt Sec. 58A and ipso facto Rule 3A since the legislation pertains to Entry 30 on the State List (Money lending and money lenders) rather than Entries 43 and 44 of the Union List.

• Further brought up the argument that Rule 3A is beyond the scope of section 58A and the Constitutions to the extent that it is limited retrospectively.

• Claimed that the requirement to deposit 10% of the entire amount of deposits maturing in a given year is unconstitutional and ought to be removed since it amounts to a temporary taking of property without any compensatory obligation or advantage.

5.       Respondent’s Contentions

• The respondent’s attorneys, the learned Attorney General (UOI), argued that they had raised a preliminary objection to the Writ Petition’s maintainability. The Attorney General contended that the incorporated firm is not authorized to file a writ petition under Articles 32 and 226 of the Constitution alleging infringement of fundamental rights since it is not a citizen. The Attorney General further contended that adding a shareholder or director’s name to the list of petitioners in the action will not resolve the issue because the Company has a legal personality distinct from both of them. The Attorney General also asked for Section 58A to be used to carry out legislative policy. Legislators should determine if the policy is appropriate rather than judges.
• The Attorney General further contended that the charges of excessive delegation were unfounded because the legislative strategy enforcing the provision was formulated following consultation and advice from the Reserve Bank of India, an authority on the subject. Apart from that, the relevant provisions in this case were brought to the Parliament,which held the final say over the regulations and any exclusions or exclusionary clauses.

In support of their alternative stance, the Respondents stated that the Court does not need to look at the constitutionality of the exemption clause because it is severable and its invalidity would not affect the rest of the plan, even if it were otherwise legal.

6.       Judgement

• In this instance, the court decided that the Central Government had acted within the bounds of its regulatory jurisdiction. Rule 3A’s objectives are to safeguard depositor interests and deter abuse. For the corporation to meet its obligations when the deposits mature, Rule 3 A requires it to have liquid finances. Rule 3 A is therefore seen as being within the purview of Section 58 A.

• The Court pointed out that the funds allocated in line with Rule 3 A remain the company’s assets. As a result, Rule 3 A is not intrinsically restrictive. The Court further declared that the immediate purpose of the provision should be taken into account rather than its long-term consequences. Consequently, the petitioner’s claims that the Act was passed to boost deposits in nationalized banks were dismissed by the Court. The Court further declared that an exception could not be established because a better provision could have been prepared than the one that was in place. This is because the legislature decides what kind of regulations are acceptable, and the court would only look into the legislature’s wisdom about Article 13 of the Constitution.
• The Court further decided that the purpose or aim for which the government of India was authorized under Section 58 A is not incompatible with Rule 3 A. When someone is given power to carry out a task and certain conditions are imposed, the conditions must be fair, reasonable, and relevant to the task at hand. If there are no such causal connections, the requirements could be dismissed based on arbitrariness. However, in this case, the Central Government’s power under Section 58 A to define the terms, procedures, and upper limits that apply to non-banking companies seeking or accepting deposits has a particular intent.

• The primary objectives were to protect depositors and prevent abuses by the corporate sector. Recognizing the mischief, this regulatory action was taken as a corrective measure. The court also declared that the State bears an essential responsibility to shield economically and socially disadvantaged groups from exploitation by the affluent. Furthermore, it was determined that the provisions of the Companies Act concerning the transfer of authority, specifically Section 58 A, were not violated. In this case, the legislative policy is clear and direct in offering protections against the influence of the corporate sector.

• The Court has established that under the doctrine of Pith and Substance, legislation is considered valid even if it incidentally encroaches upon matters beyond its jurisdiction, as long as it primarily falls under an entry within its legislative field. In the case at hand, Sections 43 and 44 of the Union List pertain to Section 58 A, thereby confirming Parliament’s authority to legislate on this matter, despite any incidental overlap with Entry 30 of the State List concerning Money Lending. Accordingly, Parliament is competent to enact Section 58 A. The rule mandates that ten percent of deposits maturing annually must be allocated as specified by Rule 3 A. This applies to deposits maturing between April 1, 1978, and March 31, 1979. The Court included a proviso for such eventualities, ensuring that the rule is not applied retroactively.

• The court has acknowledged ambiguity regarding whether an Incorporated Company can lodge a complaint claiming infringement of its fundamental rights under Article 19(1)(g), and Articles 32 and 226 of the Constitution.

• Conclusion
• The three-judge panel of the Apex Court rendered a landmark decision in the field of corporation law. The Companies (Amendment) Act of 1974 introduced section 58A of the Companies Act, 1956 (referred to as the “Act”) and Rule 3A of the Companies (Acceptance of Deposit) Rules, 1975. The court properly decided, based on a variety of legal grounds, that these provisions are constitutionally permissible.