Yashodhara Shroff Vs. Union of India (Karnataka High Court)
(a) It is held that Section 164(2)(a) of the Act is not ultra vires Article 14 of the Constitution. The said provision is not manifestly arbitrary and also does not fall within the scope of the doctrine of proportionality. Neither does the said provision violate Article 19(1)(g) of the Constitution as it is made in the interest of general public and a reasonable restriction on the exercise of the said right. The object and purpose of the said provision is to stipulate the consequence of a disqualification on account of the circumstances stated therein and the same is in order to achieve probity, accountability, and transparency in corporate governance.
(b) That Article 164(2)(a) of the Act applies by operation of law on the basis of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post- disqualification and this is not in violation of the principles of natural justice and hence, is not ultra vires Article 14 of the Constitution.
(c) That Section 164(2)(a) of the Act does not have a retrospective operation and is therefore, neither unreasonable nor arbitrary, in view of the interpretation placed on the same.
(d) That there has been an arbitrary exercise of power by the respondent authority in disqualifying the petitioners as directors of public companies by taking into consideration the period prior to 01.04.2014 as well as subsequent thereto for the purpose of reckoning the continuous period of three financial years. It is observed that even in respect of public companies, having regard to the nature of the consequences envisaged under Section 164(2) of the Act as compared to Section 274(1)(g) of the 1956 Act, the period prior to 01.04.2014 and subsequent thereto could not have been considered for reckoning three continuous financial years for disqualifying the directors of public companies. Such disqualification is hence quashed.
(e) Insofar as the private companies are concerned, disqualification on account of the circumstances stated under Section 164(2)(a) of the Act has been brought into force for the first time under the Act and the consequences of disqualification could not have been imposed on directors of private companies by taking into consideration any period prior to 01.04.2014 for the purpose of reckoning continuous period of three financial years under the said provision. The said conclusion is based on the principle drawn by way of analogy from Article 20(1) of the Constitution as, at no point of time prior to the enforcement of the Act, a disqualification based on the circumstances under Section 164(2) of the Act was ever envisaged under the 1956 Act vis-à-vis directors of private companies. Such a disqualification could visit a director of only a public company under Section 274(1)(g) of 1956 Act and never a director of a private company. Such disqualification of the petitioners who are directors of private companies is hence quashed.
(f) But, if any disqualification of directors of public companies has occurred under the 1956 Act, i.e., prior to 01.04.2014, the same would result in an ineligibility under Section 164(2) of the Act on account of the retro-active operation of the Section.
(g) Consequently, where the disqualification under Section 164(2)(a) of the Act is based on a continuous period of three financial years commencing from 01.04.2014, wherein financial statements or annual returns have not been filed by a public or private company, the directors of such a company stand disqualified and the consequences of the said disqualification would apply to them under the Act.
(h) That Section 167(1)(a) of the Act is not ultra vires Article 14 and/or Article 19(1)(g) of the Constitution. The said provision is saved under Article 19(6) thereof.
(i) The proviso to Section 167(1)(a) of the Act is not ultra vires Articles 14 or 19(1)(g) of the Constitution as being manifestly arbitrary having regard to the interpretation made above.
(j) Further, the amendment to Section 167(1)(a) of the Act, by insertion of the proviso is by virtue of the Amendment Act, 2017 is subsequent to the date on which the petitioners were disqualified, which in most cases is 01.11.2016 or at any rate prior to May 2018. That the said proviso has only a prospective effect and cannot have a retrospective operation. Thus, in respect of the petitioners who were disqualified prior to the date of enforcement of the amended provision, that portion of the proviso namely “office of the director shall become vacant in all the companies” is not applicable to those petitioners. Hence, the petitioners herein, (who may have also been granted interim orders by this Court) continue to hold office as directors in the defaulting company as well as all other companies. This is in consonance with the interpretation placed on the proviso and petitioners would not vacate the office in all other companies in which they are directors as the proviso does not apply to the petitioners who were all disqualified prior to 07th May 2018, as the amendment, by way of an insertion of proviso, has only a prospective operation.
(k) It is clarified that the operation of the proviso under Section 167(1)(a) of the Act being prospective in nature, any disqualification of any director of a public company or a private company prior to 07th May 2018, would not result in such director vacating the office of the director in all other companies in which the disqualified director is a director. However, the director of the company in default would continue to hold office as a director even in respect of the defaulting company. The proviso to the above extent only is by way of a clarification so as to avoid an absurdity as otherwise, all the directors of the defaulting company would have to vacate office which would result in the company being bereft of directors and have a cascading effect and there would be no compliance of Section 164(2)(a) by such a company. Hence, the expression “other than the company which is in default” in the proviso to Section 167(1)(a) would imply that the director of a defaulting company who has suffered disqualification need not vacate his office of the director in the defaulting company.
(l) Consequently, proviso to Section 167(1)(a) of the Act having a prospective operation would affect only those directors who are disqualified on or after 07th May 2018 insofar as vacating office of director other than the defaulting company is concerned.
(m) It is held that the directors of the struck off companies under Section 248 of the Act do not per se get disqualified. But, if the said company has also not complied with Section 164(2)(a) of the Act, then the said company being a defaulting company, the directors of such a company get disqualified in terms of the discussion made above.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
COMMON ORDER
Part – 1
As common questions of fact and law arise in these writ petitions, they have been clubbed together, heard and disposed of by this common order.
I have heard the learned senior counsel and learned counsel for the petitioners and learned Additional Solicitor General of India and other counsel for Union of India and respondents, and perused the pleadings and statement of objections filed on behalf of the respondents.
2. The Petitioners herein were directors of either public companies or private companies or both and they are all aggrieved by their disqualification as directors as per the list issued by the respondents.
Part – 2
Bird’s eye view of the controversy:
3. In these writ petitions, some of the petitioners have assailed the vires of Section 164(2)(a) of the Companies Act, 2013 (hereinafter referred to as “the Act” for the sake of brevity) as well as Section 54 of the Companies (Amendment) Act, 2017 (hereinafter referred to as “the Amendment Act, 2017”) by which a proviso has been inserted to clause (a) of sub-section (1) of Section 167 of the Act as well as Section 167(1)(a) itself. In all these writ petitions, the List published by the respondent – authority (Ministry of Corporate Affairs) to the effect that the petitioners have been disqualified from being directors of their respective companies for the respective five year period (mostly from 01.11.2016 to 30.10.2017) is assailed. As a result, they are faced with the consequences as stipulated under Section 164(2) and Section 167(1)(a) of the Act, particularly, its proviso as inserted by the Amendment Act, 2017.
4. The vires of Section 164(2) of the Act is assailed on the touch-stone of Articles 14 and/or 19(1)(g) of the Constitution of India, as well as being in violation of the principles of natural justice. Section 167(1)(a) and proviso to Section 167(1)(a) of the Act are challenged as being in violation of Article 14 and/or Article 19(1)(g) of the Constitution. Further, the petitioners have contended that there has been an arbitrary exercise of power by the concerned respondent authority in disqualifying the petitioners as directors of the respective companies by giving a retrospective operation to the aforesaid provisions of the Act.
Part – 3
Factual matrix:
5. Since the main thrust of the controversy in these cases is in the realm of constitutionality of the aforementioned provisions and on interpretation of statute, it is unnecessary to go into the factual aspects of each of the cases except where the same is necessary to advert to.
6. For the sake of convenience, the details relevant for consideration of these cases are extracted from the pleadings and are mentioned in the following table. The names of the companies which are shown in bold are struck off companies under Section 248 of the Act. The names of the companies which have not complied with Section 164(2)(a) of the Act are also mentioned:
For details Download Case Law File (Page 298 to 317) -Link – https://taxguru.in/wp-content/uploads/2020/01/Yashodhara-Shroff-Vs.-Union-of-India-Karnataka-High-Court.pdf
*Sequence of Case Numbers is as per cause-list dated 27.03.2019.
7. On perusal of the aforesaid table, it could be gathered that the petitioners are directors either in public companies or private companies, or both, and the period of their disqualification have also been noted. They are aggrieved by they being disqualified on account of non-compliance with the provisions of Section 164(2)(a) of the Act and also the fact that during the pendency of their disqualification and during the pendency of most of these writ petitions, proviso to Section 167(1)(a) of the Act has been inserted. As a result of which, they have to vacate their office as director in all other companies where they are functioning as directors even though there is no default under Section 164(2) of the Act by the other companies.
Part – 4
Legal frame work:
8. The relevant provisions of the Companies Act, 1956 (hereinafter referred to as “1956 Act” for the sake of convenience) and “the Act” are extracted as under:
Relevant provisions of 1956 Act:
274. Disqualifications of directors.-
(1) A person shall not be capable of being appointed director of a company, if –
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;
(e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or
(f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section;
(g) such person is already a director of a public company which, –
(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or
(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B).
(2) The Central Government may, by notification in the Official Gazette, remove –
(a) the disqualification incurred by any person in virtue of clause (d) of sub-section (1), either generally or in relation to any company or companies specified in the notification; or
(b) the disqualification incurred by any person in virtue of clause (e) of sub-section (1).
(3) A private company which is not a subsidiary of a public company may, by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in sub-section (1).
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283. Vacation of office by directors. –
(1) The office of a director shall become vacant if –
(a) he fails to obtain within the time specified in sub-section (1) of section 270, or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company;
(b) he is found to be of unsound mind by a Court of competent jurisdiction;
(c) he applies to be adjudicated an insolvent;
(d) he is adjudged an insolvent;
(e) he is convicted by a Court of any offence involving moral turpitude and sentence in respect thereof to imprisonment for not less than six months;
(f) he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, within six months from the last date fixed for the payment of the call unless the Central Government has, by notification in the Official Gazette, removed the disqualification incurred by such failure;
(g) he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;
(h) he (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295;
(i) he acts in contravention of section 299;
(j) he becomes disqualified by an order of Court under section 203;
(k) he is removed in pursuance of section 284; or
(l) having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company.
(2) Notwithstanding anything in clauses (d), (e) and (j) of sub-section (1), the disqualification referred to in those clauses shall not take effect –
(a) for thirty days from the date of the adjudication, sentence or order ;
(b) where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of; or
(c) where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed of.
(2A) Subject to the provisions of subsections (1) and (2), if a person functions as a director when he knows that the office of director held by him has become vacant on account of any of the disqualifications, specified in the several clauses of sub-section (1), he shall be punishable with fine which may extend to five thousand] rupees for each day on which he so functions as a director.
(3) A private company which is not a subsidiary of a public company may, by its articles, provide that the office of director shall be vacated on any grounds in addition to those specified in sub-section (1).
x x x
560. Power of Registrar to strike defunct company off register.— (1) Where the Registrar has reasonable cause to believe that a company is not carrying on business or in operation, he shall send to the company by post a letter inquiring whether the company is carrying on business or in operation.
(2) If the Registrar does not within one month of sending the letter receive any answer thereto, he shall, within fourteen days after the expiry of the month, send to the company by post a registered letter referring to the first letter, and stating that no answer thereto has been received and that, if an answer is not received to the second letter within one month from the date thereof, a notice will be published in the Official Gazette with a view to striking the name of the company off the register.
(3) If the Registrar either receives an answer from the company to the effect that it is not carrying on business or in operation, or does not within one month after sending the second letter receive any answer, he may publish in the Official Gazette, and send to the company by registered post, a notice that, at the expiration of three months from the date of that notice, the name of the company mentioned therein will, unless cause is shown to the contrary, be struck off the register and the company will be dissolved.
(4) If, in any case where a company is being wound up, the Registrar has reasonable cause to believe either that no liquidator is acting, or that the affairs of the company have been completely wound up, and any returns required to be made by the liquidator have not been made for a period of six consecutive months, the Registrar shall publish in the Official Gazette and send to the company or the liquidator, if any, a like notice as is provided in sub-section (3).
(5) At the expiry of the time mentioned in the notice referred to in sub-section (3) or (4), the Registrar may, unless cause to the contrary is previously shown by the company, strike its name off the register, and shall publish notice thereof in the Official Gazette; and on the publication in the Official Gazette of this notice, the company shall stand dissolved:
Provided that—
(a) the liability, if any, of every director, the managing agent, secretaries and treasurers, manager or other officer who was exercising any power of management, and of every member of the company, shall continue and may be enforced as if the company had not been dissolved; and
(b) nothing in this sub-section shall affect the power of the Court to wind up a company the name of which has been struck off the register.
(6) If a company, or any member or creditor thereof, feels aggrieved by the company having been struck off the register, the Court, on an application made by the company, member or creditor before the expiry of twenty years from the publication in the Official Gazette of the notice aforesaid, may, if satisfied that the company was, at the time of the striking off, carrying on business or in operation or otherwise that it is just that the company be restored to the register, order the name of the company to be restored to the register; and the Court may, by the order, give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off.
(7) Upon a certified copy of the order under sub-section (6) being delivered to the Registrar for registration, the company shall be deemed to have continued in existence as if its name had not been struck off.
(8) A letter or notice to be sent under this section to a company may be addressed to the company at its registered office, or if no office has been registered, to the care of some director, the managing agent, secretaries and treasurers, manager or other officer of the company, or if there is no director, managing agent, secretaries and treasurers, manager or officer of the company whose name and address are known to the Registrar, may be sent to each of the persons who subscribed the memorandum, addressed to him at the address mentioned in the memorandum.
(9) A notice to be sent under this section to a liquidator may be addressed to the liquidator at his last known place of business.
x x x
Relevant provisions of 2013 Act:
2. Definitions.- In this Act, unless the context otherwise requires,-
x x x
(20) “company” means a company incorporated under this Act or under any previous company law;
x x x
(32) “depository” means a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 (22 of 1996);
x x x
(40) “financial statement” in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) or to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement;
(41) “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:
Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;
x x x
92. Annual return.- (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and
(k) such other matters as may be prescribed, and signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
(2) The annual return, filed by a listed company or, by a company having such paid-up capital or turnover as may be prescribed, shall be certified by a company secretary in practice in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the company has complied with all the provisions of this Act.
(3) An extract of the annual return in such form as may be prescribed shall form part of the Board’s report.
(4) Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed, within the time as specified, under section 403.
(5) If any company fails to file its annual return under sub-section (4), before the expiry of the period specified under section 403 with additional fees, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakhs rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
(6) If a company secretary in practice certifies the annual return otherwise than in conformity with the requirements of this section or the rules made thereunder, he shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
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96. Annual general meeting.- (1)Every company other than a One Person Company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next:
Provided that in case of the first annual general meeting, it shall be held within a period of nine months from the date of closing of the first financial year of the company and in any other case, within a period of six months, from the date of closing of the financial year:
Provided further that if a company holds its first annual general meeting as aforesaid, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation:
Provided also that the Registrar may, for any special reason, extend the time within which any annual general meeting, other than the first annual general meeting, shall be held, by a period not exceeding three months.
(2) Every annual general meeting shall be called during business hours, that is, between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate:
Provided that the Central Government may exempt any company from the provisions of this sub-section subject to such conditions as it may impose.
Explanation.—For the purposes of this sub-section, “National Holiday” means and includes a day declared as National Holiday by the Central Government.
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129. Financial statement.— (1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards:
Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company:
Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—
(a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);
(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949 (10 of 1949);
(c) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003 (36 of 2003);
(d) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.
(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year.
(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub- section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.
Explanation.— For the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture.
(4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).
(5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation.
(6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made there under, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.
(7) If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term, which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Explanation.—For the purposes of this section, except where the context otherwise requires, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act.
x x x
131. Voluntary revision of financial statements or Board’s report. – (1) If it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134 they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar:
Provided that the Tribunal shall give notice to the Central Government and the Income-tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section:
Provided further that such revised financial statement or report shall not be prepared or filed more than once in a financial year:
Provided also that the detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.
(2) Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to—
(a) the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
(3) The Central Government may make rules as to the application of the provisions of this Act in relation to revised financial statement or a revised director’s report and such rules may, in particular—
(a) make different provisions according to which the previous financial statement or report are replaced or are supplemented by a document indicating the corrections to be made;
(b) make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report;
(c) require the directors to take such steps as may be prescribed.
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164. Disqualifications for appointment of director.- (1) A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
(h) he has not complied with sub-section (3) of section 152.
(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.
(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section(1) shall not take effect—
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or
(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.
x x x
167. Vacation of office by director.— (1) The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164;
(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
(c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:
Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.
(2) If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
(3) Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section(1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.
(4) A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).
9. The Act was amended with effect from May, 2018. The amendments relevant for this case are in respect of Sections 164 & 167.
“The Companies (Amendment) Act, 2017 [No.1 of 2018]:
x x x
*Section 52. In Section 164 of the Principal Act.—
(i) In sub-section (2), the following proviso shall be inserted, namely:—
“Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.”;
(ii) in sub-section (3), for the proviso, the following proviso shall be substituted namely:—
“Provided that the disqualifications referred to in clauses (d), (e) and (g) of subsection (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.”
x x x
*Section 54. In Section 167 of the principal Act, in sub-section (1),—
(i) in clause (a), the following proviso shall be inserted, namely:—
“Provided that where he incurs disqualification under subsection (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.”;
(ii) x x x”
[*Came into force w.e.f. 07.05.2018]
At this stage, it is relevant to refer to the Companies (Appointment and Qualification of Directors) Rules, 2014. The Rules have come into force from the date of their publication in the Official Gazette. Rule 2 (d) defines “Director Identification Number” (DIN) to mean an identification number allotted by the Central Government to any individual, intending to be appointed as director or to any existing director of a company, for the purpose of his identification as a director of a company, provided that the DIN obtained by the individuals prior to the notification of these rules shall be the DIN for the purpose of the Act. Provided further that the DIN includes vis-à-vis the Designated Partnership Identification Number (DPIN) issued under Section 7 of the Limited Liability Partnership Act, 2008 (6 of 2009) and rules made thereunder. Rule 9 deals with application for allotment of “Director Identification Number”, while Rule 10 deals with “Allotment of DIN” and Rule 11 deals with “Cancellation or surrender or Deactivation of DIN. Rule 12 deals with “Intimation of changes in particulars specified in DIN application”. Rule 14 speaks about “Disqualification of directors under sub-section(2) of section 164”. For the purpose of this case, it would be relevant to extract Rules 11 and 14 which read as under:
“11. Cancellation or surrender or Deactivation of DIN.- The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received along with fee as specified in Companies (Registration Offices and Fees) Rules, 2014 from any person, cancel or deactivate the DIN in case –
(a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
(b) the DIN was obtained in a wrongful manner or by fraudulent means;
(c) of the death of the concerned individual;
(d) the concerned individual has been declared as a person of unsound mind by a competent Court;
(e) if the concerned individual has been adjudicated an insolvent:
Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned individual;
(f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN:
Provided that before deactivation of any DIN in such case, the Central Government shall verify e-records.
Explanation.- For the purposes of clause(b) –
(i) the term “wrongful manner” means if the DIN is obtained on the strength of documents which are not legally valid or incomplete documents are furnished or on suppression of material information or on the basis of wrong certification or by making misleading or false information or by misrepresentation;
(ii) the term “fraudulent means” means if the DIN is obtained with an intent to deceive any other person or any authority including the Central Government.
x x x
14. Disqualification of directors sub-section (2) of section 164.-
(1) Every director shall inform to the company concerned about his disqualification under subsection (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed.
(2) Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years.
(3) When a company fails to file the Form DIR-9 within a period of thirty days of the failure that would attract the disqualification under sub-section (2) of section 164, officers of the company specified in clause (60) of section 2 of the Act shall be the officers in default.
(4) Upon receipt of the Form DIR-9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection.
(5) Any application for removal of disqualification of directors shall be made in Form DIR-10.”
10. A comparison of Sections 274 of 1956 Act with Section 164 of the Act and Section 283 of 1956 Act with Section 167 of 2013 Act along with the amendments could be made at this stage. Similarly, comparison of Section 560 of 1956 Act with Sections 248 and 252 of the Act could be noted.
