Thursday, April 1, 2010

A Rather Elusive Form of the Statutory Corporation

Any discussion of the difference between a company and a statutory corporation seems, at first sight, unnecessary. It is, after all, settled law that a statutory corporation is an entity created by a statute, while a company is an entity that is governed by the provisions of a statute. This distinction, however, has become sharply controversial in recent times, and was considered by the Supreme Court on March 31 in a comprehensive and well-reasoned judgment. The judgment is Dalco Engineering Pvt. Ltd. v. Satish Prabhakar (CA No. 1886/07). While the judgment has not yet been reported, readers can access the judgment through the JUDIS database, or contact us by email for a copy.

The backdrop for this controversy is a set of legislations which applies to a commercial entity that is not defined uniformly. For example, some social welfare legislations apply to “industries”, some to “establishments” and others to “corporations”. One such case is s. 21 of the Indian Penal Code, which provides that a “public servant” includes, inter alia, every person in the service or pay of a “corporation established by or under a Central, Provincial, State Act or a Government Company as defined in s. 617 of the Companies Act, 1956”. It is possible to take the view that the words “or under” widen the ambit of this provision to include not only entities created by a statute, but also private companies, which are created “under” the Companies Act. This view was rejected by the Supreme Court in SS Dhanoa v. MCD, (1981) 3 SCC 431, on the reasoning that the legislative intent was only to cover statutory corporations.

The events that led to the recent decision in Dalco arose out of conflicting decisions of the Bombay High Court on whether the judgment in Dhanoa’s case excluding companies from the ambit of s. 21 IPC would apply equally to other legislations using similar language. Dalco, for example, had dismissed a telephone operator it had employed for over twenty years, since he had become deaf over that period. S. 47 of the Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 prohibits an “establishment” from adopting this course of action and requires that the employee be retained in an alternative position with the same benefits. An “establishment” is in turn defined in s. 2(k) as a “corporation established by or under a Central, State or Provincial Act” – identical, in material part, to the definition considered in Dhanoa’s case. The Bombay High Court, however, took the view that a private company is an establishment for the purposes of the Disabilities Act, and ordered reinstatement of the employee with backwages. This decision was subsequently characterised as per incuriam by another Bench of the Court, and the question before the Supreme Court was whether this view is correct. The issue is of enormous commercial significance, for the formula considered in Dhanoa and Dalco is used across several social welfare legislations, potentially generating substantial liability for companies.

In Dalco, the Court began its analysis by distinguishing between a company “established” under a statute and a company governed by the provisions of a statute. The following observations are apposite:

A ‘company’ is not ‘established’ under the Companies Act. An incorporated company does not ‘owe’ its existence to the Companies Act. An incorporated company is formed by the act of any seven or more persons (or two or more persons for a private company) associated for any lawful purpose subscribing their names to a Memorandum of Association and by complying with the requirements of the Companies Act in respect of registration. Therefore, a ‘company’ is incorporated and registered under the Companies Act and not established under the Companies Act. Per contra, the Companies Act itself establishes the National Company Law Tribunal and National Company Law Appellate Tribunal, and those two statutory authorities owe their existence to the Companies Act.

It is clear that the State Bank of India, LIC etc. are corporations established by statute. What poses greater difficulty is the distinction the Court draws in the above passage between a company “governed” by a statute and one that is created “under” a statute. To address this difficulty, the Court cited the example of the State Financial Corporation Act, 1951, which provides that a State Government may establish a Financial Corporation by notification. In statutes of that sort, the ensuing corporate entity owes its existence to a provision in the statute that allows its specific creation through an act of State, and yet cannot be said to have been created by statute. The Court held that this is the distinction between a company governed by a statute and a company created under a statute.

The importance of the distinction is that a corporate entity created “under” a statute, as the Court understands that term, will invariably be a Government entity, and fall within the definition of “State” in Art. 12 of the Constitution. This conclusion was clearly correct in the context of the IPC, but one could argue that there is no compelling reason to confine all corporations created “under” a statute to Government entities, especially in social welfare legislation. Indeed, the respondent in Dalco suggested as much, arguing that a definition adopted under a penal statute is of limited relevance to a social welfare legislation, which is normally construed broadly and in favour of the protected class.

However, the Court offered three persuasive reasons to exclude companies under the Companies Act from the Disabilities Act, and presumably from other social welfare legislations as well. First, the Court noticed that this definition is a “standard” term across legislations, and that is always used to “denote certain categories of authorities which are “State” as contrasted from non-statutory companies”. For example, the same formula is used in the Prevention of Damage to Public Property Act, 1984, and it is clear there that the reference is not to companies under the Companies Act.

Secondly, the Disabilities Act itself provides that an “establishment” is a corporation created by or under statute, or a Government company under s. 617 of the Companies Act. As the Court pointed out, if the first part of the definition (“corporation created by or under…”) automatically covered companies under the Companies Act, the specific reference to Government companies under that Act would have been unnecessary. The legislative intent, therefore, is that the Act applies only to Government entities. This is supported by the marginal note to s. 47, which refers to discrimination in “Government” employment.

Finally, the Court held that social welfare legislations are normally construed broadly, that doctrine is no invitation for courts to ignore or travel beyond the language of the provision, or the intent of the drafters (¶15).

In sum, the following points emerge:

(A) The traditional distinction between a company created “by” statute and one created “under” a statute is not exhaustive of the manner in which a corporate entity is created.

(B) A company which is “governed” by the provisions of a company legislation such as the Companies Act is not created “under” the statute, but only in “accordance” with its provisions.

(C) There is a third class of companies that falls between (A) and (B) above – one that is created under a provision of a statute that allows its creation. Such an entity is invariably a Government entity that falls within Art. 12 of the Constitution.

While this analysis is clear and persuasive, a particularly difficult question could arise if a legislation uses the expression “by or under” but offers no compelling reason to confine its application to Government entities.

3 comments:

Lawman said...

Interesting post!! Keep it up!!

One question that come to my mind-

what about the status of lest say State Bank of India? Is that both, a statutory corporation and also a company?

Warm Regards,
Nikunj

V. Niranjan said...

A statutory corporation will be covered by the sort of definition that was considered in Dalco's case because it is a company created "by" statute. Indeed, this distinction does not seem to be in dispute.

What is more controversial is the Court's classification of non-statutory companies as companies created "under" a statute and those created in "accordance" with it. State Bank of India, therefore, will be considered both a statutory corporation and an establishment for the purposes of the Disabilities Act, or other legislations that use identical language.

Lokesh said...

Brilliantly summarised a very long,complex but an important judgement.