Case Summary

Chiranjit Lal Chowdhuri vs. The Union of India and Ors.

April 17, 2019

In the Supreme Court of India
Civil Appellate Jurisdiction
Equivalent citations 
1951 AIR 41, 1950 SCR 869
Petitioners
Chiranjit Lal Chowdhuri 
Respondent 
The Union of India and Ors. 
Decided on
4^th December 1950
Bench
J. Kania, C.J; Saiyid Fazl Ali; Patanjali Sastri; K. Mukherjea; K. Das, JJ.

Background

The case pertains to the Act which regulates only one company. The mills of the company were closed by the government for the reason of mismanagement. Later, the central government enacted a Central Act to regulate the functioning of the Company which was questioned by the shareholder of the company. The petition was filed on questioning the validity of the Ordinance and Act as it violates the fundamental rights of the Company and shareholders.

Constitution and Statutory Provisions

Article 14, 19(1)(f) and 31 of Constitution of India.
The Sholapur Spinning and Weaving Company (Emergency Provisions) Act, 1950.

Facts

This is an application presented by one Chiranjit Lal Chowdhuri under Article 32 of Constitution of India. The petitioner is a shareholder in Sholapur Spinning and Weaving Company limited (Company) having a registered office in the State of Bombay and governed by the provisions of Indian Companies Act. The petitioner is the holder of three ordinary shares and eight preference shares which is pledged in the name of Bank of Baroda. Whereas the company has the authorised capital of 48 lakhs and paid up share capital of 32 lakhs. The petition is filed for the issue of writ of mandamus and declares the Act and Ordinance as ultravires.

The mills were closed in August 1949 and the government through the ordinance mentioned the how the mills were closed due to the improper management and the need to produce the essential commodity and the unemployment created due to the closure. § 3 of the ordinance gives power the government to appoint any number of members as the directors of the company and with respect to § 4 of the Ordinance deems that the existing company members and managing directors will be deemed to be terminated from the posts and the agreement with the company among these members. § 5 of the Ordinance gives powers to the members including the powers to modify or even terminate the agreements. § 12 of the Ordinance says that in case of premature termination of the members, compensation is not allowed. The Ordinance was repealed by the Sholapur Spinning and Weaving Company (Emergency Provisions) Act in April, 1950 (herein called the Act). The provisions were recreated and validated the actions taken under the Ordinance.

Procedural history

The case was filed differently as a writ petition under Article 32 of Constitution of India which invokes the Original Civil Jurisdiction of the Hon’ble Supreme Court.

Issues

Whether the petition is maintainable?

Whether the impugned legislation amounts to acquisition or taking possession of private property within the meaning of the Article 31 of the Constitution of India?

Whether the Act is in contravention with Article 14, 19(1)(f) and 31 of Constitution of India?

Whether the property belongs to shareholders or company?

Whether the shareholder be allowed to file a petition for infringement of company’s rights?

Arguments

Contention of the Petitioner:

The pith and substance of the Act is to possess and control the mills of the companies which are valuable assets of the company, which is beyond the powers of the legislature.
The government having the control and possession of the property of the company, results in deprivation of the property of the Company and the shareholders which is against Article 31 of the Constitution of India.
Moreover the restrictions in holding the shares by the shareholders result in unjustifiable interference and violates Article 19(1)(f) of the Constitution of India.
There is no public purpose which invalidates the possession of the personal property and thus it is in violation of Article 31(2) of the constitution of India.
The enactment denies equality before law and equal protection of the laws and thus it is against Article 14 of the Constitution of India.
The legislation is passed without any legislative competence and is not covered by any of the legislative lists under Seventh Schedule.
The property is given to the government which leads to dispossession of the property as now the agents are working not for the principal but to the exterior authority.
The impugned Act affects only one company and its management of affairs and does not apply generally to all companies, shareholders and their affairs. Thus, it is violative of Article 14 of Constitution.

Contention of the Respondent:

The property was not dispossessed by the company or shareholders and thus it will not attract Article 31 of the Constitution of India. Here the directors act as the agents of the company whose beneficial interest in the valuable assets are not touched or disposed. It is accepted that the management is controlled by the directors appointed by the state but it does not lead to dispossession of the property.
The word property in Article 31 connotes full property and thus it is a combination of all the rights linked with the property. (Totality of rights)
The power described under Article 31(1) is different from the power that was granted under Article 31(2).

Judgment:

Ratio Decidendi

Under Article 32 of the Indian Constitution, anyone can approach the Hon’ble Supreme Court if their fundamental rights are violated and the Court is having the power to issue any orders or directions or writs or decisions in the nature of prerogative writs in the English nature.
The fundamental rights are not only pertained to natural persons but even the incorporated company can approach the court for enforcement of the fundamental rights. Similarly the shareholders are allowed to approach the court when their fundamental rights are affected but it does not authorize the shareholders to plead for the fundamental rights of the company. The shareholder can do so only to the extent where their rights are personally affected. The company holds a distinctive identity from that of the shareholders and the only exception being habeas corpus where the individual can approach the court for illegal detention of other individual.
To make a case maintainable under Article 32 of the Constitution of India, the petitioner must show that the legislature not only lacks the legislative competence but it violates the rights guaranteed under Part III of the Constitution of India.
The court allowed the petition as the application cannot be denied only on the ground that the writ made was improper, as the mandamus was asked along with the prayer to declare the Act and the Ordinance as invalid.
Doctrine of Eminent Domain is applied here, where the State/ Sovereign is having the power to take possession of the property and use it for the public purpose is allowed without the permission of the owner even against the wish of the owner.
For the possession of the private property only two conditions are considered, property to be used for public use and the payment of the compensation to the owner.
The acquisition is the complete takeover of the property where the owner has no interest but in case of possession, only the possession is with the other party whereas the owner has the right/ interest over the property. The acquisition and possession are differentiated in Article 31 itself, but for the purpose of payment of compensation by the state, both the terms are placed in same footing.
The rights of the shareholders are not thrown away but are in abeyance like the voting in elections of the directors, passing resolutions and participating in the winding up of the company. The rights can still be exercised with the sanction of the Central Government even in the presence of the statutory directors or members of the company and thus the property and their rights are not dispossessed.
The reliance to the police powers was not entertained as the “police powers” under American law is of wide connotation. The contention regarding Clause 1 of Article 31 of the constitution is irrelevant to the present case.
There is no restriction on the part of the petitioner to buy, acquire or dispose of his property and hence there is no violation of Article 19(1)(f) of the Constitution of India. The petitioner “holds” the property which connotes that the party is allowed to enjoy the benefits of owning the property and it is also affirmed that there is no dispossession or deprivation of the property.
Even though for arguments sake if we say that it violates the fundamental rights under Article 19(1)(f), the efforts of the State fall within the reasonable restrictions under Article 19(5). The impugned Act is enacted for the production of an important commodity in the society and to alleviate the unemployment caused by the closure of the mills of the company and these measures are taken in the interests of general public.
Equal protection of laws does not mean that identically the same rules of law should be made applicable to all persons within the territory of India in spite of differences of circumstances and conditions. There should be no discrimination between one person and another if as regards the subject-matter of the legislation their position is the same.
The laws can apply to single person, family or body corporate if it is not discriminatory in nature and the laws cannot be held discriminatory for its narrow application.
No evidence was provided by the petitioner that the companies of same nature have been missed out by the legislature and it is not submitted that the classification is made on arbitrary or unreasonable grounds. The judiciary will favour the constitutionality of the legislations and it is up to the person accusing the legislation has to prove that the provisions are unconstitutional. Thus the petitioner has failed to satisfy the essential burden of proof placed on him.
The union government is having the power to make such an act under List 43 of the Central list “incorporation, regulation and winding up of trading corporations” and here the closing of the mills of company falls within the ambit of this entry

Obiter Dicta

Pertaining to the case, it is the directors who were removed from the position of the directors have to approach the Courts to enforce the fundamental rights and no one can represent them as they are the victims. Moreover none of the directors have appeared before the Court with this claim.
The proceedings under Article 32 of the Constitution of India cannot be considered as a declaratory suit. The prayer is sought for a writ of mandamus which directs the state to stop or perform a particular state function. Here the directors appointed to the company in pursuance of the Act can be considered as public servants and the writ of mandamus will apply to them. But it is followed with the prayer to declare both the Ordinance and Act as unconstitutional which is against the language of Article 32.
The right to property cannot be said to be injured under Article 31 only when the totality of the rights is affected but also when a little or minor interferences are caused to the enjoyment of the property.
Throwing out vague hints that may be possibilities of missing out different companies of same nature and plea of common knowledge cannot be accepted while determining whether the Act is discriminatory.
The legislature has the wide choice to select the fields in determining and classifying the subjects of the law. The legislature is also having the right to deny equal protection of the laws but it must not arbitrary. The classification must be reasonable and just on a substantial basis.

Dissenting opinion

The dissenting opinion is given by Justice Patanjali Sastri and Justice S.K. Das.
The preference shares are not in the name of the petitioner and thus the plea for the original shares. Moreover, Respondent 5 ceased to be the member of the board and he was wrongly added as a party.
A person cannot be allowed to merely raise the plea of legislative competence under Article 32 of the constitution which is allowed only for the fundamental rights violation. Moreover the Act which is dealing with the appointment of the directors and curtaining the rights of the voters in company elections and passing of the resolutions is well within entry 43 of union List.
Article 31 of constitution protects every person and it includes non-citizens, natural persons and artificial persons. Thus the fundamental rights of even a corporation are covered within Article 31.
Article 31 and 19(1)(f) deal with “property” and thus both the articles must be read together to understand the extent of rights and its application.
The petitioner is not deprived of his property as still the person holds the right to dividend as a shareholder, to buy, acquire of dispose the shares and thus they cannot be said to have been dispossessed of the property.
The rights described under the Ordinance or the Act such as would render the rights left untouched illusory and practically valueless, then there can be no question that in effect and substance the “property” of the shareholder has been taken away by the Ordinance or the Act.
Since there is no change in the ownership of the property it cannot be said to be deprived of the property. There is only abeyance in the incidental rights due to the appointment of the members by the Government. These incidental restraints are reasonable under Article 19(5) of the Constitution of India. These incidental rights will not form the part of Articles 31 and 19(1)(f) of Constitution of India.
Even on considering these additional rights as the property the ordinance or the Act is not talking about the acquisition of the property. Moreover, the laws are not denying these rights too as the shareholders are allowed to exercise these rights of participating in elections, resolutions with the sanction of the government.
Article 31 of the constitution of India allows deprivation of property in any means other than compulsory acquisition and possession of the property. The example of Police power is used: the government is allowed to destroy the intervening building in case of calamity.
The deprivation of the property must be supported by authority of law. Moreover, the element of compensation comes only in cases of deprivation of property done through compulsory acquisition or possession of property. Thus the Hon’ble Justice concludes that Article 31(1) is wider than Article 31(2) of the Constitution of India. The competence is also assured through Entry 43 in union list of Seventh Schedule and thus arguments under Articles 31and 19 will fail.
But the fundamental right of the company is infringed as the company was not having the say in appointment of the servant or agents. This shows that the possession of the company was taken by the government from company. Moreover, the argument that the state acts as the agent or servant is not accepted as it affects the company’s right to appoint its members. Thus the question of who can appear for infringement of company’s rights arises.
The company will be the appropriate person to approach the courts in case of violation of its fundamental rights. If the Act is said to be unconstitutional, then the directors are not discharged from their position and can approach the Hon’ble Court but no attempt has been made by the directors of the company so far. The constitutionality of the law can be questioned only by the person whose rights are directly affected by the law and here it is only the company which has the rights but not the shareholders.
An interest in the company owing to the undertaking is not the property by itself, moreover, it is also pertinent to note that it has no link with the possession of property by the shareholder.
Any classification under Article 14 will be discriminatory but to challenge the constitution itself it must be arbitrary, unreasonable and made without any substantial basis.
Based on the contentions submitted by the parties, the justice held that there was no classification at all but a mere arbitrary selection or zoning out of a particular company, through hostile legislation where no presumption of constitutionality arises. Thus it is held that the singling out of one company is nothing but ‘actually and palpably unreasonable and arbitrary” action.
It is also pertinent to note that no objective was mentioned in the preamble to show that the act is to deal with mismanagement and also there is no classification and no justification to show that the company was treated specially. Thus the petition must be allowed.

Conclusion

It is evident based on the analysis that the reasoning may differ for all the members of the judge but they are certain about three findings:

The corporation is having the fundamental rights.
The Act is not leading to deprivation of property and is not in violation of Articles 31 and 19(1)(f).
The central government can make such a law under Entry 43 of Union List and the classification discretion is given to government but it cannot be used arbitrarily.

The difference of opinion came on the question whether the Act is discriminatory and the burden of proof.

Edited by Chiranjeeb Prateek Mohanty
Approved & Published – Sakshi Raje

References

Minister of State for the Army v. Dalziel 68 C.L.R. p. 26.

Willis Constitutional Law, P. 580.

Gulf C. & S.F.R. Co. v. Ellis, 163 U.S. 150, at 159.

Southern Railway Co. v. Greene, 216 U.S. 400, at 412.

America in Middleton v. Texas Power and Light Company 249 U.S. 152, p. 15.

Radice v. New York, 264 U.S. 294.

Minister for State for the Army v. Datziel (1943-1944) 68 C.L.R. 261.

Jeffrey Manufacturing Company v. Blagg 235 U.S. 571.

Hendrick v. Maryland 235 U.S. 610.

Newark Natural Gas and Fuel Company v. The City of Newark 242 U.S. 403.

Truax v. Rich 239 U.S. 33.

Buchanan v. Warley 245 U.S. 60.

Darnell v. The State of Indiana 226 U.S. 388.