Essential Rules of Interpretation of Statutes for company secretaries A presentation by

1. Essential Rules of Interpretation of Statutes for company secretaries A presentation by Dr K R Chandratre

2. To be a company secretary, you have to be able to read and interpret statutes, rules, regulations , etc correctly and effectively, and advise your employer or client, who look to you for advice for their problems. • A company secretary can advise their clients effectively and correctly on statutes only if they have sound knowledge of the principles or rules of interpretation of statutes. • This will enable you to enhance your legal acumen, your status and multiply your clientele; or else you will lag behind and can’t gain true recognition to our profession.

3. Statute Law • It is the body of law contained in an Act of Parliament (statute) is a document that sets out legal rules and has (normally) been passed by both Houses of Parliament in the form of a Bill and assented to by the President of India a Bill becomes an Act.

4. Delegated legislation (subordinate legislation) • It is the law made in exercise of the powers conferred on a government or other authority by an Act of Parliament (an enabling statute or parent Act). The bulk of delegated legislation is governmental, consisting mainly of orders, regulations, rules, directions, etc. • Every statute contains a provision conferring powers on the government or other statutory authorities to make rules, regulations, forms, etc (such as s. 469 of Cos Act 2013 or s. 642 of Cos Act 1956).

5. Rules, Regulations, etc made under a Statute have the same legal status and force as the statute made by Parliament. Notification published in the Official Gazette either promulgating rules, regulations, forms, etc or amending them but not circulars issued by the government have the same legal status. • Circulars, press notes, instructions, clarifications, etc issued by the government constitute only views of the government on statutory provisions and may be taken help of to understand meaning of a statutory provision but they are not mandatory and cannot have a bearing on interpretation of a statute.

6. For example, the Supreme Court (SC) said in one case, that MCA’s Circular of 6 September 1994, advising companies that bonus shares should not be issued out of revaluation reserve cannot have any mandatory effect against the law which does not prevent issue of bonus shares out of revaluation reserve. These Circulars are merely advisory in character.

7. Case Law (also known as precedential law, decisional law or jurisprudence) • It is the law established by judicial decisions in particular cases, instead of by legislative action or the law as established by the outcome of former cases. It is the body of judge-made law and legal decisions that interprets prior case law, statutes and other legal authority. • It is the source for interpretation and understanding of various facets of statute law. It helps to develop an insight and enrich knowledge of law. The courts interpret law and unfold Legislative intent by applying principles of statutory interpretation.

8. Object of Interpretation • To ascertain what is intended by the words of a statute. The primary object of the interpretation of statutes is to discover the true intention of the Legislature; and where the intention can be indubitably ascertained the courts are bound to give effect to it regardless of their opinion about its wisdom or folly.

9. Process of Interpretation (1) Read the relevant provision carefully and try to unfold meaning of every word and the whole provision. Focus on the language of the provision. (2) If any word used in the provision is defined either in the section itself or in the definitions section, apply it; if it is not defined, find out its meaning from a dictionary. (3) Try to find out if a word used is defined in some other statute and take aid of such definition to understand its meaning in the context of the provision you are interpretation.

10. (4) Don’t add or deduct any word of your own or rewrite any word to suit your case. Don’t mix into the language of the statutory provision anything like ethics, morals, governance, equity; or your emotions or sentiments and not even views expressed in the circulars or press notes. (5) If there are any standard phrases or expressions used in the provision, which are ordinarily used in legislative drafting (such as Notwithstanding anything contained; Provided that; Save as otherwise provided; Without prejudice to, etc; try to ascertain the effect of such phrase or expression in relation to any other provision(s) of the Act.

11. (6) If there are two provisions on the same subject and they apparently conflict with one another, try to find out of them which one is special and which one is general. (7) If a word is ambiguous and can lead to two meanings, try to find out the intention or purpose of the provision from legislative background, case law, etc in order to decide whether interpretation you are trying to place on it is consistent with such intention or purpose. (8) Now, by applying various rules of interpretation in the following slides, come to a conclusion as to the correct interpretation of the provision.

12. THE BASIC AND PRIMARY RULE OF INTERPRETATION - THEGOLDEN RULE • The primary rule of interpretation (which is called ‘literal rule’) is the literal interpretation: to interpret a statutory provision literally and grammatically giving the words their ordinary and natural meaning. • If a word used in a statutory provision is not defined in the statute, it must be given its ordinary, literal meaning in the context of the relevant provision.

13. It was held that the first and primary rule of construction is that the intention of the legislature must be found in the words used by the Legislature itself. If the words used are capable of one construction only ,then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object policy of the Act.

14. Thus, the cardinal rule of construction of statutes is to read the statute literally, that is, by giving to the words used by the legislature their ordinary, natural and grammatical meaning. If, however, such a reading leads to absurdity and the words are susceptible of another meaning the Court may adopt the same. But if no such alternative construction is possible, the Court must adopt the ordinary rule of literal interpretation.

15. If the language of an Act is clear and explicit, we must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the Legislature. In other words, if the language used by the Legislature is precise and unambiguous, we have only to expound the words in their natural and ordinary sense. • So, truly speaking, the only rule of interpretation is ‘literal interpretation rule’.

16. For example,- • If a statutory provision states ‘contract for the sale, purchase or supply of any goods, material or services’, all the words - sale, purchase, goods, material, services - not defined in the statute must be interpreted according to their natural, ordinary meaning, although in the process, meanings given in other statutes may be taken help of to understand its meaning. • Meaning of a word or phrase defined in any other statute may be taken help of to interpret it if it is used but not defined in another statute.

17. Hardship, inconvenience etc are not relevant • The statutory provision may cause hardship or inconvenience to a particular party but the Court has no choice but to enforce it giving full effect to the same. The legal maxim duralexsedlex (the law is hard but it is the law), stands attracted in such a situation. It has consistently been held that, inconvenience is not a decisive factor to be considered while interpreting a statute. • If the language of a statute is clear and explicit, it must receive full effect, whatever may be the consequences.

18. Some examples of ‘literal interpretation’ • The words ‘purchase’ of immovable property do not include ‘lease’ of immovable property. • The word ‘sale’ did not include lending of an article for temporary use to be returned after some time. • A guarantee or security not in respect of a loan is outside the ambit of the provision which applies to a guarantee or security in connection with a loan. • The words ‘contract for service’ do not apply to ‘contract of service’.

19. A comfort letter given by a company to a bank in respect of another company which had taken a loan from the bank, was not a guarantee. • In the absence a definitions, the natural and ordinary meaning of the word ‘aircraft’ is wide enough to include a hot air balloon used for carrying passenger and ‘passenger’ includes any person who is being conveyed in an aircraft from one place to another and who is not himself contributing to the process of flying, and even for reasons of pleasure or recreation and destination is unpredictable.

20. READING WORDS IN AND READING WORDS OUT OF A STATUTE • Adding words in, or omitting words from, a statutory provision is not permissible, as it amounts to doing something which only Legislature is permitted to do. So, no one (even courts) cannot add any words into a statute, nor can we omit any words from it; not even in the name of interpretation or policy or anything else. Otherwise everyone would do it. • The intention of the legislature is required to be gathered from the language used and, therefore, a construction, which requires for its support with additional substitution of words or which results in rejection of words as meaningless has to be avoided.

21. Every word in a statute to be given a meaning and no word should be ignored, omitted or brushed aside, on the presumption that Parliament does nothing in vain. • An interpretation which would leave without effect any part of the language of a statute will normally be rejected. Every word and expression used by the Legislature has to be given its proper and effective meaning as the legislature uses no expression without a purpose or meaning, for a statute is never supposed to use words without a meaning, and no word should be considered as redundant.

22. The Stamp Act in Delhi levied a fixed stamp duty on MoA and stamp duty with reference to the authorised share capital only at the time of incorporation of a company. Delhi High Courtrefused to add words and held that in the absence of express provision in the Act permitting levy of stamp duty on the increase of authorised share capital, no stamp duty was payable when a company increased its authorised share capital.

23. Examples: • Madras HC held: The words relative of such director in cl. (b) of s. 314(1) refer to a director of the company who himself holds an office or place of profit, and not any director; that is the plain grammatical meaning of the words such director. • Gujarat HC held: The words Every company … shall have a whole-time secretary, in s. 383A of Cos Act 1956 cannot be interpreted as meaning shall be in the employment ; so a company secretary need not be in the employment of a company but may be engaged on a contractual basis.

24. Delhi HC held: The expression monthly remuneration in s. 314, doesn’t include those payments which by virtue of their nature and practice are not made on monthly basis (like reimbursement of medical expenses, benefit of employer's contribution to PF, encashment of un-availed leave and bonus). • Calcutta HC held: The phrase "office of profit" in s. 204 has to be given its ordinary and natural meaning, namely, that by virtue of the office any profit is derived. • Madras HC held: Advance against salary is not a loan. • Bombay HC held: A deferment of purchase price of property is not a loan although it is a debt.

25. INTERPRETATION OF A PROVISO • A proviso is a clause in a statute, which begins with the phrase Provided that. Literally it means ‘on the condition or understanding that’. • A proviso has one or more of the following three functions: (a) Exception to the main provision; (b) Condition to the main provision; (c) Additional requirement.

26. A proviso must be interpreted harmoniously with the section or subsection to which it is appended. A proviso qualifies the generality of the main enactment • Unless the words of the proviso indicate otherwise, the proviso applies to the whole of the main part of the section or subsection under which the proviso has been inserted. For example, where the main section contained two periods, eighteen months and one year, and the proviso used the words “the period”, it was held that the proviso applied to both the period mentioned in the main section.

27. Example (Exception) • Except with the consent of the Board of Directors given by a resolution at a meeting of the Board …, no company shall enter into any contract or arrangement with a related party with respect to … Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm's length basis.

28. Example (Condition) Where a licence is revoked under sub-section (6), the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section: Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard.

29. Example (Exception and Condition) Every company shall keep at its registered office proper books of account; Provided that the books of account may be kept at such other place in India as the Board of directors if, within seven days of the decision, the company files with the Registrar a notice in writing giving the full address of that other place.

30. Ejusdem generis [Things of the same kind or class rule or the consistent list rule] • When a general word or phrase follows a list of specific words or phrases, the general word or phrase will be interpreted to include only items of the same type as those listed. • If a list of things of a particular type concludes with a catch-all expression like or anything else, or the like, or otherwise, etcetera, et all, and others; and so forth; and so on, the general word is restricted to things of the same type or class

31. Examples: • In the expression ‘cats, dogs, and other animals’, the general words ‘other animals’ are to be treated as confined to other domestic animals. • The word ‘otherwise’ in the phrase “salary, fee, commission, perquisites, any rent-free accommodation, or otherwise”, should not be interpreted to include something which is not remuneration, such as travelling expenses. • Closing down of an undertaking would not fall within the phrase ‘sell, lease or otherwise dispose of’ despite the use of the words ‘otherwise dispose of’.

32. PURPOSIVE INTERPRETATION • Although literal rule is the primary and universal rule of interpretation of statutes when the words of a statute are clear and unambiguous, the rule of purposive interpretation is resorted to when the words in a statutory provision are unclear, vague or ambiguous and admit of more than one meaning. • In this situation, to find out the true purpose or object of the provision, the court uses other (external) aids of interpretation such as historical background, report of a committee, statement of objects & reasons, debate in Parliament, the practice prevailing before the enactment, etc.

33. HARMONIUS INTERPRETATION OF TWO CONFLICTING PROVISIONS IN A STATUTE • The provisions of a statute should be so interpreted as to harmonise with one another and the provisions of one section cannot be used to defeat those of another unless it is impossible to effect reconciliation between them.

34. The Court should, when it seeks to ascertain the legislative intent, construe all of the constituent parts of the statute together, and seek to ascertain the legislative intention from the whole Act, considering every provision in the light of the general purpose and object of the Act itself, and endeavouring to make every part effective, harmonious, and sensible. This means, that the Court should attempt to avoid absurd consequences in any part of the statute and refuse to regard any word, phrase, clause or sentence superfluous, unless such a result in clearly unavoidable.

35. Harmonious interpretation rule is used when two provisions on the same subject are in conflict and cannot be reconciled with each other on plain reading. The endeavour in such a situation is to give effect to both and not render either redundant or useless or a dead letter. • So, if there appears inconsistency between two sections of the same Act, the principle of harmonious interpretation should be applied to avoid a head-on-clash; it should not be assumed that what Parliament has given with one hand, it took away with the other.

36. CONFLICT BETWEEN GENERAL PROVISION AND SPECIAL PROVISION  Another well known rule of construction used when there are two conflicting or inconsistent provisions, one of them special and the other general, is that the special provision prevails over or overrides the general provision. They should be interpreted to avoid the conflict and harmonize them to give effect to both so that neither is rendered useless or a dead letter. Provisions of one section of a statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them.

37. As was said by the Supreme Court, It is a cardinal rule of construction that when there are in a Statute two provisions which are in conflict with each other such that both of them cannot stand, they should, if possible, be so interpreted that effect can be given to both, and that a construction which renders either of them inoperative and useless should not be adopted except in the last resort. This a what is known as the rule of harmonious construction.

38. A classic example is, sections 185 and 186 of Companies Act 2013. While s.185 prohibits giving loans, guarantees and securities to some parties, s.186 permits it. In this situation, allowing s.186 to prevail over s.185 will make s.185 completely useless and a dead letter. So the rules of harmonious interpretation and special overrides general would help reconcile them, to say that cases covered by s.185 (which is a special provision) are excluded by s.186 (which is a general provision).

39. INTERPRETATION OF DEFINITIONS • Definition is a statement of the meaning as of a word or phrase used in a statute. It is common to define in a statute certain words and phrases used in that statute, e.g. s. 2 of Companies Act 2013. • Definitions are either restrictive or extensive. They are called ‘exhaustive definitions’ and ‘inclusive definitions’ respectively. This is indicated by the use of the words ‘means’ and ‘includes’ respectively.

40. There is also a definition called an ‘adoptive definition’. This type of definition adopts the definition given in one statute for another statue (‘Depository’ has the same meaning as in the Depositories Act, 1996.) • There is also an ‘exclusive definition’ that excludes something from for the Act in which it is stated (‘member’, in relation to a company, does not include a bearer of a share-warrant of the company ...) • A majority of definitions are, however, either exhaustive or inclusive.

41. When the word ‘means’ is used, the definition is exhaustive or restrictive definition which means the definition does not cover anything outside the definition. When the word ‘includes’ is used the definition is an inclusive or expansive definition. • When both the words are used, the definition is an exhaustive or restrictive definition.

42. An exhaustive definition does not cover anything other than what is stated in the definition and hence its scope is restrictive; you cannot include anything outside its scope. • Unless there are compelling reasons to do so, meaning of the word or phrase in a restrictive definition would not be expanded or made extensive to embrace things which are strictly not within the meaning of the word as defined.

43. An inclusive definition is wide enough to include anything not mentioned in the definition but which is similar to what is mentioned in it; while the term defined should retain its ordinary meaning, it should also cover things in addition to those mentioned in the definition of similar nature. • For example, definition of ‘company’ only means a company registered in India under the Companies Act but definition of ‘body corporate’ includes a company as well as any entity in or outside India which is a juristic or artificial person incorporated under law and having an independent corporate personality.

44. But the definition using the word ‘means’ is an exhaustive definition and it cannot take in its fold anything other that what is covers. For example, we can’t bring anything beyond what the definitions of ‘companysecretary’, ‘promoter’, ‘public company’, ‘private company’, ‘related party’, ‘relative’, ‘subsidiary’ state because all these definition use the ‘means’ and hence cannot be expanded beyond what they state.

45. Examples: • "company" means a company incorporated under this Act or under any previous company law. • "Chief Financial Officer" means a person appointed as the Chief Financial Officer of a company • "body corporate" or "corporation" includes a company incorporated outside India. • "document" includes summons, notice, requisition, order, declaration, form and register, whether issued, sent or kept in pursuance of this Act or under any other law for the time being in force or otherwise, maintained on paper or in electronic form.

46. Definition having a limited scope to specific section • While definitions given in the definition section apply to the entire Act, sometimes a definition for a particular section or subsection is given in the Explanation appended to that section or subsection. • These definitions apply to specific sections only. In such cases, usually the words “For the purposes of this section’ or ‘For the purposes of this subsection’ are used to indicate the limited scope of the definition. • Such definitions cannot be used to interpret the same words or phrases used in other sections.

47. Examples: Explanation.—For the purposes of sub-section (2), the term "infrastructure projects" means the infrastructure projects specified in Schedule VI. Explanation.—For the purposes of this sub-section, "National Holiday" means and includes a day declared as National Holiday by the Central Government.

48. Interpretation of words not defined • When a word used in a provision of Act is not defined in the Act, it should be interpreted according to its ordinary, natural meaning. • If it is defined in some other statute, that definition cannot be blindly imported into the statute but such other definition can be used to understand the meaning of that word in the context of the provision of such other Act.

49. HEADINGS AND MARGINAL NOTES • The ‘heading’ or ‘title’ prefixed to a section or a group of sections have a limited role to play in the construction of statutory provision. • They may be taken as very broad and general indicators or the nature of the subject matter dealt with by the section but they do not control the meaning of the section if the meaning is otherwise ascertainable by reading the section in proper perspective along with other provisions. • Often, the heading of a section is at variance with the provision in the section and sometimes it is misleading.

50. INTERPRETATION OF ‘SHALL’ AND ‘MAY’ • The standard rule is that the provision containing shall is mandatory and the provision containing may is either permissive or discretionary. In other words, shall conveys mandatory nature of the provision, while may conveys permissive or discretionary or directory nature. • When a provision uses the word may, it is a permissive provision, giving a discretionary power or authority and that the provision is not mandatory and when the word shall is used the provision is considered mandatory, prohibitory or commanding a duty or obligation.