Circular in Conflict with a Statutory Provision cannot prevail over the Statute: Companies Act

8 November 2021 • Apoorwa & Gyanendu

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8 November 2021 • Apoorwa & Gyanendu

In view of the multifarious activities of a welfare state, the legislature cannot work out all the details to fit the varying aspects of complex situations. It must necessarily delegate the working out of details to the executive or any other agency. In the context of governance of companies in India, Ministry of Corporate Affairs (“MCA”)is vested with the power to issue circulars and clarifications to remove the difficulty in execution of provisions of the Companies Act 2013 (“the Act”) and the rules made thereunder.  However, what happens when the subordinate legislation, unknowingly, is found to be in conflict with the corresponding statute?

Legal provisions providing for subordinate/ delegated legislation under various Acts

Under the Indian Constitution – The power to make subordinate laws is provided under Article 13(3) of the Indian Constitution which is entitled in the words that law includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usages.

Under Companies Act 2013– The provision of Section 469 and 470 of the Act empowers Ministry of Corporate Affairs (MCA) to issue circulars, orders and clarifications to administer the Act.

Under GST lawsFor the purpose of imposition of GST, the essence of delegated legislation is conveyed through section 164 of the CGST Act 2017 that gives the power to the Government, to make rules or regulations by way of notification, on recommendations of the GST council.

Under Income Tax Act 1961– Section 119(1) of the Income Tax Act 1961 empowers the Central Board of Direct Taxes to issue orders, instructions and circulars.

Analysis: whether the Clarification Circulars issued by MCA can over-ride the Act and the rules made thereunder

Notably, administrative circulars are issued in relation to an occupied field of law which is enacted by the Parliament to ensure achievement of its objectives and provide clarifications in execution of the same. Therefore the power of MCA to issue such circulars is circumscribed by the Act and the Rules.

The logical question that arises then is whether the MCA is empowered to interpret the Act or the Rules by issuing such circulars and clarifications.

Supreme Court in the case of BabajiKondajiGarad and others v. Nasik Merchants Co-operative Bank Ltd., Nasik and others (1984 AIR 192) had firmly confirmed that the legal validity of any sub-ordinate legislation has to be viewed in line with the statutory provisions which provide the locus standi to such delegated legislation.

Examining the Locus Standi and binding nature of MCA circulars

Examining the locus standi of circulars by MCA, Supreme Court, in the case of Bhuwalka Steel Industries Ltd v. Bombay Iron and Steel Ltd., while adjudicating a similar issue categorically stated:

“It is not the task of the government to interpret the law; that is the task of the courts and even if the government understood the law in a particular manner, that cannot be a true and correct interpretation unless it is so held by the court. “These circulars are merely advisory in nature.” 

In this context, former Secretary to the Government of India and former Chairman, Company Law Board Mr. K.K. Ray, had said in the preface to the Government publication ‘Circulars & Clarifications on Company Law’ that,

“ While, the Department has tried to take a broad and balanced view of the various issues in the light of the intention underlying the statute, it only reflectsan open minded thinking of the Department at the time when they were issued and the same could be subject to change if a better view is shown to be possible.

These clarifications should not, therefore, be cited as an authority of a binding character as is usually done in courts.”

Supporting this contention, Supreme Court in Bhagwati Developers v. Peerless General Finance & Investment Co. & Ors. (Case No. Appeal (Civil) 12640 of 1996) had upheld the Calcutta High Court decision that MCA Circular dated September 6, 1994 (advising that unlisted companies should not issue bonus shares out of revaluation reserves) do not have any mandatory effect.

The SC observed:

“We are also in agreement with the observation, in the impugned judgment, to the effect that the Circular dated 6th September 1994 does not have any mandatory effect. These Circulars are merely advisory in character”.

The above decision of the SC was followed by Madras High Court in Michelin India Pvt. Ltd. In [2015] 192 Comp Cas 152 and held that General Circular No. 45 of 2011dated July 8, 2011 did not have any mandatory effect and it is merely advisory in character.

Ascertaining liability in case of compliance of a circular which runs contrary to the Act

The Kerala High Court in the case of Harrisons and Crossfield (India) Ltd. v. Registrar of Companies, in which the company relied on such a circular, held that,

“The directors were entitled to rely on the above advice, as honest and reasonable men, even if the same was not legally correct.They had only chosen to follow the path indicated by the Board, a high authority in the hierarchy of company law administration, and for that, they should not be penalized.

There is no harm in relying upon these circulars but it is always open to the company to make the right decision whenever clarification circulars are inconsistent with Act.

Determining enforceability of a conflicting administrative instruction / department order in the context of tax laws

In a plethora of cases such as Punit Rai v. Dinesh Chaudhary, (2003) 8 SCC 204; Union of India v. Naveen Jindal, (2004) 2 SCC 510; and State of Kerala v. Chandra Mohan, (2004) 3 SCC 429, the Apex Court has re-confirmed its ratio decidendi that executive instructions cannot be termed as law within the meaning of Article 13(3)(a) of the Constitution. Since the very objective of Article 265 of the Constitution is to guarantee that there shall be no taxation without representation. If there is any conflict between an executive instruction and rules framed under law, the rules shall prevail over the other.

Concluding Thoughts

The Hon’ble Supreme Court has emphasized in several cases in India that the executive has no inherent/implied law-making power by itself, until and unless the same is derived through delegation by the legislature. Supremacy of law, being the grund-norm of Indian legal system, as well expounded in the Rule of Law theory by A.V. Dicey, any amount of action exercised by the administrative body has to be judged within the metes and bounds of the empowering Act and it cannot

i) travel beyond it, or

ii) run counter to it, or

iii) change the essential features, the identity, structure or the policy of the Act.

Hence, it can be concluded that Circular in Conflict with a Statutory Provision cannot prevail over the Statute.

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