Case Law Details

Case Name : Satish Kumar Gupta Vs Union of India (Bombay High Court)
Appeal Number : WRIT PETITION NO.1224 OF 2018
Date of Judgement/Order : 07/02/2020
Related Assessment Year :

Satish Kumar Gupta Vs Union of India (Bombay High Court)

Conclusion: Where a director was disqualified under section 164(2) of the Companies Act 2013 for not filing Financial Statements and Annual Returns continuously for a period of three years, then, the disqualification was incurred and no interim relief  was to be granted for the same as these were ministerial or administrative act of filing which was to be performed by the Company.

Held: Assessee prayed for an interim relief to be granted to directors who were disqualified under section 164(2)of the Companies Act 2013 . He contended that Gujarat, Karnataka and Madras High Courts had held that provisions of Section 164(2) could not be applied with retrospective effect. Revenue however contended that there was a ministerial or administrative act of filing the financial statements or annual returns. If they were not filed continuously for a period of three years, then, the disqualification was invited or incurred. Further, argued that the proviso to Section 164(2) was only clarifcatory in nature and, therefore, it had retrospective operation and this position was envisaged even under Section 16 7(1) clause (a). The argument of assessee’s advocate that Section 167(1)(a) did not envisage vacation of office of a director under Section 164(2), was incorrect. It was held under section 164(2) the re-appointment of director of that company, which had not filed financial statements or annual returns for any continuous period of three financial years would mean that the person can continue till the end of the extant term, but would not be eligible for re-appointment for another five years thereafter. As far as Section 167(1)(a) was concerned, the vacancy would not occur in the case of a director, who had incurred the disqualifications specified in Section 164 more so, when he incurred that disqualification was sufficiently set out in the statute itself. Therefore, the following order would sub-serve the ends of justice. On the applicability of principle of retrospectivity or that Section 164 could not have a retrospective operation, prima facie if the company, in which the person is or has been a director, has not filed financial statements or annual returns for any continuous period of three financial years, on the date on which the company fails to do so, the disqualification is incurred. It is a ministerial or administrative act of filing which was to be performed by the Company. Therefore, if such financial statements or annual returns for any continuous period of three financial years have not been filed, then, the action was triggered. The interpretation of the legal provisions must be based on the language of the statute. In such circumstances, the interim relief as sought could not be granted. A blanket stay or a relief having far reaching legal consequences as sought could not be granted.

FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT

1. The matters were placed before us for considering the prayer for interim relief.

2. On these petitions, on 15th October, 2019, an order was passed by a Division Bench, to which, one of us (S.C.Dharmadhikari, J.), was a party.

3. The Court had, after quoting the sections, raised certain queries.

4. Consistent with those queries, Mr.Anil Singh, learned Additional Solicitor General, submits that the prayers in these writ petitions are virtually to stay the operation, enforcement and effect of the law itself. Even when there is no challenge to the constitutional validity, the writ petitions contain a prayer by which the petitioners are calling upon this Court to go into the issue of the individual directors’ disqualification and in that process, the Court is requested to virtually re-write the Section.

5. The attempt is made on several grounds to urge, according to Mr.Singh, that the law should not take effect at all.

6. However, with reference to queries posed in this order, Mr.Singh has been fair enough to point out that a challenge to the Constitutional validity of the provision has not been upheld.

7. He has also pointed out the judgments of Karnataka High Court, Madras High Court, Delhi High Court and Gujarat High Court. Though these judgments have been rendered by the learned Single Judges, the Karnataka High Court, Gujarat High Court and Madras High Court have held that the provision cannot be applied retrospectively. The Delhi High Court has clarified that in this case, there is no retrospective operation or application of the provision. Mr.Singh, however, submits that in this case, there is a ministerial or administrative act of filing the financial statements or annual returns. If they are not filed continuously for a period of three years, then, the disqualification is invited or incurred. He would submit that the provisions have been construed and interpreted by the above High Courts and in that process, the argument of the Central Government has been noted. In that regard, our attention is invited to the judgment and order of the High Court of Karnataka at Bangalore reported in Indian Law Reporter 2019 Karnataka 3768 (Yashodhara Shroff and Ors. Vs. Union of India and Ors.). Mr.Singh has invited our attention to para 191 of this judgment to urge that the Government argued that the proviso to Section 164(2) is only clarifcatory in nature and, therefore, it has retrospective operation, by which, the  petitioners would continue as directors of the defaulting company, but they would vacate office in all other companies. This position is envisaged even under Section 167(1) clause (a) of the Act and, therefore, the proviso only clarifies that the directors of the defaulting company would not vacate the office in the defaulting company in order to ensure that the defaulting company is not left without any director.

8. The learned Single Judge in para 193 of this judgment has held that the object of introducing Section 167(1)(a) of the Act, when such a provision was conspicuous by its absence in 1956 Act, is to bring in a higher degree of transparency and accountability in corporate governance so as to ensure control over the companies in the interest of shareholders and the public in general and in the interest of Indian economy. Therefore, the argument of the petitioners’ advocate that Section 167(1)(a) of the Act did not envisage vacation of office of a director under Section 164(2) of the Act, is incorrect. Thereafter, the judgment refers to other arguments.

9. After having heard the learned Additional Solicitor General, Mr. Ardeshir, Mr.Andhyarujina and some other counsel, we are of the view that the order dated 15th October, 2019 passed on these petitions raising legal queries, sufficiently protects the interest of both sides. This Court has performed a balancing act. Therefore, taking that order and the queries further it is clear that Section 164 of the Companies Act, 2013 provides for disqualifications for appointment of director. By sub-section (1), the eligibility for appointment of the director of a company is the aspect dealt with. By sub-section (2), it is said that no person, who is or has been a director of a company, which has not filed financial statements or annual returns for any continuous period of three years, 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. Then, there is a proviso, which has been inserted by Act 1 of 2018.

10. Sub-section (2) of Section 164 has been, on the own showing of all parties before us, brought into effect on 1st April, 2014. So is Section 167. In that Section, we find that it deals with vacation of office of director. That office becomes vacant if any of the disqualifications specified in Section 164 are attracted. Those would include the aspect covered by sub-section (2) of Section 164. Additionally, prima facie we find that when the Section is containing a marginal heading “disqualification for appointment”, by sub-section (2) it covers a case of a person who has been a director of a company. If such a company has not fled financial  statements or annual returns for any continuous period of three financial years, then, as further noted in the Section, the disqualification is incurred. He cannot be appointed in other company also for a period of five years from the date on which the defaulting company fails to do so. The office of the director will become vacant in terms of Section 167, if the disqualifications are incurred. The proviso is inserted to clause (a) of sub-section (1) of Section 167 with effect from 7th May, 2018. There, it is said that when the disqualification is incurred under sub-section (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.

11. Prima facie, the queries that were posed in our order that the restriction is only on re-appointment and not from continuing as a director of the defaulting company would mean that a director would continue until the end of the extant term, but would not be eligible for reappointment for another five years thereafter. Further, if such a director had been appointed within six months of the company becoming a defaulting company, he would not incur disqualification. The query that we raised with regard to interpretation of Section 167 sub-section (1) clause (a) is also in consonance with the intent of the legislation and we are of the opinion that the stand of the Central Government before the Karnataka High Court would sufficiently protect the interest of the petitioners before us. Section 167(1)(a) is also considered when this Court raised the above queries. Once the queries themselves denote that the Court was of the prima facie opinion that the re-appointment of director of that company, which has not filed financial statements or annual returns for any continuous period of three financial years would mean that the person can continue as noted in the order passed on 15th October, 2019 till the end of the extant term, but would not be eligible for re-appointment for another five years thereafter, then, there is sufficient opportunity to enable him to correct the affairs of that company. As far as Section 167(1)(a) is concerned, there, the vacancy would not occur in the case of a director, who has incurred the disqualifications specified in Section 164 more so, when he incurs that disqualification is sufficiently set out in the statute itself and in the order passed on 15th October, 2019. Therefore, the following order would sub-serve the ends of justice.

12. As far as the arguments on the applicability of principle of retrospectivity or that Section 164 could not have a retrospective operation, prima facie, with respect, we do not think that it will be proper to accept the interpretation based on the provision by Mr. Andhyarujina for the simple reason that it is filing of the financial statements or annual returns, which is contemplated in clause (a) of sub-section (2). If the company, in which the person is or has been a director, has not filed financial statements or annual returns for any continuous period of three financial years, on the date on which the company fails to do so, the disqualification is incurred. It is a ministerial or administrative act of filing which is to be performed by the Company. Therefore, if such financial statements or annual returns for any continuous period of three financial years have not been filed, then, the action is triggered.

13. Prima facie, we do not think that the Circular which has been issued by Ministry of Corporate Affairs and the notice dated 7th September, 2017 is in any way inconsistent or contravening the position emerging from the plain reading of this section. In the event, there is any inconsistency, then, statute must prevail. The Circulars are issued by the members of the Executive and is the same is position qua notices of the Department. However, the interpretation of the legal provision is a job or task to be performed by the Court and understanding of the legal provisions by a member of Executive or any Executive functionary cannot be a substitute for that exercise. The Court cannot rely upon them to  interpret the legal provisions. The interpretation of the legal provisions must be based on the language of the statute. In such circumstances, we do not think that the interim relief as sought can be granted. A blanket stay or a relief having far reaching legal consequences as sought cannot be granted. The prayers in that behalf are rejected. However, the Section shall operate consistent with the observations by this Court in the forgoing paragraphs. The application for interim reliefs is disposed of in these terms.

14. We clarify that this order only expresses our tentative and prima facie view and shall not influence the Court while finally deciding the matter and particularly the Constitutional challenge.

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