Background:
We all must have experienced this multiple times that we read the provision and have two different views on the same — both seemingly supported by the law. The question then arises as which interpretation is correct: Is the answer found only in the words of the statute, or should one also consider the purpose behind those words? That is where the principles of statutory interpretation assume importance.
Amongst them, the two most widely recognised approaches are the Literal Rule of Interpretation and the Purposive Rule of Interpretation. While both seek to discover the intention of the legislature, they adopt fundamentally different paths in doing so.
The literal rule begins with the words used in the law. The purposive rule begins with the object sought to be achieved. Understanding the distinction between these principles is essential because the choice between them can influence the outcome of the provision.
Literal rule of interpretation (The Law Means What It Says):
The words appearing in a statute are not accidental; they are the result of some thought process. deliberation, and legislative drafting.
The literal rule therefore rests upon an important constitutional principle which is also explained by the Supreme Court in case law of State of Jharkhand v. Govind Singh on December 03, 2004, When the words of a Statute are clear, plain or unambiguous, i.e. they are reasonably susceptible to only one meaning, the courts are bound to give effect to that meaning irrespective of consequences.
Similarly, in Nasiruddin & Ors. vs. Sita Ram Agarwal 2003(2) SCC 577, In a case where the statutory provision is plain and unambiguous, the court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom.
The first duty of the interpreter is to give effect to the ordinary meaning of the words actually used without any addition or deletion of words used by the statute. Equitable considerations have no place where the statute contained express provisions.
Why the Literal Rule Continues to Matter
If the interpretation is taken on identifying the intent of the law by always substituting the words of law, the certainty and predictability expected from legislation would quickly disappear.
The Supreme Court ruling in Independent Sugar Corporation Ltd. v. Girish Sriram Juneja & Ors.[i] is a landmark decision that has reignited the debate on statutory interpretation in insolvency law. The case revolved around whether prior approval from the Competition Commission of India (‘CCI’) under the proviso to s. 31(4) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), was a mandatory prerequisite before a resolution plan could be approved by the Committee of Creditors (‘CoC’). The dispute arose from the Successful Resolution Applicant’s (SRA) resolution plan for the Corporate Debtor (‘CD’), which was approved by the CoC without obtaining prior CCI clearance. This procedural lapse led the Supreme Court, by a majority, to rule that prior approval was mandatory, as the law was very clear and unambiguous.
This is one of the reasons why regulatory obligations should ordinarily emerge from the language of the statute rather than assumptions regarding what the legislature might have intended.
There have been multiple provisions of the Companies Act, 2013 and SEBI Regulations where law has been very clear and unambiguous like special resolutions specifically required for preferential issue, borrowings exceeding limits, investments exceeding limits, whole-time KMPs cannot be appointed in more than one company except subsidiary, etc.
However, there are situations where a purely literal interpretation produces results that are plainly inconsistent with the purpose of the legislation. There are also cases where the language is capable of more than one interpretation or where a strict reading creates consequences that Parliament could never reasonably have intended.
It is in such situations that courts begin looking beyond the words themselves and seek to understand the object that the legislation was enacted to achieve.
Purposive interpretation
The transition from reading the words to understanding their purpose marks one of the most interesting developments in statutory interpretation. It explains why courts sometimes uphold a meaning that appears broader than the literal language and, in other cases, refuse to do so despite compelling equitable considerations.
The question, therefore, is not whether the literal rule is correct or whether purposive interpretation is preferable. The real question is this: when do the words of the law speak for themselves, and when must they be understood in the light of the purpose they were intended to serve? Should courts still follow the words, even if doing so defeats the purpose of the law?
This question led to the evolution of what is now popularly known as the Purposive Rule of Interpretation.
The focus shifts from merely understanding the words to understanding the problem that those words were intended to solve. This does not mean that courts ignore the statutory language. Rather, they interpret the language in a manner that best advances the legislative objective.
Purpose Cannot Be Ignored
Perhaps the most celebrated example of purposive interpretation is the decision of the Supreme Court in K.P. Varghese v. Income Tax Officer, Ernakulam & Anr., (1981) 4 SCC 173.
The issue before the Court related to the interpretation of provisions under the Income-tax Act dealing with transfer of capital assets. A purely literal reading suggested that tax consequences could arise even where no understatement of consideration had actually taken place. Had the Court confined itself strictly to the language, several genuine transactions could have been subjected to unintended taxation.
The Supreme Court, however, adopted a purposive approach. The Court examined the legislative history, the object behind the amendment and the mischief that Parliament intended to remedy. It concluded that the provision was enacted to prevent tax evasion through understatement of consideration and not to penalise every bona fide transaction.
How does this apply to Corporate law?
- Section 149(11) of the Companies Act, 2013 – Whether independent director can be appointed as Non-Executive director of the Company post completion of tenure?
Section 149(10) provides that an independent director may hold office for a term of up to five consecutive years and may be re-appointed for one more consecutive term upto five years subject to passing of a special resolution by the shareholders of the Company. Section 149(11) further provides that after completion of two consecutive terms, an independent director shall be eligible for appointment as an independent director only after the expiration of three years of ceasing to become an independent director. The proviso further states that during this period of three years, the individual shall not be associated with the company in any other capacity, either directly or indirectly.
A strictly literal reading of the proviso, particularly the expression “shall not be associated with the company in any other capacity”, may lead to the conclusion that once an individual completes the permissible tenure as an independent director, he or she is prohibited from associating with the company in any capacity whatsoever for the next three years. Consequently, the individual would not be eligible to be appointed even as a non-executive non-independent director, advisor, consultant or in any other role during the cooling-off period, irrespective of whether the company ever intends to appoint that individual again as an independent director.
Such an interpretation, however, gives rise to an important practical concern. The purpose of prescribing a maximum tenure and a cooling-off period is to preserve the independence of an independent director and to ensure that prolonged association with the company does not impair objective judgment. If the company has no intention of re-appointing the individual as an independent director after the expiry of the cooling-off period, preventing the individual from serving the company in any other legally permissible capacity serves little regulatory purpose.
It would unnecessarily restrict the company’s ability to continue benefiting from the individual’s knowledge and experience, even though the concerns relating to independence would no longer be relevant.
When Section 149(11) is read purposively, its true object becomes evident. The cooling-off period is intended to restore the independence of the individual before he or she is considered for re-appointment as an independent director. The restriction on association with the company is therefore intrinsically linked to the concept of future independence and is designed to ensure that the individual does not maintain a continuing relationship with the company that could compromise the independence expected of an independent director upon re-appointment. It is not necessarily intended to create an absolute prohibition against every form of association where no future appointment as an independent director is contemplated.
Accordingly, the provision is better understood by appreciating its underlying purpose rather than by reading the words “any other capacity” in complete isolation. This example demonstrates that while the statutory language remains the starting point, the legislative object often provides the context necessary to understand the true scope of the restriction. A purely literal interpretation may extend the provision beyond the mischief it seeks to address, whereas a purposive interpretation ensures that the law operates in a manner consistent with its objective without rewriting the statutory language.
Having understood both approaches independently, the next question is perhaps the most important one.
Can Courts Rewrite the Law in the Name of Purpose?
At this stage, one may wonder whether purposive interpretation gives unlimited discretion to courts.
The answer is an ‘No’.
The Supreme Court has repeatedly cautioned that courts cannot supply omissions merely because they believe the legislature ought to have enacted a different provision.
Similarly, in New India Assurance Co. Ltd. v. Nusli Neville Wadia & Anr., (2008) 3 SCC 279, the Supreme Court reiterated that purposive interpretation cannot be invoked where the statutory language is plain and unambiguous.
In other words, purpose assists interpretation—it does not replace legislation.
In other words, purpose does not replace the words; it explains them.
The above provisions of the Companies Act referred by us where purposive intent was applied didn’t replace the provision but gave clarity on the intent of the provisions basis the language or words used in the same.
Conclusion:
Thus, for the professionals, statutory interpretation is no longer a theoretical exercise. Every view on the Companies Act, SEBI Regulations or other corporate laws ultimately requires a choice between following the words and understanding their purpose. The best advice rarely begins by choosing one approach over the other. It begins by reading the provision carefully, understanding why it exists, and recognising that the purpose of interpretation is not to improve legislation, but to faithfully give effect to what Parliament intended.
If those words are clear, complete and capable of only one meaning, the inquiry ordinarily ends there, and the one must consider the said interpretation.
However, where the language is reasonably capable of two interpretations, where a literal construction defeats the legislative object, or where it leads to an absurd or impractical consequence, the professionals can examine the broader purpose behind the enactment.
The article is written by
Priyanka Nagda – Associate Director