Whether the provisos to Section 164(2) and Section 167(1)(a) of the Companies Act, 2013 [inserted via the Companies (Amendment) Act, 2018 w.e.f. 07.05.2018] be applicable retrospectively?

The aforesaid issue was raised before the Hon’ble Delhi High Court in the matter of Mukut Pathak & Ors. vs Union of India & Anr. In the present case, the Court has observed that the operation of the provisos to Section 164(2) and Section 167(1)(a) of the Companies Act, 2013 (‘the Act, 2013’) cannot be read to operate retrospectively. The proviso to Section 167(1) of the Act, 2013 imposes a punitive measure on directors of defaulting companies. 

Before the Companies (Amendment) Act, 2018 w.e.f. 07.05.2018.

A plain reading of Clause (a) of Section 167 (1) of the Act, 2013 indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act, 2013.  The conditions as set out in sub- section (1) of Section 164 of the Act, 2013, which disqualify a person from being appointed as a Director are directly attributable to him/her.

In contrast to the above, the provisions of sub-section (2) of Section 164 of the Act, 2013 stipulates the defaults committed by a defaulting company, which results in the directors of that company incurring the disqualification being vicariously responsible for such defaults. It is possible that a particular director may not be, in fact, directly responsible for such defaults; nonetheless, he is disqualified to act as a director on account of being responsible for the affairs of the defaulting company by virtue of his holding the office of a director.

In terms of Clause (a) of Section 167(1) of the Act, 2013 the office of a director becomes vacant in case he incurs any disqualification as specified under Section 164 of the Act, 2013. Thus, whereas Section 164 of the Act, 2013 disqualifies a person from being appointed/reappointed as a director, the import of Section 167(1)(a) of the Act, 2013 is that such a director demits his office immediately on incurring such disqualification.

On or after the Companies (Amendment) Act, 2018 w.e.f. 07.05.2018.

The proviso to Clause (a) of Section 167(1) of the Act, 2013 was introduced with effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018.

“Provided that where he incurs disqualification under sub-section (2) of Section 164, the office of the director shall become vacant in all the companies, other than company which is in default under than sub-section.”

Insofar as the conditions that disqualify a person disqualified from acting as a director under Section 164(1) of the Act, 2013 are concerned, there is no difficulty in reading such conditions to also result in the particular director demitting office in terms of section 167(1)(a) of the Act, 2013. This is so because the conditions as stipulated in section 164(1) of the Act, 2013 are attributable to the individual and not to all directors of a company.

The problem, essentially, arises in implementing the provisions of Section 167(1) (a) of the Act, 2013 in respect of directors who have incurred disqualification under Section 164(2) of the Act, 2013. This is so because the disqualification incurred in Sub-Section (2) are not directly on account of reasons attributable to an individual director but on account of defaults committed by a company. Any person who is or has been a director of a company, which commits the defaults as set out in clauses (a) and (b) of Sub-Section (2) of Section 164 of the Act, 2013 incurs the disqualification for being appointed/reappointed as a director.

If the provisions of Section 167(1)(a) of the Act, 2013 are applied in such a case, all directors of such a defaulting company would demit their office as directors immediately on incurring the disqualification under section 164(2) of the Act, 2013. In addition, such directors would also cease to be directors of any other company in which they are directors.

But this results in an absurd situation where a defaulting company can never appoint a director. This is so because as soon as the person – who is otherwise eligible for being appointed as a director and has not incurred any disqualification either under sub-section (1) or (2) of Section 164 of the Act, 2013 – is appointed as a director of a company that has committed the defaults as stipulated in clauses (a) or (b) of Section 164(2) of the Act, 2013; he would immediately incur the said disqualification and consequently demit office of not only that company but any other company in which he is a director.

The proviso to Section 164 (2) as introduced by the Companies (Amendment) Act, 2018 with effect from 07.05.2018, provides that that any person who has been appointed as a director of a company which is in default of clauses (a) or (b) of Sub-Section (2) of Section 164 of the Act, 2013 would not incur the disqualification for a period of six months.

“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 month from the date of his appointment.”

Mukut Pathak & Ors. vs Union of India & Anr. (4th November, 2019) 

In the present case, it was contended by the petitioners that Clause (a) of Section 167(1) of the Act, 2013 as it stood prior to introduction of the proviso could apply only individuals who incurred the disqualification as specified in Section 164(1) of the Act, 2013 not to those who incurred the disqualification under Section 164(2) of the Act, 2013. It was contended that introduction of the proviso brought about a material change in the import of clause(a) of Section 167(1) of the Act, 2013 and therefore the same would be applicable only prospectively.

It was contended by the petitioners that it is a substantive provision to enable a company to appoint directors (other than those who had incurred any disqualification) to enable them to cure the defaults. The legislature has provided a window of six months for curing the defaults and to enable the incoming directors appointed on the board of the defaulting companies to avoid disqualification under Section 164 (2) of the Act, 2013.  There is no possibility to read such a window of six months in Section 164 (2) of the Act, 2013 prior to 07.05.2018; that is, prior to enactment of the proviso to section 164(2) of the Act, 2013.

This also leads to the question as to why it was necessary to introduce the proviso to Section 164 (2) of the Act, 2013. It is obvious that such a proviso was also necessary if the provisions of Section 167(1)(a) of the Act, 2013 were to be extended to result in vacation of office occupied by persons who had incurred the disqualification under Section 164(2) of the Act, 2013. In absence of such a provision, the incoming directors- who are otherwise eligible for being appointed as a directors and had not incurred any disqualification either under Sub-Section (1) or under Sub-Section (2) of Section 164 of the Act, 2013 – would demit office in all other non-defaulting companies on being appointed on the board of a company that had already committed defaults under clauses (a) and (b) of section 164(2) of the Act, 2013. With the inclusion of the aforesaid proviso, a person appointed as a director of a defaulting company would not incur such disqualification for a period of six months. Consequently, he would also not cease to be a director of any company by application of Section 167(1)(a) of the Act, 2013. Extending the punitive measure under section 167(1)(a) of the Act, 2013 to such directors, would expose the said section to a challenge on the ground of being manifestly unreasonable and arbitrary.

It is clear from the import of the two provisions as introduced by the Companies (Amendment) Act, 2018 with effect from 07.05.2018 that the same cannot be read as clarificatory. This is so because the plain language of section 164 and 167 of the Act, 2013 did not any such statutory scheme. More importantly, this is not the only interpretation that would resolve the absurdity presented by the plain language of the said sections. Thus, such a scheme – as introduced by enactment of the two provisions – could not be read as a part of Section 164 and 167(1) of the Act, 2013.

In view of the above, the petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act, 2013 by virtue of Section 167(1)(a) of the Act, 2013 prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act, 2013 are that they would demit their office in all companies other than the defaulting company.

Court’s judgment – As discussed above, the Scheme of Section 164(2) and Section 167(1)(a) of the Act, 2013 was materially amended by the Companies Amendment Act, 2018 by introduction of the provisos to Section 164(2) and Section 167(1)(a) of the Act, 2013 with effect from 07.05.2018. All directors who incur disqualification under Section 164(2) of the Act, 2013 after the said date, would also cease to be directors in other companies (other than the defaulting company) on incurring such disqualification. However, the operation of the provisos to Section 164(2) and Section 167(1)(a) of the Act, 2013 cannot be read to operate retrospectively. The proviso to Section 167(1) of the Act, 2013 imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to matters of procedure – cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act, 2013 on such director incurring the disqualifications specified under Section 164(1) of the Act, 2013. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act, 2013 after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act, 2013. 

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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