Case Law Details
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).
x x x
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.
x x x
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.
x x x
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.
x x x
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.
| 1956 Act | 2013 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 lone 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 subsection (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 subsection (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). |
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 reappointed 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. |
| 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 sub- sections (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 subsection (1), he shall be punishable with fine which may extend to five thousand] rupees for each day on which he so unctions 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). |
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 sub-section (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). |
| 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 subsection (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 subsection 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 same 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. |
248. Power of Registrar to remove name of company from register of companies.- (1) Where the Registrar has reasonable cause to believe that—
(a) a company has failed to commence its business within one year of its incorporation or; (b) [Omitted] (c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455, he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice. (2) Without prejudice to the provisions of sub-section (1), a company may, after extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent. members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified in subsection (1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner: Provided that in the case of a company regulated under a special Act, approval of the regulatory body constituted or established under that Act shall also be obtained and enclosed with the application. (3) Nothing in sub-section (2)shall apply to a company registered under section 8. (4) A notice issued under sub-section (1) or subsection (2) shall be published in the prescribed manner and also in the Official Gazette for the information of the general public. (5) At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, 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. (6) The Registrar, before passing an order under subsection (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company: Provided that notwithstanding the undertakings referred to in this subsection, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies. (7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved. (8) Nothing in this section shall affect the power of the Tribunal to wind up a company the name of which has been struck off from the register of companies. |
| 252. Appeal to Tribunal.-
(1) Any person aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal within a period of three years from the date of the order of the Registrar and if the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified in view of the absence of any of the grounds on which the order was passed by the Registrar, it may order restoration of the name of the company in the register of companies: Provided that before passing any order under this section, the Tribunal shall give a reasonable opportunity of making representations and of being heard to the Registrar, the company and all the persons concerned : Provided further that if the Registrar is satisfied, that the name of the company has been struck off from the register of companies either inadvertently or on the basis of incorrect information furnished by the company or its directors, which requires restoration in the register of companies, he may within a period of three years from the date of passing of the order dissolving the company under section 248, file an application before the Tribunal seeking restoration of name of such company. (2) A copy of the order passed by the Tribunal shall be filed by the company with the Registrar within thirty days from the date of the order and on receipt of the order, the Registrar shall cause the name of the company to be restored in the register of companies and shall issue a fresh certificate of incorporation. (3) If a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the Tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies, and the Tribunal may, by the order, give such other directions and make such provisions as deemed 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 from the register of companies. |
11. At the outset, a comparison of Section 274 of 1956 Act with Section 164 of the Act could be made and similarly, a comparison of Section 283 of the 1956 Act with Section 167 of the Act could be made.
(a) On a comparison of Section 274 of 1956 Act with Section 164 of the Act, what emerges is, subsection (1) of Section 274 of 1956 Act as well as subsection (1) of Section 164 of the Act deal with the grounds for disqualification or basis of disqualification of a person for being appointed as a director of a Company. Clauses (a) to (f) of Section 274 (1) and clauses (a) to (h) of Section 164 (1) are almost in pari materia and apply to directors of both public as well as private companies. It is submitted by learned counsel for the petitioners that the basis of disqualification in the aforesaid clauses is personal to the director, such as unsoundness of mind, being an un-discharged insolvent, being adjudicated as an insolvent, conviction of any criminal offence, etc.
(b) Section 274(1)(g) of 1956 Act was inserted with effect from 13.12.2000, whereby for the first time, a person was held to be not capable of being appointed as a director of a company, if such person was already a director of a public company which had, inter alia, not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; whereas Section 164(2)(a) of the Act, inter alia, states 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 financial years would be visited with certain consequences. The consequences under 1956 Act is as per proviso to Section 274(1)(g), which states that such a 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(g), whereas under Section 164(2)(a) of the Act, a 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 or under Section 164(2)(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 not be eligible to be re-appointed as a director of the defaulting company or appointed in any other company for a period of five years from the date on which the said company fails to do so. The distinction is that under the Act, a director of a company which is in default under Section 164(2)(a) and (b) of the Act shall not be eligible to be re-appointed as a director of the defaulting company and be appointed in any other company for a period of five years from the date on which the said company fails to do so. In other words, under the proviso to Section 274(1)(g) of the 1956 Act, the director of a defaulting company could be reappointed as a director of such a company, whereas under the Act he cannot be so re-appointed as a director of even the defaulting company as well as any other company for a period of five years from the date on which the defaulting company has failed to comply with Section 164(2)(a) of the Act.
(c) Further under Section 274(3) of the 1956 Act, 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 grounds in addition to those specified in Section 274(1). Under Section 164(3) of the Act, a private company may, by its articles, provide for any disqualification for appointment as a director in addition to those specified in sub-sections (1) and (2) of Section 164 of the Act. Under the Act, it is immaterial whether a private company is or is not a subsidiary of a public company.
12. It would not be out of place to also note the differences between Section 275 of 1956 Act and Section 165 of the Act. Section 165 of the Act deals with the maximum number of public companies in which a person can hold office as a director. Under Section 275 of 1956 Act, a person could, save as otherwise provided in Section 276, hold office at the same time as director in not more than fifteen companies. The words “fifteen companies” was substituted for the words “twenty companies” with effect from 13.12.2000. As per Section 53 of the Amendment Act, 2017, the Explanation has been renumbered as Explanation I and after Explanation I, Explanation II has been inserted namely, for reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included. But, under Section 165 of the Act, no person after the commencement of the Act, can hold office as a director, including any alternate directorship, in more than twenty companies at the same time. The proviso states that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten. The other clauses of Section 165 of the Act is not relevant for the purpose of the case, except referring to the explanation, which states that for reckoning the limit of public companies in which a person can be appointed as a director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.
13. A comparison of Section 283 of the 1956 Act with Section 167 of the Act could be made as under:
(a) Section 283 of the 1956 Act and Section 167 of the Act both deal with vacation of office by directors on being disqualified. Section 283 of 1956 Act states that the office of the director shall become vacant if any of the contingencies as stated in Clauses (a) to (l) thereto apply. On perusal of the same, they clearly indicate that there is no reference to Section 274(1)(g) of 1956 Act. In other words, when Section 274(1)(g) of 1956 Act was inserted by amendment to 1956 Act with effect from 13.12.2000, there was no corresponding amendment made to Section 283 of 1956 Act. Therefore, even if a director was disqualified by virtue of Section 274(1)(g) of 1956 Act, it did not result in his vacating the office of director either in the defaulting company or in any other company in which he was a director. But, under Section 167(1)(a) of the Act, it is clearly indicated that the office of a director shall become vacant in case he incurs any of the disqualifications specified in Section 164 of the Act. As already noted, Section 164 of the Act is in two parts. Section 164(1)(a) to (h) deals with the disqualifications which affect a director personally, while Section 164(2)(a) and (b) are disqualifications which visit a director on account of a default committed by the company in which he is a director. But, according to Section 167(1)(a) of the Act, if there is disqualification of a director under Section 164, which comprises of sub-sections (1), (2) and (3) then the office of such a director would become vacant.
(b) The comparison does not end, as by amendment made to Section 167(1)(a) of the Act by virtue of the Amendment Act, 2017, a proviso has been added. As per the proviso, if a director incurs disqualification under sub-section (2) of Section 164 of the Act, the office of the director shall become vacant in all the companies where he is a director except the companies which is in default under that sub-section. In other words, by the proviso, a director of a defaulting company as per Section 164 (2) of the Act, would not vacate his office as director of the defaulting company, but he would vacate the office of director in all other companies in which he is a director.
(c) In this regard, it would also be useful to refer to Section 52 of the Amendment Act 2017 which has added a proviso to Section 164(2) to the effect that where a person is appointed as a director of a company which is in default under Clause (a) or Clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.
14. On a comparison of the aforesaid provisions, what emerges is the bone of contention between the parties. According to the petitioners, Section 164(2) of the Act is ultra vires Article 14 and/or Article 19(1)(g) of the Constitution of India as being manifestly arbitrary. That, the aforesaid provision does not envisage pre and post decisional hearing, which is violation of principles of natural justice. That, Section 164(2)(a) of the Act has been given a retrospective effect by the respondents and is hence unreasonable and arbitrary. That, Section 167(1)(a) as well as the proviso thereto is ultra vires Article 14 and/or Article 19(1)(g) of the Constitution as being manifestly arbitrary. That, it cannot have a retrospective operation and thereby affect the vested rights of the petitioners herein adversely. In the above context, learned Senior counsel as well as learned counsel for the petitioners have also submitted that for the first time, the disqualification for appointment of a director has been imposed on private companies under Section 164(2)(a) of the Act as, under Section 274(1)(g) of the 1956 Act, such a disqualification was only restricted to public companies.
Part – 5
SUBMISSIONS:
15. In the above background, the submissions of learned senior counsel and learned counsel for the petitioners and learned senior counsel and Additional Solicitor General for India, Sri Prabhuling Navadagi and learned Central Government Standing Counsel have been heard at length.
Submissions of Petitioners:
16. Learned senior counsel, Sri Dhyan Chinnappa appearing for the petitioners in Writ Petition Nos.51769 of 2017, 36613 of 2018 and other connected cases drew my attention to Section 164 of the Act and contended that the constitutional validity of Section 164(2)(a) of the Act is assailed. He submitted that Section 164 of the Act deals with disqualification for appointment of director and that Section 164(1) of the Act are those disqualifications which are personal to a director. Section 164(1) of the Act states that a person shall not be eligible for appointment as a director of a company on account of the circumstances stated in Clauses (a) to (h) of the Act thereof, such as unsoundness of mind, being convicted by a court of any offence, an order of disqualification for appointment as a director being passed by a court or tribunal, or such other grounds. He contended that Section 164(2) of the Act relates to ineligibility to be appointed as a director of a company which has not filed financial statements or annual accounts for any continuous period of three financial years or 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 a period of one year or more. That the ground of disqualification for reappointment as a director of a defaulting company or appointment in any other company for a period of five years, is not directly attributable to a director of a defaulting company, but the consequence is vicarious on account of the default committed by the company. That the said consequence is serious, almost penal and disproportionate to the default and hence, it is in violation of Article 14 of the Constitution. That the disqualification is not on account of any act/omission of the director per se, but due to the default committed by the company in which he is a director. That Section 167 of the Act has also been amended in the year 2017 by the insertion of a proviso, as a result of which a director of a defaulting company would have to vacate his office as a director as per Section 164(2) of the Act in respect of any other company where there is no default while he continues to be a director of the company which has defaulted. Sri Chinnappa contended that if both these consequences are read cumulatively, it is wholly disproportionate to the default stated under Section 164(2) of the Act.
17. It was contended that the disqualification is by operation of law without there being any prior hearing; not even a post-decisional hearing being provided and without taking into consideration the valid circumstances or grounds for not filing the financial statements or annual returns for a period of three continuous years. In the absence of hearing, if a director is visited with such serious consequences, the provisions are manifestly arbitrary.
18. In this context, it was contended that this Court may interpret the expression “who is or has been a director of a company” in Section 164(2) of the Act in such a manner as to not apply to a person who was not a director during the three years period when the financial statements or annual returns were not filed and not extend it to any person who has been a director of a company during any period prior thereto. Further, the period of three years must commence from 01.04.2014 when the Act commenced and not include any period prior thereto.
19. It was further contended that the intention of Section 167(1)(a) of the Act is to restrict the disqualification to only 164(1) of the Act and it does not extend to Section 164(2) of the Act. But, by the proviso, the director who is disqualified on account of Section 164(2) of the Act has to also vacate his office as a director in all companies other than the Company which is in default under that sub-section. It was contended that such a consequence does not have a nexus to the default committed by a company in which a person is a director and the consequence far exceeds the mischief sought to be remedied and hence, it is manifestly arbitrary and disproportionate.
20. In this regard, my attention was drawn to Section 274(1)(g) of the 1956 Act and Section 164(2) of the Act. Similarly, a comparison was made between Section 283 of 1956 Act with Section 167 of the Act, by contending that the disqualification of a director by virtue of Section 274(1)(g) of the 1956 Act did not result in vacation of the office of a director under Section 283 of the said Act. But, under Section 167(1)(a) of the Act, a director would have to vacate his office as a director in all other companies except the defaulting company in the context of Section 164(2) of the Act. In the context of the aforesaid provisions, learned senior counsel contended that the consequence of the default made by the company being so serious and disproportionate, the provision namely Section 164(2) of the Act and the proviso to Section 167(1)(a) of the Act are manifestly arbitrary and in violation of Articles 14 and 19(1)(g) of the Constitution and the same may be struck down.
21. It was further contended that in the absence of any hearing before a disqualification occurs, a director is visited with serious civil consequences without being heard. There is also no post decisional hearing and no provision under the Act to remedy such a decision. That the ineligibility to be reappointed in the company which is in default and the ineligibility on prohibition of appointment in any other company for a period of five years being harsh, it virtually puts an end to a person’s career as a director of a company and hence, the said provisions ought to be held to be unconstitutional. In support of his submissions, he relied upon the following decisions:
2. Bidhannagar (Salt Lake) Welfare Association vs. Central Valuation Board and others, [(2007)6 SCC 668], (Bidhannagar Welfare Association);
3. Shreya Singhal vs. Union of India, [(2015)5 SCC 1] (Shreya Singhal).
22. Dr. Aditya Sondhi, learned counsel appearing for the petitioners in Writ Petition No.49124 of 2017 and connected matters and Writ Petition Nos.53237-238 of 2017, contended the vires of Section 164(2)(a) of the Act has been challenged. That the object of the said provision could be seen from the Press release issued by the Ministry of Corporate Affairs. That it is in order to reign in shell companies that such a provision has been made under the Act. That action under Section 248 of the Act could be initiated against the said companies, instead, under Section 164(2) of the Act, disqualification of the directors of such a company occurs, it is by operation of law; without issuing notice or giving an opportunity of hearing to a director who is visited with such serious consequences, it is almost penal in nature and hence, ultra vires the provisions of the Constitution.
23. Further, Section 164(2) of the Act is retrospective in effect inasmuch as three continuous years of non-filing of financial statements or annual returns could extend to even prior to 01.04.2014 (on which date the Act came into force). That there cannot be a retrospective operation of Section 164(2) of the Act resulting in such serious consequences. That the material period of three years under Section 164(2) of the Act has to be construed with effect from 01.04.2014 onwards and cannot extend to any period prior thereof.
24. Learned senior counsel also contended that under Section 403 of the Act, there is provision for extension of time by two hundred and seventy (270) days for filing of annual returns. That even if the disqualification of a director of a company occurs on account of the default of a company by operation of law, there is no prior hearing thereof, or at least a post-decisional hearing could have been provided under the Act, which is not so. Therefore, Section 164(2)(a) of the Act has to be declared as being in violation of Article 14 of the Constitution.
25. Learned senior counsel drew my attention to the judgment of the Madras High Court on a similar controversy and contended that paragraph Nos. 23 to 29 of the said judgment are relied upon. He submitted that Sections 164(2) and 167(1)(a) of the Act are hit by the doctrine of proportionality on account of the grave consequences that they have on the career of a person as a director of a company. He further submitted that once a director is disqualified by operation of law, then automatically, the Director Identification Number (DIN) gets cancelled. He drew my attention to Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and contended that the same does not apply to cancellation of DIN under the circumstances stated in Section 164 (2) of the Act.
26. Learned senior counsel, Dr. Sondhi, contended that in the absence of there being any remedy under the Act or a forum, before which a complaint could be filed, if a director is aggrieved by the disqualification, except approaching the Hon’ble High Court under Article 226 of Constitution, principles of natural justice would apply. But in the absence of there being an express provision, the same would have to be read into the provisions so as to save it from unconstitutionality and as it is ultra vires Article 14 of the Constitution, on account of severe, grave consequences that occur on account of such a disqualification. He relied upon the following decisions in support of his submissions, namely:
1. Hyderabad Karnataka Education Society vs. Registrar of Societies and Others, [(2000) 1 SCC 566], (Hyderabad Karnataka Education Society);
2. B.Goutam Vs. Union of India and others, [(1993) 3 SCC 259], (C.B.Goutam);
3. Modern Dental College and Research Centre and Others vs. State of Madhya Pradesh and Others, [(2016) 7 SCC 353], (Modern Dental College & Research Centre);
4. Institute of Chartered Accountants of India vs. L.K.Ratna, [(1986)4 SCC 537], (Institute of Chartered Accountants of India).
27. Learned senior counsel, Sri Udaya Holla, appearing for petitioners in Writ Petition Nos.25683-25684 of 2018 and other cases submitted that on account of Company Law Board proceedings, the Company in question could not file its financial statements which has resulted in serious consequences for the directors of the company who have no forum before whom they could express their predicament. He contended that the directors of a defaulting company are visited with a serious consequence of disqualification without a prior or post-decisional hearing. That the exclusion of principles of natural justice vitiates the constitutionality of Section 164(2) of the Act and hence, this Court may read it into the said provisions principles of natural justice.
28. Learned counsel, Sri Holla further contended that Section 164(2)(a) of the Act has a prospective operation and any period prior to 01.04.2014 cannot be reckoned for the purpose of determining three continuous years, when there is non-filing of annual returns. He submitted that this Court may interpret Section 164(2)(a) of the Act in such a manner so as to save it from the vice of unconstitutionality. In support of his submissions, he inter alia placed reliance on the following three decisions namely:
1. Sahara India (Firm), Lucknow vs. Commissioner of Income Tax, Central-I and Another, [(2008) 14 SCC 151], (Shara India);
2. K.Yadav vs. J.M.A. Industries Limited, [(1993) 3 SCC 259], (D.K.Yadav).
29. Sri S.Vivekananda, learned counsel appearing for the petitioners in Writ Petition No.55702 of 2017, 49062 of 2017 and other matters drew my attention to the fact that the petitioner therein resigned as director on 10.01.2013. That the Act came into force with effect from 01.04.2014. Even then the petitioner has been disqualified for a period of five years from 01.11.2015 to 31.10.2020. That the three continuous years of default under Section 164(2)(a) of the Act must be construed prospectively and not include any period prior to 01.04.2014. The said provision cannot have a retrospective effect/operation. If so interpreted, there can be no disqualification until the year 2017. But, in the instant case, five years period of disqualification is even prior to that date by including a period as part of three years prior to 01.04.2014 for reckoning three continuous years. He submitted that the respondent authorities have misunderstood the said provision and therefore, this Court may interpret the same in its proper perspective. Learned counsel also filed an extract of the Law Commission Report to highlight on the amendment made to the Act in the year 2015. He contended that for a company, as well as a Limited Liability Partnership (LLP), the DIN is common and once it stands cancelled in respect of a company, it also affects his position as a partner in an LLP. In support of his submissions, he placed reliance on the following judgments:
1. M/s.Mother Care (India) Limited (In Liquidation), Rep. by the Official Liquidator, Bangalore vs. Prof.Ramaswamy P.Aiyar, [ILR 2004 KAR 1081], (Mother Care (India) Ltd.);
2. Yenugu Krishna Murthy vs. Union of India and Another, [2018 (3) KLJ 619], (Yenugu Krishna Murthy).
30. Sri M.I.Arun, learned counsel appearing for petitioners in Writ Petition Nos.44839 & 46210 of 2018 submitted that the constitutional validity of the provisions have not been assailed in the aforesaid petitions, but the disqualification of the director has been challenged on two grounds: firstly, the three financial years under Section 164(2)(a) of the Act have to be considered with effect from 01.04.2014, on which date the Act was enforced and therefore, no period prior to that could be reckoned for computing the three continuous financial years during which there is non-filing of annual returns. If three years are so reckoned, then it would be with effect from 01.04.2014 onwards. Therefore, the disqualification of directors on 01.11.2016 is erroneous. The Department has given a retrospective effect to the provision which is impermissible. Secondly, he submitted that under the provisions of the Act, there is extension of time provided under Section 403 of the Act for filing of annual returns and without considering the said period for extension to file the returns, the directors have been visited with almost penal consequences of disqualification. That the benefit of 270 days given for filing annual returns provided under Section 403 of the Act has not been taken into consideration. He further submitted that prior to disqualification of a director, no hearing has been provided and even a representation made has not yet been considered. Placing reliance on paragraph 25 of the judgment of the Madras High Court, he submitted that the Writ Petition Nos.44839 of 2018 and 46210 of 2018 may be allowed.
31. Sri Uday Shankar, learned counsel appearing for petitioners in Writ Petition Nos.52952 of 2017, 613 of 2018 and other cases also contended that Section 164(2)(a) of the Act has been implemented by the respondents with retrospective effect which is unconstitutional. That under Section 274(1)(g) of the 1956 Act, the disqualification was limited to a public company and it did not extend to a private company, that too it was with effect from 13.12.2000, though it had an express retrospective effect from 01.04.1999. But, now Section 164(2)(a) of the Act, without having any express intent, has been given a retrospective effect or retrospective operation by the respondent-authorities which is bad in law.
32. He further compared Section 283 of the 1956 Act with Section 167 of the Act to contend that under 1956 Act, a default under Section 274(1)(g) did not result in vacating of office and that Section 283 of the 1956 Act was restricted to a disqualification affecting a particular director personally and not the entire Board of Directors of a public company. He contended that while Section 274(1)(g) of the 1956 Act was given a retrospective effect by expressly stating so, Section 164(2)(a) of the Act has only a prospective effect and cannot be construed as having a retrospective operation having regard to the serious consequences it entails.
33. Learned counsel, Sri Uday Shankar contended that the disqualification under Section 164(2)(a) of the Act being not personal to the director but being vicarious in nature on account of the default committed by the company, a remedy ought to have been provided under the Act so that there could have been an adjudicatory process, as the consequences of disqualification are serious both under Section 164(2) of the Act as well as by virtue of the proviso to Section 167(1)(a) of the Act. He contended that the disqualification of a director being automatic or by operation of law, the same is compounded by right to hearing being conspicuous by its absence and immediate vacating of office, by a director of a defaulting company in all other companies. He contended that proviso to Section 167(1)(a) of the Act is arbitrary inasmuch as vacating of office of director in other companies has no nexus to the director continuing in office of the defaulting company. Hence, it is illegal and arbitrary. He drew my attention to the Report of the Companies Law Committee and also to the counter or statement of objections filed by Union of India and contended that the Company Law Settlement Scheme and Amnesty Scheme envisage a prospective operation of Section 164(2)(a) of the Act. He relied upon the following decisions in support of his submissions:
1. Govind Das and others vs. The Income Tax Officer and Others, [AIR 1977 SC 552] (Govind Das);
2. Commissioner of Income Tax vs. Vatika Township Private Limited, [(2014) 3 ITR 466 (SC)], (Vatika Township);
3. Jayam and Co. vs. Assistant Commissioner and Others, [AIR 2016 SC 4443], (Jayam).
34. Learned counsel, Sri C.K.Nanda Kumar, appearing for petitioners in Writ Petition Nos.15616-617 & 50103 of 2018 contended that the validity of the proviso has been challenged in Writ Petition No.50103 of 2018 but not in Writ Petition Nos.15616-617 of 2018. He submitted that if the object of the proviso is to curtail a mischief, then the medicine is worse than the disease. That merely because of a default committed by a company, the director of such a company cannot be tarnished with the same brush vis-à-vis other companies wherein he is a director and which are not in default. That the consequence of a default under Section 164(2) of the Act is by a legislative sword without there being any hearing, which is illegal, as disqualification entails a serious consequence for a director. He next submitted that those directors who are disqualified with effect from 01.11.2016 up to 31.10.2021, have been so disqualified for a period of five years by taking into consideration three years being the material period of non-filing of annual returns even prior to 01.04.2014 when the Act was not in force, which is not in accordance with the settled principles of law as it gives a retrospective operation to the provision which is illegal.
35. He further submitted that there are cases where the names of the directors are not in the list of disqualified directors, but they have been disqualified. Learned counsel contended that the respondent authorities have not applied the provision on an uniform basis and the List is haphazard. Referring to the meaning of the expression “disqualification”, he contended that it means an ineligibility and that Sections 164 and 167 of the Act must be given an interpretation which does not vitiate the fundamental rights of directors under the Constitution and if a harmonious interpretation cannot be given to save the provisions from the vice of unconstitutionality, the same would have to be struck down.
36. Gayathri Shridharan, learned counsel appearing for the petitioner in Writ Petition No.24976 of 2018 also emphasized on the arguments of retrospectivity vis-à-vis Section 164(2) of the Act and contended that the principles of Article 20 of the Constitution would apply by way of analogy. Further in the absence of pre or post-decisional hearing being provided under the Act in the context of disqualification of a director, the provisions are vitiated. In support of her submissions, she placed reliance on Swadeshi Cotton Mills vs. Union of India, [(1981) 2 SCC 664] (Swadeshi Cotton Mills).
37. Sri Praveen Kumar, learned counsel appearing for the petitioner in Writ Petition No.52911/2017 contended that Section 164(2) of the Act is not a reasonable restriction but in the nature of a prohibition and it violates Article 19(1)(g) of the Constitution as the career of a director is seriously affected by Section 164(2) of the Act and that too, by operation of law and without being given an opportunity of being heard. Under Article 19(6) of the Constitution, a reasonable restriction could be imposed in the interest of general public, but in the instant case, no such justification has been made out by the respondents. That on account of the consequences flowing from Section 164(2) of the Act, it results in a total extinction of a right of a director, which is in violation of Article 19(1)(g) of the Constitution. He submitted that there could have been a less severe consequence under the Act and that the provisions could be read down if not struck down to save it from unconstitutionality. He relied on the following judgments in support of his submissions:
1. Saghir Ahmad vs. State of U.P. and Others, [AIR 1954 SC 728], [Saghir Ahmad];
2. P. Sharma vs. Union of India & Others, [(2003) 7 SCC 309] [B.P.Sharma];
3. State of Gujarat vs. Mirzapur Moti Kureshi Kassab Jamat and others, [(2005) 8 SCC 534], [Mirzapur Moti Kureshi];
Submissions of Respondents:
38. Sri Prabhuling K.Navadagi, learned Additional Solicitor General appearing for Union of India and other respondents at the outset drew my attention to the Scheme of the Act revolving around Sections 164(2) and 167 of the Act and made his submissions with reference to the statement of objections filed in the matter. He contended that the Act was preceded by a Bill which was referred to a Parliamentary Committee headed by Dr.J.J.Irani and the Act has certain objects and features which have been introduced for the first time with the object of bringing about transparency in standard of corporate governance in sync with international standards.
39. He submitted that Section 2(20) of the Act defines a “Company” to mean a company incorporated under the Act or under any previous company law. That the expression “previous company law” is defined under Section 2(67) of the Act which also includes the 1956 Act. That Section 164(2) of the Act refers to filing of financial statements or annual returns. The expression ‘financial statement is defined in Section 2(40) of the Act while “annual return” is explained in Section 92 of the Act. That an annual return gives an encyclopediac information of the Company, while what the financial statement should contain is delineated in Section 129 of the Act.
40. He next submitted that Chapter XI of the Act deals with the Appointment and Qualifications of Directors. Section 152 deals with the appointment of directors. Under Section 1(3) of the Act, it has been indicated that various provisions of the Act would come into force on different dates as may be appointed and any reference in any provision to the commencement of the Act shall be construed as a reference to coming into force of that provision. Sections 164 to 168 of the Act came into force on 01.04.2014 by issuance of a gazette notification in that regard. That the Ministry of Corporate Affairs identified 30,964 directors, who did not have the eligibility to continue as directors as they were disqualified. While Section 164(1) of the Act is in the nature of a permanent disqualification, under Section 164(2) of the Act, it is only for a period of five years. The genesis for the provision of Section 164(2) of the Act lies in Section 274(1)(g) of 1956 Act which came into force with effect from 13.12.2000. While Section 274(1)(g) of 1956 Act applied only to public companies, Section 164 of the Act applies to both public as well as private companies. There is a slight difference between Section 274(1)(g) of 1956 of the Act and Section 164(2) of the Act. That, Section 283(1) of 1956 Act was enforced from 28.12.1960, but was not amended after the insertion of Section 274(1)(g) to the 1956 Act. Vacating of office of a director on account of the disqualification due to a default under Section 274(1)(g) of the 1956 Act was not contemplated under the 1956 Act. But under the Act it is provided for in order to bring about strict corporate governance and transparency.
41. Placing reliance on the interim order of the Calcutta High Court in Nabendu Dutta vs. Arindam Mukherjee and others, [2004 (121) Comp.Cases 150 (Cal)], [Nabendu Dutta], learned ASG contended that Section 164(2)(a) of the Act does not have a retrospective effect and it is prospective in operation. That any person who intends to be a director of a company with effect from 01.04.2014 must have possessed eligibility criteria on and from that date. That the prescription of eligibility criteria having regard to an antecedent period i.e., a period prior to 01.04.2014 does not vitiate any provision of law. He submitted that taking into consideration an antecedent period, i.e., a period prior to coming into force of the Act is permissible, when it comes to construing the eligibility of a person to be appointed as a director. In this regard, my attention was drawn to the latter portion of Section 164(2) of the Act, which prescribes the eligibility for reappointment of a director of a defaulting company or of any other company. That even under Section 274(1)(g) of the 1956 Act, such a provision existed. He submitted that retrospectivity would impact a provision if the rights acquired by a director are adversely affected retrospectively, i.e., prior to 01.04.2014. That, no director has been disqualified for a period prior to 01.04.2014. That the disqualification is only after that date. Therefore, any period prior to 01.04.2014 could be taken into consideration in order to ascertain whether a disqualification has been incurred under Section 164(2) of the Act after its enforcement.
42. He further contended that no director has a vested right to be continued as a director forever. Such a right is not a fundamental right, it is only a contractual right which can always be taken away by statute. That the object of disqualifying a person as a director of a company on account of circumstances mentioned under Section 164 of the Act, is in order to suppress the mischief and to bring in transparency in corporate governance, which is necessary to protect members of the general public. That Section 164(2) of the Act is neither arbitrary nor its effect is disproportionate and can never be stated to be manifestly arbitrary. He submitted that the said provision in no way violates Article 14 or Article 19(1)(g) of the Constitution.
43. Learned ASG further submitted that the Condonation of Delay Scheme is not applicable to companies which are struck off as per Section 248 of the Act and that the petitioners could have availed the benefit under the said Schemes at an appropriate time. He emphasized that in today’s world of globalisation, strict corporate governance is the need of the hour and it is necessary to have a provision such as 164(2) in the Act. In this regard, he placed reliance on the following decisions:
1. P.Dairy Development Corporation Federation vs. B.Narasimha Reddy, [(2011)9 SCC 286] (A.P.Dairy);
2. K. Industries Limited and Others vs. Chief Inspector of Factories and Boilers, [(1996) 6 SCC 665], (J.K. Industries).
44. On the aspect of disproportionality, learned Additional Solicitor General submitted that the object of the provision is to keep away directors of defaulting companies from being reappointed as directors in the same company or other companies. He contended that if the said object and purpose is not given its complete effect and meaning, then it would be unviable. Placing reliance on Fertilizer Corporation Kamgar Union (Reg.) vs. Union of India, [(1981) 1 SCC 568], he contended that holding the post of a director of a company is not pursuant to any fundamental right. That it is a statutory right or one arising under the Memorandum of Association or Articles of Association of the company and thus contractual. That Section 164(2) of the Act is a reasonable restriction imposed in public interest vide Article 19(6) of the Constitution. He further contended that the disqualification being only for a period of five years and not a permanent one the provision is not vitiated as being disproportionate. That the disqualification does not occur on account of the non-filing of annual returns in a single year or for that matter for two consecutive years. That disqualification visits the director of a defaulting company only after three years i.e., on the third consecutive year of non-filing. That even if a director is disqualified to be reappointed as a director or has to vacate his office, it does not prevent him from continuing as a share holder of a company. Hence, there is no unreasonableness or arbitrariness in the provision. He further submitted that the principles of natural justice do not apply when the consequences are on account of operation of law and that there is no vested right in a person to be a director of a company.
45. Learned ASG referred to A.P.Dairy Development Corporation Federation Vs. B.Narasimha Reddy, (2011) 9 SCC 286 (A.P.Dairy) and submitted that even when there is freedom of association under Article 19(1)(c) of the Constitution, there is scope for regulation and reasonable restriction under Article 19(4) of the Constitution. That the right to form an association is distinct from right as to running of its business by that association. That once a co-operative society is formed and registered, rights of the society and of its members stand abridged by provisions of the Act under which it is registered and activities of the society are controlled by statute. There cannot be any objection to the statutory interference with their composition or functioning merely on the ground of contravention of individual’s rights to freedom to form association be statutory functionaries.
46. Concluding his arguments, by placing reliance on certain citations, learned Additional Solicitor General reiterated that the Act has been made with a view to bring about economic reforms in light of globalisation and privatization of the economy and for probity and transparency in corporate affairs. In the circumstances, he submitted that several enactments have been brought about recently such as Prevention of Money Laundering Act, 2002 and amendments to Arbitration and Conciliation Act, 1996, Income Tax Act, 1961 and enactment of Insolvency and Bankruptcy Code, 2016 to achieve transparency in the economy, particularly in the field of corporate governance. Learned Addl. Solicitor General contended that this Court may hold the provisions to be constitutional and dismiss all the writ petitions.
Reply arguments by petitioners:
47. By way of reply, Dr. Sondhi contended that, in the recently delivered judgement of Gujarat High Court is in the context of Section 248 of the Act, if a company is struck off under Section 248 of the Act, whether Section 164(2) of the Act would apply is a moot point which arose for consideration in those cases. That if a company is struck off, it would not entail a disqualification of the directors of such a company. That subsequent to the disqualification of directors, some of whom are petitioners before this Court, amendment has been effected to Section 167 of the Act in May 2018. That the amendment has been enforced with retrospective effect which is bad in law. That vacating of office in companies other than defaulting company is with retrospective effect from 1st November 2016 when disqualification occurred, but amendment has been enforced from May 2018. He contended that as the DIN is struck off, the Condonation Scheme also does not apply. That the judgment of the Calcutta High Court cannot be a precedent as it only expresses a prima facie view at an interlocutory stage and it is not a final order.
48. Sri Dhyan Chinnappa, learned senior counsel contended that the expression “he incurs” under Section 167(1)(a) of the Act refers to a disqualification arising only under Section 164(1) of the Act. That the proviso cannot enlarge the scope of Section 167(1)(a) of the Act so as to incorporate something new into the main provision. That vacating of office in companies other than the defaulting company by a director of a defaulting company was originally not envisaged under Section 167(1)(a) of the Act, but it is included by way of a proviso inserted by way of Amendment Act, 2017 enforced from 07th May 2018. Since Section 164(1) of the Act concerns a permanent disqualification, Section 167(1)(a) of the Act, which deals with vacating of office is also to be read in that context i.e., incurring a permanent disqualification. That Section 164(2) of the Act deals with only a temporary disqualification for a period of five years and the same does not envisage vacating of office in all companies other than the defaulting company under Section 167(1)(a) of the Act. Therefore, Section 167(1) of the Act does not take within its ambit Section 164(2) of the Act. If the proviso to Section 167(1)(a) of the Act is to be read as if Section 164(2) of the Act is also envisaged under it, then the same is disproportionate to the object sought to be achieved as the repercussions are disastrous and therefore, also arbitrary in nature. That even as per the proviso to Section 167(1)(a) of the Act, a director in a defaulting company does not vacate his office. But, such a director would vacate his office in all other companies, although there may be no default in those companies. The same has no nexus to the object sought to be achieved.
49. Rebutting the arguments of learned ASG, Sri Dhyan Chinnappa contended that events that have occurred even prior to the enforcement of the Act cannot be the basis for incurring a disability. In this regard, he placed reliance on the judgments of the Hon’ble Supreme Court in the case of The Commissioner of Income Tax vs. Vatika Township Privated Limited, [(2015) 1 SCC 1]. He also drew my attention to Section 129(1) & (2) of the Act to contend that it begins with a non-obstante clause. The same deals with independent directors and non-executive directors who are not promoters or not managerial persons of a company. Such persons cannot be disqualified under Section 164(2) of the Act.
50. Learned senior counsel, Sri Udaya Holla in his reply reiterated that it is necessary to have at least a post-decisional hearing if not a pre-decisional hearing before disqualifying a director. That the extended period to file annual report must be taken into consideration and that Section 164(2)(a) of the Act must be given a prospective operation.
51. Sri V.G.Prashanth, learned counsel submitted that Section 167(1) of the Act uses the expression “incurs any of the disqualifications”. That the expression “incur” cannot be by operation of law. “To incur” means to bring on oneself which is only referable to Section 164(1) of the Act and does not extend to Section 164(2) of the Act thereof.
52. Sri C.K.Nanda Kumar submitted, with regard to challenge made to the validity of proviso to Section 167(1)(a) of the Act are, there is no response by the Union of India or any other respondent.
53. Smt. Gayathri Shridharan submitted that the deactivation of DIN is contrary to proviso to Section 167(1)(a) of the Act, as a disqualified director continues to be a director of the defaulting company. Therefore, DIN cannot be cancelled, as compliances under the Act becomes impossible. That there is no provision for deactivation of the DIN nevertheless it has been done by the respondent authorities, which is contrary to the provisions of the Act. She relied upon Godhra Electricity Co. Ltd. and another vs. State of Gurjarat and Another, [(1975) 1 SCC 199], (Godhra Electricity) and J.S.Yadav vs. State of Uttar Pradesh and another, [(2011) 6 SCC 570], (J.S.Yadav), in support of her submissions that the contractual rights of a director are violated on account of the implementation of Section 164(2) of the Act and proviso to Section 167(1)(a) of the Act. She also contended that Section 164(2)(a) of the Act uses the expression “has been” and not “had been” and therefore, the provisions of the Act must be accordingly interpreted and therefore, past directors who are not directors during the three years cannot be visited with any disqualification.
54. Sri Praveen Kumar Hiremath, learned counsel submitted that 30,964 directors have been disqualified throughout the country. The adverse impaction and effect ought to be appreciated. To disqualify directors in such a mass scale adversely affects the economy both horizontally and vertically and the financial or commercial implication of such a decision must be borne in mind. The cascading effect of such directors vacating their offices in all other companies other than the defaulting company has to be understood while interpreting the provisions. In this regard, he drew my attention to Shivashakti Sugars Limited vs. Shree Renuka Sugar Limited and others, [(2017) 7 SCC 729], (Shivashakti Sugars Ltd.). He submitted that the expression “is” or “has been” in Section 164(2) of the Act is in present continuous tense, as opposed to “had been” which is a past continuous tense. He submitted that the consequences envisaged under Section 164(2) of the Act vis-à-vis director of a defaulting company has to be restricted to that provision only and it cannot be extended to Section 167(1)(a) of the Act resulting in vacating of office.
55. Sri Raghuram Cadambi, learned counsel appearing for some petitioners along with Sri C.K.Nandakumar assisted this Court by placing on record the scheme of disqualification in United Kingdom, Singapore and Australia. He submitted that in the instant case, it is by operation of law, but in those countries, it is mainly due to intervention of the Court.
Part – 6
Points for consideration:
56. Having heard learned senior counsel and other counsel for the petitioners, learned Additional Solicitor General and other counsel for Union of India and other respondents, the following points would arise for my consideration:
(1) Whether Section 164(2) (a) of the Act is ultra vires Articles 14 and/or 19(1)(g) of the Constitution being manifestly arbitrary or on the principle of proportionality?
(2) Whether Section 164(2)(a) of the Act is in violation of principles of natural justice and hence ultra vires Article 14 of the Constitution as it does not envisage any hearing prior to disqualification or post-disqualification?
(3) Whether Section 164(2)(a) of the Act has retrospective operation and therefore, is unreasonable and/or arbitrary as per Article 14 of the Constitution?
(4) Whether there has been any illegal exercise of power by the concerned respondent-authority in publishing the List of Directors, including the names of petitioners as disqualified directors, under Section 164(2)(a) of the Act?
(5) Whether Section 167(1)(a) of the Act is ultra vires Article 14 and/or Article 19(1)(g) of the Constitution as being manifestly arbitrary?
(6) Whether proviso to Section 167(1)(a) of the Act is ultra vires Articles 14 and/or 19(1)(g) of the Constitution as being manifestly arbitrary?
(7) What order?
57. The aforesaid points shall be considered and answered in seriatim.
Part – 7
Preliminary Aspects of the Matter:
58. It is not in dispute that the petitioners in these writ petitions were all holding the position of directors either in public limited companies or in private limited companies or both, as the case may be, and are all aggrieved by being disqualified by operation of Section 164(2)(a) of the Act for a period of five years, the details of which are mentioned in the table above. It is also not in dispute that in some of the writ petitions, orders have also been passed under Section 248 of the Act and proceedings may/may not have been initiated under Section 252 of the said Act in certain cases. Further, on account of the amendment made to Section 167(1)(a) of the Act by insertion of the proviso, the petitioner/Directors by operation of law have to vacate their office as directors in all companies other than the companies which have defaulted under Section 164(2)(a) of the Act. That this Court has issued interim stay of the disqualification of the petitioners as directors of their respective companies.
Background to the enactment of the Companies Act, 2013:
59. The Companies Act, 1956 provided the legal regime for corporate governance in India. During the course of time, several amendments were made to the Act. They were on the recommendation of the Sachar Committee and Eradi Committee. Many countries worldwide have made reviews and revisions of their respective Companies Act. With the emergence of globalization, liberalization and privatization in India the need was felt to review Companies Act, 1956 in a comprehensive manner and to simplify corporate laws to facilitate faster economic growth. A need was felt to encourage good corporate governance and enable protection of the interests of the investors and other stakeholders. The Government of India initiated comprehensive revision of the Companies Act, 1956 by having a consultative process and for making way for emergence of new ideas and appropriate legislative proposals to meet India’s growing economy in the years to come. The Government of India set up the Expert Committee under the Chairmanship of Dr.J.J.Irani, Director, Tata Sons on 02.12.2004 seeking advice on the proposed revisions to the Companies Act, 1956, bearing in mind the changes taking place in the international scenario so as to provide adequate flexibility for timely evolution of new arrangements in response to the requirements of the ever-changing and dynamic business models. The Expert Committee consisted of thirteen members and six special invitees drawn from various disciplines and fields. During the course of its deliberations it inter alia considered the scope and coverage of the Companies Act, 1956, the adaptation to be made to changed circumstances; growth of the corporation regulatory framework; regulatory overlap; framework for small enterprises and institutional structure. The Expert Committee submitted its report on Company Law on 31.05.2005 to the Hon’ble Minister for Company Affairs. It is noted that the Act has incorporated recommendations made by various Committees and after a rigorous review process in the Parliament, after the Bill was first tabled in the year 2009, the Parliamentary Standing Committee of Finance examined the Bill twice, during which, extensive public consultations were also held. The notifications of the provisions of the Companies Act, 2013 has been made in a phased manner with 283 out of 470 provisions being enforced on 01.04.2014. The Act has introduced significant changes in the Company law in India, especially in relation to the accountability, disclosure, investors protection and corporate governance.
60. Sri Raghuram Cadambi, learned senior counsel appearing for Sri C.K.Nandakumar, has drawn my attention to the Company Directors Disqualification Act, 1986 of the United Kingdom which is an Act to consolidate certain enactments relating to the disqualification of persons from being directors of companies, and from being otherwise concerned with a company’s affairs. The Statutes of the Republic of Singapore Companies Act has also been cited with reference to Section 165 thereof. Corporations Act, 2001 of Australia has also been referred to on the aspect of disqualification of directors wherein, under certain circumstances, there is automatic disqualification and in other circumstances, the Court has power to disqualify and that a person who is disqualified from managing Corporations under Part 2D.6, may only be appointed as Director of the Company if the appointment is made with permission granted by Australian Securities and Investments Commission (ASIC) under Section 206F or leave granted by the Court under Section 206G thereof.
61. Before considering the contentious issues, it would be useful to refer to certain provisions of the Act concerning the Board of Directors of a company.
(a) Section 2(10) of the Act defines “Board of Directors” or “Board” in relation to a company, to mean a collective body of the directors of the company. Chapter XI of the Act deals with appointment and qualification of the directors. Section 149 of the Act states that every company shall have a Board of Directors consisting of individuals as directors and shall have (a) a minimum of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and (b) a maximum of fifteen directors after passing a special resolution. Further, proviso states that such clause or clauses of companies as may be prescribed shall have at least one woman director. An “independent director” in relation to a company means (a) a director other than a managing director or a whole time director or a nominee director subject to qualifications and conditions mentioned under sub-section (6) of section 149 of the Act. For the purpose of Section 149 of the Act, nominee director is defined to mean a director nominated by a financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests. The term of office of independent director is prescribed in sub-section 10 of Section 149 of the Act and the liability of an independent director and a non-executive director not being promoter or key managerial personnel, with regard to any acts of omission or commissions by a company is circumscribed.
(b) Section 150 of the Act deals with appointment of directors while Section 151 deals with appointment of directors elected by small share holders. Section 152(3) of the Act states that no person shall be appointed as a director of a company unless he has been allotted the Director Identification Number (DIN) under Section 154 of the Act. Subsection 6 of Section 152 of the Act states that unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall (i) be persons whose period of office is liable to determination by retirement of directors by rotation; and (ii) save as otherwise expressly provided in this Act, be appointed by the company in general meeting. The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting. After the first annual general meeting of a public company held after the date of the general meeting at which the first directors are appointed in accordance with clauses (a) and (b) of sub-section (6) of Section 152 of the Act and at every subsequent annual general meeting, one-third of such of the directors of the time being are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. At the annual general meeting at which a director retires as aforesaid, the company may fill up a vacancy by appointing the retiring director or some other person thereto.
(c) Section 153 of the Act states that every individual intending to be appointed as a director of the Company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in such form and manner and along with such fees as may be prescribed. The Central Government shall within one month from the receipt of the application under section 153 of the Act, allot a DIN to an applicant in such manner as may be prescribed (Section 154). No individual, who has already been allotted a DIN under Section 154 of the Act, shall apply for, obtain or possess another DIN (Section 155). Every existing director shall, within one month of the receipt of DIN from the Central Government, intimate his DIN to the company or all companies wherein he is a director (Section 156). Every company shall, within fifteen days of the receipt of intimation under Section 156, furnish the DIN of all its directors to the Registrar or any other officer or authority as may be specified by the Central Government with such fees as may be prescribed and on failure to do so, shall be liable for consequences stipulated under Section 157(2) of the Act. The punishment for contravention of Sections 152, 155, 156 is prescribed in Section 159 of the Act.
(d) Section 160 of the Act deals with right of persons other than the retiring directors to stand for directorship, while Section 161 deals with appointment of additional director, alternate director and nominee director. The manner of appointment of directors is prescribed in Section 162 of the Act, while the option to adopt principle of proportional representation for appointment of directors is prescribed in Section 163 of the Act. The duty of directors is prescribed in Section 166 of the Act, while resignation of directors and removal of directors are prescribed in Section 168 and 169 respectively of the Act. The maintenance of registers containing the particulars of its directors and key managerial personnel as may be prescribed is contemplated in Section 170 of the Act.
Part – 8
Re. Point No.1:
“Whether Section 164(2)(a) of the Act is ultra vires Articles 14 and/or 19(1)(g) of the Constitution being manifestly arbitrary or on the principle of proportionality?”
62. The rival arguments on this point have been narrated above.
63. A comparison of Section 274(1)(g) of the 1956 Act with Section 164(2) of the Act has already been made. To briefly revisit the same for the purpose of answering point No.1, it is noted that Section 274(1)(g) of the 1956 Act was inserted by virtue of an amendment made on 13.12.2000, but having effect from 01.04.1999. The said sub-clause concerned a director of a public company only. It did not disqualify a director of any private company, whereas Section 164(2) of the Act applies to a director of a company which includes a private company as well which is for the first time. Thus, Section 164(2) applies to a private company also. Since Section 274(1)(g) of the 1956 Act was inserted by way of an amendment with effect from 13.12.2000 a disqualification due to non-filing of annual accounts and annual returns for any continuous three financial years was reckoned on and after the 01st day of April, 1999 as stated in the provision itself. Hence, the provision had a retrospective operation by an express intention. But, under Section 164(2)(a) of the Act, the phraseology is non-filing of financial statements or annual returns for any continuous period of three financial years. The phrase “continuous period of three financial years” has not been defined under the Act. One of the contentions raised by the petitioners is, the said expression would not include any period prior to the enforcement of the Act i.e., prior to 01.04.2014 i.e., if the financial statements or annual returns had not been filed during any period prior to 01.04.2014, the said period cannot be considered within the scope of the expression “any continuous period of three financial years”.
64. Another aspect of the matter is the use of the expression “such person is already a director of a public company” in Section 274(1)(g) of the 1956 Act, but under Section 164(2) of the Act, the expression is “no person who is or has been a director of a company”. In other words, a distinction was sought to be made by petitioners’ counsel by contending that under Section 274(1)(g) of the 1956 Act, the default arose when the person “is” a director of a public company i.e., holding the position of a director, but under Section 164(2) of the Act, a person “who has been” a director of the company is also visited with the disqualification on account of the default of the company under sub-clauses (a) and (b) of sub-section (2) of Section 164 of the Act. The contention was that the expression would also take within its scope and ambit a past director of a company who has ceased to be a director even prior to the occurrence of the default and whether such a past director could also be visited with the consequences under Sections 164(2)(a) and 167(1)(a) of the Act.
65. The expression “has been” was debated upon and it was contended that the same must be given a limited meaning by referring to the three financial years during which the financial statements or annual returns are not filed i.e., material period of three years which leads to a disqualification of a director of a company. In other words, the contention was that the expression “has been” cannot extend to a person who was a director of a defaulting company prior to the three material years or to a director who has joined the company subsequent to the three material years leading to the default and has since ceased to be a director.
66. Further, it was submitted that both under Section 274(1)(g) of the 1956 Act as well as under Section 164(2) of the Act, the disqualification vis-à-vis re-appointment as a director of any other company for a period of five years is identical. But, under Section 164(2) of the Act, the disqualification also extends to re-appointment as a director of a company which has defaulted for a period of five years. In other words, all the directors of a defaulting company would have to be changed once the default occurs and their term ends.
67. On a consideration of the aforesaid arguments, it is observed that Section 274(1)(g) of the 1956 Act is a precursor to Section 164(2) of the Act. The question to be considered is, whether, Section 164(2) of the Act is manifestly arbitrary as it is contended that it is in violation of Article 14 and/or Article 19 of the Constitution. In this regard, it is necessary to emphasize at the outset that the vires of Section 274(1)(g) of the 1956 Act was upheld by the two Division Benches of two High Courts, namely by the Bombay High Court in the case of Snowcem India Limited vs. Union of India, [(2005) 124 Comp.Cases 161 Bom.] (Snowcem India Limited) and Gujarat High Court in Sourashtra Cement Limited and Another vs. Union of India (UOI), [(2007)2 GLR 1384] (Sourashtra Cement Limited).
68. In fact, the constitutional validity of Section 274(1)(g) of the 1956 Act was assailed before the Bombay High Court in Snowcem India Limited. The Division Bench of the Bombay High Court on noting the Statement of Objects and Reasons for the insertion of the said provision to the Act observed that the amendment has been incorporated for better corporate governance and the protection of the investment of the depositors. That such a provision would ensure transparency in the functioning of the Company and would lead to the protection of the investment of the investors and better corporate governance. That Section 274(1)(g) of the 1956 Act does not violate Fundamental Rights guaranteed under Article 19(1)(g) of the Constitution, neither does it violate the rules of natural justice. That Section 274(1)(g) of the 1956 Act does not penalize the Company; it is only the directors that are rendered incapable of functioning as directors for a certain period. According to Bombay High Court, the amendment has been carried out primarily to ensure that directors of the company should discharge their obligations properly. They should be more vigilant and careful and ensure that investors do not lose their lifetime savings. That it is desirable for the public to know the names of some defaulting directors of the other companies, so that they would be wary of such persons who are directors of such companies. This can also be justified in the larger public interest. The Division Bench of the Bombay High Court also observed that the amendment became absolutely imperative to protect large number of investors, particularly small and poor investors, who had invested their lifetime savings in companies, and in a majority of cases, neither the principal amount nor interest was repaid. In the circumstances, it was held that Section 274(1)(g) of the 1956 Act did not violate the fundamental rights or any other right of the petitioners therein in any manner and the petition was dismissed as being devoid of merit.
69. Similarly, in Sourashtra Cement Limited, a Division Bench of the Gujarat High Court considered a challenge to the constitutional validity of Section 274(1)(g) of the 1956 Act as amended by the Companies (Amendment) Act, 2000 with effect from 13.12.2000. The Gujarat High Court noted that the purpose of Section 274(1)(g) of the 1956 Act was to disqualify certain persons from directorship in public companies so as to protect the investors from mismanagement, ensure compliance in filing annual accounts and annual returns. The purpose of the said provision was not to punish those who were disqualified but to save the community from consequences of mismanagement and also to prescribe standards of corporate managership and to protect the public against future conduct by persons whose past record as directors had shown a great danger to creditors and others. Thus, the object of insertion of Clause (g) to Section 274(1) of the 1956 Act, according to the Gujarat High Court, was to ensure proper governance of companies, transparency in working of companies and also ensure more effective enforcement. The said judgment enumerated the intention and purpose of the said provision in the following terms:
(i) disqualifying errant directors;
(ii) protecting the investors from mismanagement;
(iii) ensuring compliance and filing of annual accounts and annual returns which are the means of disclosure to all stakeholders;
(iv) increasing compliance rate of filing statutory documents; and
(v) infusing good corporate governance in the regulations of corporate affairs and to protect the interest of the investors.
70. Referring to the judgment of the Bombay High Court in Snowcem India Limited, wherein the vires of the said Section of the said clause was upheld, it was observed as under:
“ (1) The Statement of Objects and Reasons for enactment of Section 274(1)(g) is for better corporate governance and protection of investment of the depositors. Such amendment would ensure transparency in the functioning of the company and would lead to the protection of investment and investors for better corporate governance. According to the wisdom of the legislature, this can be achieved by enhancing penalty/punishment for contribution so as to ensure better compliance with the provision of the Act;
(2) Article 21 of the Constitution is not at all attracted;
(3) Section 274(1)(g) of the Act does not violate the Directors’ fundamental rights guaranteed under Article 19(1)(g) of the Constitution of India. The amendment does not debar the petitioners from carrying on any business, trade or occupation, only that the person have been rendered incapable of becoming Directors in other companies and the said amendment became imperative in view of a large number of companies becoming defaulters.
(4) The said amendment does not violate the rules of natural justice;
(5) Section 274(1)(g) does not penalize the Company. It is only the Directors who are rendered incapable of functioning as Directors for certain period. The amendment has been carried out primarily to ensure that Directors of the Company discharge their obligation properly. They should be more vigilant and careful and ensure that investors do not lose their life time savings.
(6) Once a person becomes a Director, it is his primaryduty to ensure that there is proper governance and investors’ money is protected.
(7) The amendment is not violative of Article 14.
(8) Amendment to Section 274(1)(g) has been made primarily in larger public interest to protect large number of investors, particularly small and poor investors who had invested their life time savings with these companies and in majority of the case neither principal amount nor interest is paid. ”
71. The Gujarat High Court nevertheless considered additional submissions made and upheld the constitutional validity of the said provision by holding that it has been enacted in larger public interest. While saying so, it observed that the object of the provision was that the whole Board of Directors may act vigilantly and that the affairs of the company are managed in such manner that ultimately the deposits are repaid and/or debentures are redeemed. Otherwise, no company would try to improve their affairs and ultimately try to protect the interest of the investors. That the object of the provision is not to punish those who are so disqualified only but to save the community from the consequences of mismanagement and to protect the public against future conduct of persons whose past record as directors shows them to be a danger to creditors and others.
72. The reasoning in the aforesaid judgments could be squarely applied to Section 164(2) of the Act. Though the aforesaid judgments have been delivered vis-à-vis public companies, the ratio would squarely apply even with regard to the private companies. It is emphasized that under the Act, the Parliament has not made any distinction between the public companies and private companies vis-à-vis disqualification. That under the 1956 Act, there was no disqualification of directors of private companies. But, in order to achieve the objects of the Act and to remove the mischief, the Parliament has treated both public companies as well as private companies on par. Financial disclosure requirements supply the relevant data about the functioning of the companies by way of information to the general public. Secondly, it would enhance confidence in the corporate sector and have transparency in corporate enterprises. On a comparison of the provisions, it is noted that under Section 164(2) of the Act, while the director of a company which is in default shall not be eligible to be re-appointed as a director of the defaulting company and be appointed in any other company for a period of five years from the date of which the said company fails to do so, under Section 274(1)(g) of the 1956 Act, the director of a defaulting company could be re-appointed as a director of such a company, but not in any other company. Thus, under the Act he cannot be re-appointed as a director of even the defaulting company as well as any other company for a period of five years from the date on which the defaulting company has failed to comply with Section 164(2) of the Act. It must be emphasized that the consequences stipulated in Section 164(2) of the Act applies not only to Clause (a) but also to Clause(b) thereof.
73. Although, in almost all the present cases, the reason for disqualification is under Section 164(2)(a) of the Act, and in some cases under Section 248 of the Act (which aspect shall be dealt with separately) one cannot lose sight of the fact that the very same consequences of disqualification applies even to a situation arising under Section 164(2)(b) of the Act. The reasons as to why a two-fold consequence has been stipulated under section 164(2) of the Act are for the very reasons already stated by the Bombay High Court as well as Gujarat High Court. They are in order to protect investors from mismanagement, infuse good corporate governance, regulation of corporate affairs and to protect the interest of investors and ensure compliance in filing the annual accounts and annual returns, which are a means of disclosure to all stock-holders.
74. In this regard, what is to be noted is the fact that the disqualification does not visit the director of a defaulting company when the financial statement or annual returns are not filed in the very first year itself. It is only when, for a continuous period of three financial years, when the company does not file annual statements or annual returns that the disqualification impacts its director. Similarly, under Section 164(2)(b) of the Act, the reason for disqualification being more serious, the disqualification would visit when there is failure to repay the deposits or redeem any debentures for a period continuous for one year or more. Under Section 274(1)(g) of the 1956 Act, the disqualification was only with regard to a director of a defaulting company being ineligible to be appointed in any other company for a period of five years from the date on which the company defaults, but, under the Act, in addition, a director is ineligible to be re-appointed as a director of the defaulting company also.
75. Despite the aforesaid discussion, the vires of Section 164(2) of the Act shall be considered in light of submissions made by learned counsel for the respective parties.
76. Petitioners have contended that Section 164(2)(a) of the Act is ultra vires Article 14 and/or Article 19(1)(g) of the Constitution as it is manifestly arbitrary. Secondly, they have also argued that the provision would have to be struck down on the principles of proportionality.
77. Can it be held that Section 164(2)(a) provision is manifestly arbitrary having regard to the objects and reasons for engrafting Section 274(1)(g) of the 1956 Act, which has been upheld by two High Courts and the Objects and Reasons for the present enactment and bearing in mind the recommendations made by the Parliamentary Committee headed by Dr.J.J.Irani.
78. Having noted the above, the specific contentions of learned senior and other counsel and learned ASG shall now be considered in light of the case law cited at the Bar.
79. Learned counsel, Sri Dhyan Chinnappa placed reliance on a recent judgment of the Hon’ble Supreme Court in the case of Shayara Bano vs. Union of India & others (Ministry of Women and Child Development Secretary and Others) [(2017)9 SCC 1] (Shayara Bano), to contend that Section 164(2)(a) of the Act is manifestly arbitrary. In the said case, the question was, whether divorce by Triple Talaq had any legal sanctity. The said question was considered in the context of Article 14 of the Constitution, having as its facets, equality of status and opportunity. Analysing Article 14 of the Constitution, it was observed that it has both a negative as well as a positive content: equality before law has a negative content, but equal protection of law has a positive content.
80. That the arbitrariness doctrine contained in Article 14 would apply to negate legislation, subordinate legislation and executive action, vide E.P.Royappa vs. State of Tamil Nadu [(1974)4 SCC 3] (E.P.Royappa). The following decisions were also referred to in the above context. In Ramana Dayaram Shetty vs. International Airport Authority of India, [(1979) 3 SCC 489], (Ramana Dayaram), it was observed that wherever there is arbitrariness in State action, whether it be of the legislature or of the executive or of an authority under Article 12, Article 14 immediately springs into action and strikes down such State action. The concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme and is a golden thread which runs through the whole fabric of the Constitution. In Mithu vs. State of Punjab, [(1983)2 SCC 277] (Mithu), a Constitution Bench of the Supreme Court struck down Section 303 of the Indian Penal Code, 1860, by which a mandatory sentence of death was imposed on life convicts who commit murder in jail. In Sunil Batra vs. Delhi Administration, [(1978)4 SCC 494] (Sunil Batra), Section 30(2) of the Prisoners Act was read down when a challenge was made regarding a prisoner under sentence of death being confined in a cell apart from all other prisoners, (under solitary confinement). Thus, in the aforesaid cases, Article 14 was referred to in the context of constitutional invalidity of statutory law as the same could be struck down if found to be arbitrary. In Indian Express News Papers (Bombay) (Pvt.) Limited vs. Union of India, [(1985) 1 SCC 641] (Indian Express News Papers), it was held that the test of manifest arbitrariness would apply to invalidate a legislation as well as subordinate legislation under Article 14 of the Constitution.
81. According to the Hon’ble Supreme Court, arbitrariness in legislation is also a facet of unreasonableness in Article 19(2) to (6) of the Constitution and that arbitrariness could be used in the aforesaid sense to strike down a legislation under Article 14 as well. That legislation which arbitrarily or excessively invade the fundamental rights could not be said to contain the quality of reasonableness unless it struck a proper balance between the rights guaranteed and the control permissible under Articles 19(2) to (6) of the Constitution, though in State of A.P. vs. McDowell and Co., [(1996) 3 SCC 709] (McDowell), the aforesaid proposition was doubted and not quite accepted. In Mardia Chemicals Limited vs. Union of India, [(2004) 4 SCC 311] (Mardia Chemicals Limited), sub-section(1) of Section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was struck down as being unreasonable, arbitrary and being violative of Article 14 of the Constitution. Similarly, in State of Tamil Nadu vs. K.Shyam Sunder, [(2011) 8 SCC 737] and A.P.Dairy (supra), the Hon’ble Supreme Court reiterated that a legislation can be struck down on the ground that it is arbitrary and therefore, violative of Article 14 of the Constitution.
82. In Shayara Bano, it was observed that the thread of reasonableness runs through the entire fundamental rights chapter of the Constitution. What is manifestly arbitrary is unreasonable and being contrary to Rule of Law, would violate Article 14. In the context of challenge being made to a legislation or a provision of an Act, what is relevant is the law being disproportionate, excessive or otherwise being manifestly unreasonable.
83. Thus, according to the Hon’ble Supreme Court, if a constitutional infirmity is found on the touchstone of Article 14 the legislation is “manifestly arbitrary”; i.e., when it is not fair, nor reasonable, discriminatory, not transparent, capricious, biased, with favoritism or nepotism and not in pursuit of promotion of healthy competition and equitable treatment. Positively speaking, it should conform to norms which are rational, informed with reason and guided by public interest. At the same time, the Hon’ble Supreme Court has cautioned that a Court considering the validity of a legislation must be mindful that a legislation does not become unconstitutional merely because there is another view or because there is another method which may be considered to be as good or even more effective, like any issue of social, or even economic policy. That the Courts cannot substitute their views on what the policy is, vide Dr.Subramanian Swamy vs. Director, Central Bureau of Investigation, [(2005) 2 SCC 317] (Dr.Subramanian Swamy).
84. Manifest arbitrariness, according to the Hon’ble Supreme Court, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is excessive and disproportionate, such legislation would be manifestly arbitrary. Applying the aforesaid test, the Hon’ble Supreme Court in Shayara Bano, by a majority held that Triple Talaq being an incident and irrevocable form of divorce, was manifestly arbitrary as the marital tie could not be broken capriciously and whimsically by a Muslim man, without any attempt at reconciliation so as to save it. Hence, Triple Talaq was said to be violative of the fundamental right contained under Article 14 of the Constitution of India and struck down as being void. In the case of Shreya Singal vs. Union of India, [(2018) 5 SCC 1] (Shreya Singal), Section 66A of the Information Technology Act, 2000 was struck down inter alia, on the ground of uncertainty and vagueness and as being violative of Article 19(1)(a) and not saved under Article 19(2) of the Constitution.
85. On considering the aforesaid decisions, it would be useful to recall that the 1956 Act was enacted in order to consolidate and amend the law relating to companies and certain other associations. The said law was subjected to several amendments. If the developments of the Indian economy is viewed historically, it is observed that the year 1991 was a water-shed year when a conscious decision was taken by the Government of India to introduce liberalization, privatization and globalisation in the economy. Therefore, a need was felt for making several amendments subsequent to the year 1991 to the 1956 Act with the changing national economic environment and strides made in the international economic scenario. For acceleration and expansion of the national economy, Companies Bill, 2009 was introduced in the Parliament. Several suggestions were received and amendments were sought. Parliamentary Standing Committee on Finance also made numerous recommendations. Suggestions of various stakeholders were considered. The Companies Bill 2009 was withdrawn and after incorporating the recommendations of the Parliamentary Standing Committee on Finance and suggestions of all stakeholders, the Companies Bill, 2012 was introduced in the Parliament. The said Bill was revised and Companies Bill, 2011 incorporated several amendments including enhanced accountability on the part of the companies, which touched upon corporate social responsibility, additional disclosure norms, audit accountability, protection of minority shareholders, and investors protection. National Company Law Tribunal was also established. The Companies Bill was thereafter passed by both Houses of the Parliament and received Presidential assent on 29.08.2013 and it became the Companies Act, 2013 (18 of 2013). The Central Government by Notification in the Official Gazette appointed different dates for enforcement of various provisions of the Act. Sections 164 to 168 of the Act (both inclusive) have been enforced with effect from 01.04.2014.
86. According to the Report of SEBI Committee on Corporate Governance headed by Sri N.R.Narayana Murthy submitted on 08.02.2003, Corporate Governance is about ethical conduct in business. Ethical leadership is good for business as the organisation is seen to conduct its business in line with the expectations of all stake-holders namely, customers, employees, investors, vendor partners, government and society. Corporate governance is beyond the realm of law and stems from the culture and mindset of management, and cannot be regulated by legislation alone. What legislation can and should do, is to lay down a common framework – the “form” to ensure standards. The “substance” will ultimately determine the credibility and integrity of the process. Substance is inexorably linked to the mindset and ethical standards of management. One of the best corporate governance practices is for the management to act as trustees of the share-holders at large and prevent asymmetry benefits between various sections of share-holders especially, between the owner-managers and the rest of the share-holders.
87. In this regard, it is noted that in India in the year 1998 Desirable Code of Corporate Governance – a voluntary Code published by Confederation of Indian Industry (CII), and the first formal regulatory framework for listed companies specifically for Corporate Governance, established by the SEBI. This was on the recommendations of the Kumarmangalam Birla Committee Report. According to the latter report, which was submitted in February 2000, financial disclosure is a critical component of effective corporate governance.
88. According to Dr.Umakanth Varottil, National University of Singapore [B.A., LL.B (Hons.) NLSIU, LL.M (Corporations) New York University School of Law, Ph.D., National University of Singapore] “A Cautionary tale of the transplant effect on Indian Corporate Governance”,
“The drive towards a more stringent corporate governance regime over the last decade can be attributed to two factors, viz., (i) the internationalization of Indian capital markets, and (ii) cross-listings by Indian companies. Beginning with the phenomenon of internationalization, a review of the pre-1991 era indicates that the capital markets were heavily regulated1, thereby impeding foreign investors from investing in the Indian markets. However, with the liberalization of the Indian economy in 1991 and the consequent promotion of capital market activity by SEBI, a simplified process became available to Indian companies to access capital from the public2. Simultaneously, the foreign investment regime was relaxed thereby increasing the avenues available to foreign investors to participate in Indian capital markets3. These measures signify the objective of the Indian Government during the turn of the century to attract foreign capital so as to make its securities markets more competitive among emerging markets4.
In addition, Indian companies themselves found it essential to issue securities to investors in other countries to meet their capital needs. When Indian companies undertook public offerings of securities in India with listings on Indian stock exchanges, a significant portion of the investments came from offshore investors. Due to this phenomenon, Indian companies (at least those raising capital market finance) were persuaded to comply with corporate governance norms that most investors around the world understood in order for the securities offerings to be successfully marketed overseas5. Companies therefore had to depart from where they received investments. Since, a large portion of such foreign investment came from the developed world (primarily the U.S. and U.K.), it became convenient for companies to adopt standards with which investors from those countries were familiar.”
1All securities offerings to the public required the approval of the Controller of Capital Issues [hereinafter “CCI”], which effectively micro-managed offering including by reviewing the details such as price at which securities were to be offered rather than leaving those to the market forces to determine.],
2The office of the CCI was abolished in 1992 by the Capital Issues (Control) Repeal Act, 1992. Furthermore, SEBI effected a series of capital market reforms in the late 1990s streamlining the public offering process. Significant measures include the introduction of the book-building process for price discovery, dematerialization of securities (and the consequent availability of scripless trading) and the use of “shelf prospectus”. All these helped stimulate greater capital market activity in India. See, J.Armour & P.Lele, Law, Finance and Politics: The Case of India, 18-20 (ECGI Working Paper Series in Law, Working Paper No.107/2008, 2008) available at http://ssrn.com/ abstract=1116608.
3Significant changes in the foreign investment regime include the enactment of the Foreign Exchange Management Act, 1999 and the availability of the automatic route for foreign investment in most sectors up to specified shareholding percentages. Government of India, Ministry of Industry, (Department of Industrial Policy & Promotion), Press Note No.2, 2000 Series). See also, R.Sachdev, Comparing the Legal Foundations of Foreign Investment in India and China: Law and the Rule of Law in the Indian Foreign Direct Investment Context, COLUM.BUS.L.Rev.167, 200-04 (2006).
4See , Mazumdar, supra note 14, at 253.
5See, R.Gupta, Reforms made and Reforms Needed in India’s Capital Markets: Issues Facing U.S. Investors, 1650 PLI CORP.85 (2008).”
[Source: SCC Online: Page 9 of National Law School of India Review, Volume 21(1) (2009)]
He has further referred to SOX (Sarbanes-Oxley Act) of U.S.A. and that, over the last decade, giant strides have been taken by the Indian industry as well as its securities regulator SEBI, to enhance measures of corporate governance in India. These developments have closely followed efforts in other jurisdiction such as the U.K. (the Cadbury Committee Report) and the U.S.A.(SOX). Globalisation and Internationalisation of capital markets are said to be the driving forces behind this phenomenon and that the enhanced measures of corporate governance would augur well for the Indian industry.
89. It would also be useful to extract the relevant portions of the Report of Company Law submitted by the Expert Committee on Company Law headed by Dr. J.J.Irani:
“Vanishing companies
14.1 The Committee is seriously concerned at the phenomenon of companies that vanished after raising funds from the public, thereby cheating investors. This has resulted in a lack of credibility not only on the part of the companies but also of the institutional structure regulating such entities and enforcement agencies. We understand that the Central Government is now pursuing action against such companies through a coordinated mechanism involving both the Ministry of Company Affairs and SEBI. However, a lot requires to be done to prevent such phenomenon. We feel that such preventive action should begin with registration itself and should be sustained through a regime that requires regular and mandatory filing of statutory documents. With introduction of electronic filing, this process would become convenient to companies as well as the stakeholders. Behaviour resulting in non-filing of documents or incorrect disclosures should be dealt with strictly.
14.2 Information provided at the time of registration should determine the addresses of the company as well as its directors. It should be the duty of the Company to intimate any change of address within a fixed time period.
14.3 There should also be a system of random scrutiny of filings of corporates to be carried out by the registration authorities with heavy penalties for the companies found inadequate in their disclosures and filings.
14.4 Inter agency coordination should be enabled to track down the persons behind such companies to bring them to book. Law should be amended to make them disgorge their ill-gotten gains by lifting the corporate veil.
x x x
Duties And Responsibilities Of Directors:
18.1 International practice (particularly in U.K.) recognizes a very wide spectrum of duties to be discharged by directors of a company. There is an obligation of obedience to the constitution and decisions of the company lawfully taken under it, or under rules of law permitting such decisions to be taken, the duty of loyalty towards the company and, in good faith, to promote its success to the benefit of members as a whole, to exercise independence of judgment along with care, skill and diligence in exercise of duties, to disclose transactions involving conflict of interest and seek shareholders approval as relevant, not to exploit company assets or benefits from third parties for personal purposes, the duty of special care if a company is unable to pay its debts or is facing a likely prospect of an insolvent situation. The question is whether all such duties, and more, can be recognized in law.
18.2 The Committee is of the view that this aspect should be exposed to a thorough debate. The law may include certain duties for directors, with civil consequences to follow for non-performance. However, the law should provide only an inclusive, and not exhaustive list in view of the fact that no rule of universal application can be formulated as to the duties of the directors.
18.3 Certain basic duties should be spelt out in the Act itself such as,
(a) duty of care and diligence;
(b) Exercise of powers in good faith, i.e., discharge of duties in the best interest of the company, no improper use of position and information to gain an advantage for themselves or someone else;
(c) duty to have regard to the interest of the employees, etc.
Disqualification of Directors:
19.1 The conditions for disqualification of a director should be prescribed in the Act itself as they relate to the substantive law and may not require much change once the law is framed.
19.2 Director proposed to be appointed should be required to give a declaration to the Board that he is not disqualified to be appointed as a director under provisions of the Act.
19.3 Provision of Section 274 (1) (g) of the present Companies Act, prescribing the disqualifications of directors, inter alia, provides that a person is disqualified for being appointed as a director in other companies for a period of five years, if such person is a director of a public company which has failed to repay its deposits 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. This disqualification should be retained.
19.4 In case of sick companies which have defaulted on payment of deposits/debentures etc., it is necessary to re-constitute its Board of Directors for the purpose of rehabilitation of such companies. The new directors who join boards of such companies are likely to attract the disqualification under the present Section 274(1)(g) of the Companies Act. In order to encourage qualified professionals to join Boards of such companies, it is necessary to amend Section 274(1)(g) of the Companies Act to provide that such disqualification would not be applicable for new directors joining the boards of such sick companies which have failed to repay their deposits, debentures etc.”
90. The Hon’ble Supreme Court in N.Narayanan vs. Adjudicating Officer, Securities and Exchange Board of India, [(2013)12 SCC 152], (N.Narayanan), which is a matter that arose under the provision of the Securities and Exchange Board of India Act, 1992 (SEBI Act), pertaining to public companies has observed as under:
“35. Gower and Davies on Principles of Modern Company Law, 9th Edition (2012) at page 751, reiterated their views on the scope and rationale of annual reporting required under the Companies Acts, as follows:
“On the basis that “forewarned is forearmed” the fundamental principle underlying the Companies Act has been that of disclosure. If the public and the members were enabled to find out all relevant information about the company, this, thought the founding fathers of our company law, would be a sure shield. The shield may not have proved quite so strong as they had expected and in more recent times, it has been supported by offensive weapons.”
36. The Companies Act casts an obligation on the company registered under the Companies Act to keep the Books of accounts to achieve transparency. Previously, it was thought that the production of the annual accounts and it preparation is that of the Accounting Professional engaged by the company where two groups who were vitally interested were the shareholders and the creditors. But the scenario has drastically changed, especially with regard to the company whose securities are traded in public market. Disclosure of information about the company is, therefore, crucial for the accurate pricing of the company’s securities and for market integrity. Records maintained by the company should show and explain the company’s transactions, it should disclose with reasonable accuracy the financial position, at any time, and to enable the Directors to ensure that the balance-sheet and profit and loss accounts will comply with the statutory expectations that accounts give a true and fair view.”
91. On perusal of Section 164(2) of the Act, in light of the above references, it is noted that a twofold consequence is prescribed if there is an infraction of either Section 164(2)(a) or (b), or both. The first is that a director of the defaulting company cannot be re-appointed as a director of the said company. Secondly, such a director cannot also be appointed as a director of any other company for a period of five years. The Parliament in its wisdom has prescribed the two-fold consequence under the Act though as per Section 274(1)(g) of 1956 Act, there was only one consequence viz., that a director of a defaulting company could not be appointed as director of any other company for a period of five years. But under Section 164(2) of the Act, a director of a defaulting company cannot be re-appointed as a director of a defaulting company for a period of five years. The prescription of a two-fold consequence, in my view, cannot be held to be manifestly arbitrary as the Parliament in its wisdom has prescribed the same having regard to the objects sought to be achieved which have been elaborately stated by the Bombay High Court as well as Gujarat High Court and which are reiterated. The prescription of a two-fold consequence is neither arbitrary nor manifestly arbitrary. The additional reasons for stating so could also be gathered while considering the validity of the Section from the point of view of proportionality, which aspect has also been discussed under point No.1.
92. Further, it was brought to my notice that the object of providing for stringent provisions under Section 164(2) of the Act is in order to identify directors of shell companies which are not engaged in any business as such, but are used as a method for dubious financial transactions. That some times shell companies are involved in money laundering and hardly have any operations as such. That such companies are misused for tax evasion or other illegal purposes, such as round tripping of products obtained from illegal transactions and for converting them into white money. That the expression “shell company” does not find a place under the Act. It means that it is a company which exists as an investment company with dubious and oblique intentions having serious economic consequences and offences. A discussion of the above has been made by the Guwahati High Court in Assam Company India Limited and another Vs. Union of India and others, in WP (C) No.2572 of 2018 disposed of on 07.03.2019. Viewed in the above perspective, I do not find the prescription under Section 164(2) of the Act to be either arbitrary or manifestly arbitrary.
93. Further, the judgments cited by learned senior counsel for the petitioners, particularly, in the case of Shayara Bano, Mithu, Sunil Batra and Mardia Chemicals Limited are not applicable to the facts of the case. On the other hand, it would be necessary to reiterate what has been observed by the Hon’ble Supreme Court in the case of Dr.Subramanian Swamy to the effect that the Court cannot, while considering the validity of the legislation substitutes its view of what has been stated in the provision or the policy of the Government. Further, the judgment of the Hon’ble Supreme Court in Shreya Singal turned on the nature of the provision 66A of the Information Technology Act, 2000. The said provision was struck down as offensive or a menace. The said ground does not apply in the instant case.
94. In this regard, the only aspect that requires further consideration is the expression “is or has been a director of a company”. On a reading of Section 164(2)(a) of the Act, it is clear that a person who is a director of the company when the default occurs i.e., when for any continuous period of three financial years, financial statements or annual returns are not filed would be faced with the consequences mentioned under the Section. But there has been a debate at the Bar over the expression “has been a director of a company”. Petitioners’ counsel contended that the expression “has been” cannot extend to a person who is a director of a defaulting company prior to the three material years. There is force in the said contention. The expression “has been” is not equivalent to the expression “was”. The phrase has to be interpreted to mean a person was a director during the period of three years i.e., continuous period of three financial years during which financial statements or annual returns were not filed and who may have since ceased to be a director. Even if such a director has subsequently ceased to be a director after the default has occurred, he would be disqualified. In other words, the expression “has been” is incorporated in the provision to overcome a situation where directors of the company could resign immediately before or soon after the default occurs so as to escape the consequences mentioned in the Section. In other words, if a person has been a director of a company which for a continuous period of three financial years has not filed financial statements or annual returns and has since resigned or ceased to be a director, such a person would also be visited with the disqualification. Therefore, the expression “has been” also refers to a person who ceases to be a director of the company once the default occurs. The reason being, the default by the company would have occurred when he was the director for a continuous three financial years when financial statements or annual returns were not filed. Therefore, the expression “has been” must be interpreted contextually with reference to the three material years, which is continuous period of three financial years during which period financial statements or annual returns have not been filed by the company resulting in a default. Any resignation of a director of a defaulting company thereafter cannot escape the consequences of the default.
95. Further, under 1956 Act, the words used are “is already a director” which states that when the default occurs, he continues to be a director. On the other hand, the expression “has been a director” under Section 164(2)(a) of the Act would also include a director who has been disqualified in the provisions of the 1956 Act and would then continue to face the disqualification as per Section 164(2) under the new Act. Thus, there is no reason to hold that the provision is manifestly arbitrary or arbitrary in nature.
96. From the aforesaid discussion, it is noted that the Division Bench of the Bombay High Court as well as the Gujarat High Court upheld the vires of Section 274(1)(g) of the 1956 Act. They held that the said provision did not violate any fundamental right under Article 19(1)(g) of the Constitution. Further, in light of the judgments cited on behalf of the petitioners on the point of Section 164(2)(a) of the Act being manifestly arbitrary, the said provision has been considered and compared with Section 274(1)(g) of the 1956 Act. In view of the above discussion, it is held that Section 164(2) of the Act is not manifestly arbitrary.
97. The other limb of argument of the learned senior counsel for the petitioners is based on the principles of proportionality.
(a) In Om Kumar and Others vs. Union of India, [(2001) 2 SCC 386], the doctrine of proportionality was discussed at length. According to the Hon’ble Supreme Court, under the principle of proportionality, the Court would have to see that the legislature and the administrative authority “maintain a proper balance between the adverse effects which the legislation or the administrative order may have on the rights, liberties or interests of persons keeping in mind the purpose which they were intended to serve”. The legislature and the administrative authority are, however, given an area of discretion or a range of choices but as to whether the choice made infringes the rights excessively or not is for the Court to determine. That is what is meant by proportionality.
(b) In Modern Dental College and Research Centre and others vs. State of Madhya Pradesh and others, [(2016)7 SCC 353], the “doctrine of proportionality” was applied in the context of Article 19(6) of the Constitution by quoting “Proportionality: Constitutional Rights and Their Limitation (Cambridge University Press 2012)”, by Aharon Barak, former Chief Justice, Supreme Court of Israel. It was noted that there are sub-components of proportionailtiy which need to be satisfied. That a limitation of constitutional right will be constitutionally permitted if:
(i) it is designated for a proper purpose;
(ii) the measures undertaken to effectuate such a limitation are rationally connected to the fulfillment of that purpose;
(iii) the measures undertaken are necessary in that there are no alternative measures that may similarly achieve that same purpose with a lesser degree of limitation; and finally,
(iv) there needs to be a proper relation (‘proportionality stricto sensu’ or ‘balancing’) between the importance of achieving the proper purpose and the social importance of preventing the limitation on the constitutional right.
The doctrine of proportionality as delineated by the Hon’ble Supreme Court are referred to in several judgments.
98. In the context of the doctrine of proportionality, it is noted that under Section 164(2)(a) of the Act and Section 274(1)(g) of the 1956 Act, the consequence regarding ineligibility to be re-appointed as a director is for a period of five years from the date of default committed by the Company, in respect of companies other than the defaulting company. But under the Act, the ineligibility to be reappointed as a director of the defaulting company for a period of five years has also been stipulated. Can this additional stipulation fall within the scope of the doctrine of proportionality or, in other words, be held to be disproportionate to the object sought to be achieved? In my view, it cannot be held so for the simple reason that the director of a company which has defaulted under section 164(2)(a) or (b) of the Act cannot be re-appointed as a director of that very company although disqualification of a director of a defaulting company occurs vicariously and as argued, the director of such a company is not directly responsible for causing the default. Nevertheless, a director being a member of the Board of Directors which is the supreme administrative body of a corporate entity or company whether, public or private, ought to face an ineligibility to be reappointed as director of the defaulting company also. The ineligibility to be re-appointed as a director of the defaulting company under Section 164(2) of the Act is significant for, when juxtaposed with the fact that such a director cannot be re-appointed in any other company for a period of five years, (although any other company may not be in default), it is logical that such a director is also ineligible to be re-appointed as a director of the company in default.
99. The ineligibility to be re-appointed as a director of a defaulting company stems from the fact that a director, being a member of the governing body of a company, must ensure that the company does not default either under Section 164(2)(a) or (b), as the case may be. Further, the ineligibility to be reappointed is not in the nature of a disqualification as under Section 164(1) of the Act, but only results in a temporary suspension for a period of five years which is in order to ensure compliances as stipulated under Section 164(2) of the Act. Moreover, under Section 164(1) of the Act, the material period resulting in the ineligibility is three years and not immediate which, in my view, is a reasonable period. Thus, Section 164(2)(a) of the Act resulting in an ineligibility for a director after a lapse of three consecutive financial years cannot be held to be capricious or a disproportionate repercussion, lacking in reasonableness or any rationale. A director who is part of a company, which is in default as per Section 164(2)(a) of the Act cannot be perpetuated in the same position by the company. If a remedy is not provided in a manner as provided under Section 162(2) of the Act, the mischief of committing a default would continue and it would appear as if the law permeates such a default by, not only being passive, but rather approving or giving its concurrence to such a default. On the other hand, the reasons stated in the judgments of the Bombay and Gujarat High Courts are apposite. Merely because there is a two pronged effect stipulated under the Act as opposed to Section 274(1)(g) of the 1956 Act, it cannot be held that the same is hit by the doctrine of proportionality. It is further observed that the consequence for non-compliance of Section 164(2)(a) or (b) of the Act is only a suspension by way of an ineligibility for appointment of a director in the defaulting company or any other company for a period of five years only. It is not a permanent disqualification to be appointed as a director at all in future. Hence, it cannot be held that the said provision is unreasonable or excessive in nature.
100. It is further noted that the aforesaid provisions have been incorporated with a view to deepen corporate governance. According to J.Wolfensohn, Former President, World Bank, “Corporate governance is about promoting corporate Fairness, Transparency and Accountability.” It is a mechanism to safeguard the interest of the shareholders. According to the Cadbury Committee (1992), “corporate governance is the system by which companies are directed and controlled. It is a simple and concise definition that goes to the heart of the matter. It talks about a system, direction and control of business.”
101. The principles of corporate governance, inter alia, involves disclosure and transparency, especially of finance and operating results, major share ownership and voting rights. The Board of Directors has an important responsibility of overseeing the process of disclosure communication which is to ensure transparency, accountability so as to bring about a disciplined approach in the financial affairs of the company. It is the duty of Board of Directors to ensure that the object of the company are achieved in the most ethical manner and one of the ways is by adhering to the disclosure procedure as stipulated in Section 164(2)(a) of the Act. In this regard it is also necessary to mention about Naresh Chandra Committee Report on Corporate Audit and Governance.
102. It would also be useful to mention that the Act has introduced several provisions with regard to the composition of Board of Directors of a company, by conferring responsibility on the directors, introducing the concept of independent directors and to make the directors report more informative including several disclosures to be made. In light of the above objects to be achieved, Section 164(2) of the Act has been so provided.
103. I am of the view that the said provision is not ultra vires Article 14 and/or Article 19(1)(g) of the Constitution. Point No.1 is accordingly answered.
Part – 9
Re. Point No.2:
“Whether Section 164(2)(a) of the Act is in violation of principles of natural justice and hence ultra vires Article 14 of the Constitution as it does not envisage any hearing prior to disqualification or post-disqualification?”
104. This point concerns the fact that the disqualification under Section 164(2) of the Act is by operation of law and without envisaging any hearing, either a pre or post-decisional hearing and hence according to the petitioners, is in violation of principles of natural justice. In this regard, several decisions have been cited at the Bar.
105. The crux of the matter according to the petitioners is that a director of a defaulting company is visited with disqualification without being given an opportunity of hearing. In other words, it is simply by operation of law and according to petitioners, is not “fair play in action”. Hence, it is contended that Section 164(2)(a) of the Act violates Article 14 of the Constitution as it is opposed to principles of natural justice.
106. Having regard to the nuances of the principles of natural justice, learned senior counsel for the petitioners contended that the director of a company cannot be visited with a serious consequence of being disqualified as a director of a defaulting company, without being given an opportunity of being heard or explaining the fact that the default has occurred due to bona fide reasons and it has not been on account of negligence or carelessness. In other words, the contention is that disqualification cannot be by operation of law and the principles of natural justice must be followed.
107. As opposed to this contention, learned ASG appearing for the Union of India and others submitted that Section 164(2) of the Act envisages a situation whereby with effect from 01.04.2014, on which date the section was enforced, if a person has to be appointed as a director of a company, his eligibility must be considered. Looked at in that prism, question would arise, whether a person to be appointed or re-appointed as a director has suffered any disqualification and therefore, has become ineligible to be so appointed. According to learned ASG, Section 164(1) of the Act does not contemplate any right of hearing as the said sub-section deals with a person not being eligible for being appointed as a director of a company if any of the conditions stated in Clauses (a) to (h) apply. In such a case, the requirement of hearing a director does not apply, as Section 164(1) of the Act deals with the eligibility to become a director of a company on account of the disqualification sustained by him personally. The argument of learned ASG is similar vis-à-vis under Section 164(2) of the Act as eligibility to be reappointed as a director of a company which is in default and eligibility for appointment in any other company for a period of five years from the date of default of a director who was or has been a director of the defaulting company is contemplated.
108. Learned ASG further contended that Section 164 of the Act prescribes eligibility to be appointed as a director of a company and while considering such eligibility, the question as to whether a person has suffered any disqualification on account of any of the circumstances stated in Section 164(1) or (2) of the Act would have to be considered. According to the ASG, when the Section is viewed from the aforesaid perspective, the requirement of hearing as per the principles of natural justice pales into insignificance. It is emphasized that Section 164 of the Act applies only when a person has to be considered for appointment as a director of a company or whether he is eligible to be re-appointed as a director of a company in default. That, when the disqualification occurs by operation of law, the principles of natural justice would not apply.
109. However, by contrast, the contention of the learned senior counsel for the petitioners is not from the point of view of eligibility to be appointed as a director of any company for a period of five years, which is a consequence of disqualification, but the fact that when Section 164(2) of the Act is read along with Section 167(1)(a) of the Act, the serious consequences of disqualification are enlarged. In this regard, it was contended on behalf of the petitioners that Section 164(1) of the Act does not contemplate the right of hearing before a director of a company is disqualified, which is an infraction of the principles of natural justice. But on the other hand, a person who is faced with any of the circumstances stipulated under Section 164(1)(a) to (h) of the Act, the requirement of following the principles of natural justice may not arise; the reason being that if a person who is already a director of a company incurs disqualification on account of the grounds stated under Section 164(1)(a) to (h) of the Act, he would, having regard to those grounds, necessarily to vacate his office. It is sought to be distinguished that the incurring of a disqualification based on Section 164(1)(a) to (h) is personal to a director, but under Section 164(2) of the Act, the disqualification results in a director of the company being ineligible to be reappointed as a director of the defaulting company or being appointed in any other company for a period of five years from the date of default vicariously. It is contended that before such ineligibility is thrust on the directors of a company by the statute, an opportunity ought to be given to explain as to why there has been non-compliance of Section 164(2) of the Act. In other words, the disqualification of a director of a company in the form of ineligibility to be reappointed as the director of a defaulting company or as a director of any other company for a period of five years from the date of default cannot be without hearing such a director, is the contention of the petitioners. That it cannot be by mere operation of law and in the absence of hearing, the disqualification of a director of a company, leading to the ineligibility to be reappointed as a director of a defaulting company or in any other company for a period of five years, is arbitrary and an infraction of Article 14 of the Constitution of India.
110. Principles of natural justice are no doubt important procedural safeguards against undue exercise of power by an authority. The extension of the right of hearing to a person affected by an administrative process is an extension of the said right applicable to judicial as well as a quasi-judicial process. As a result, hearing becomes the norm rather than the exception in administrative process today. According to the Hon’ble Supreme Court in State of Orissa vs. Dr.Binapani Dei [AIR 1967 SC 1269] even an administrative order which involves civil consequences must be made consistently with the rules of natural justice. “Civil consequences cover infraction of not merely property or personal rights but of civil liberties, material deprivations and non-primary damages. In its comprehensive connotation, everything that affects a citizen in his civil life inflicts a civil consequence.” vide State of Himachal Pradesh vs. Raja Mahendra Pal [(1999) 4 SCC 43].
111. A.K.Kraipak vs. Union of India [AIR 1970 SC 150] is a celebrated decision which has demolished the conceptualistic distinction between an administrative and a quasi-judicial function in the context of natural justice. It is, no doubt, true that when a person has to be removed from an office, elected or a statutory body, principles of natural justice have to be followed. Similarly, under the Anti-Defection law, a Member of the Legislature who defects from his party loses his membership of the House. Whether a Member had defected or not and thereby become subject to the disqualification or not, is a matter to be decided by the Speaker of the House. It has been held that the Speaker acts in a quasi-judicial manner, and has to follow natural justice while adjudicating upon the matter; vide Kihoto Hollohan vs. Zachillu [AIR 1993 SC 412].
112. On the aspect of exclusion of principles of natural justice, the rule is that a statute can exclude the right of hearing, either expressly or by necessary implication. Whether or not it has been excluded depends upon the language and scheme of the provision conferring the power, the nature of the power, the purpose for which it is conferred and the effect of exercise of that power. For instance, under Article 311(2) of the Constitution, an authority is empowered to dismiss, remove a civil servant or reduce him in rank, if satisfied and for reasons to be recorded in writing, it is not reasonably practicable to hold such an enquiry. In interpreting the said provision in Union of India vs. Tulasi Ram Patel [AIR 1985 SC 1416], the Hon’ble Supreme Court held that the matter falls within the realm of the principles applicable to discretionary powers, which is in the realm of administrative functions. But, when it comes to legislative functions, when the statute is of general nature, and not applicable to a few persons, in such a case, no hearing need be given unless the statute expressly provides for such a course. The justification of excluding hearing from the legislative area is three-fold:
(a) Order affects large number of persons; and so hearing could not be given to them all;
(b) If natural justice is to be observed in this area, it may be difficult to take quick and timely action as and when necessary;
(C) The Legislature does not give a hearing while enacting the law. On the same analogy, the Administration need not give a hearing when it is acting legislatively.
113. Sometimes, the requirement of hearing is excluded where prompt action needs to be taken. Also, there may be cases where non observance of natural justice would make no difference as admitted or indisputable facts speak for themselves and in the words of the Hon’ble Supreme Court, “where on admitted or indisputable facts only one conclusion is possible, and under the law only one penalty is permissible, then the Court may not compel the observance of natural justice” vide L. Kapoor vs. Jagmohan [AIR 1981 SC 136]. Similarly, in Aligharh Muslim University vs. Mansoor Ali Khan, [(2000) 7 SCC 529, at 540], the Hon’ble Supreme Court held that where they have admitted undisputed facts, where only one view is possible, natural justice need not be applied.
[Source: Principles of Administrative Law by M.P.Jain & S.N.Jain, 7th Edition (2011)].
114. In this context, it would also be useful to identify and classify the nature of the provision of Section 164(2) of the Act. In Administrative Law, an action is classified as legislative, administrative and quasi-judicial i.e., by adjudication. Different procedures are observed for making different kinds of orders. The procedural difference depends upon the nature of the order to be passed. However, there are difficulties in distinguishing a legislative function from other types of functions. A function may be characterized as a legislative function or as an administrative function depending upon the manner in which such power is exercised. In United States of America two tests have been propounded to identify legislative functions: one test depends upon the element of applicability, i.e., legislative function is normally directed towards the formulation of requirements having a general application to all members of a broadly identifiable class. As against this, an administrative decision is one which applies to specific individuals or situations. In other words, a power to take specific action is administrative; power to take general action is legislative. Another test is, if a rule prescribes future patterns and is applicable generally it is legislative function, but an administrative decision determines liabilities on the basis of present or past facts.
115. In the context of complying with the principles of natural justice in a situation where there is removal from an office, it has been held in a catena of cases, when a person is removed from a local authority or a statutory body or by removal of a person concerned is by way of a punishment, rules of natural justice must be complied with, but suspension of a person from the office does not require observance of natural justice by an authority concerned. Further, when a dismissal of an office bearer is effected as a matter of policy and not on the basis of misconduct, the principles of natural justice are not be applicable vide Dr. D.C. Saxena vs. State of Haryana & others [(1987) 3 SCC 251].
116. In Union of India & another vs. W.N.Chadha [AIR 1993 SC 1082], the Hon’ble Supreme Court has laid down a few propositions as regards the exclusion of natural justice though in the context of criminal justice. It has observed that the rule of audi alteram partem is not attracted unless the impugned order is shown to have deprived a person of his liberty or his property. That the rule of audi alteram partem cannot be applied to make the law “lifeless, absurd, stultifying and self-defeating or plainly contrary to the common sense of the situation” and this rule may be jettisoned in very exceptional circumstances where compulsive necessity so demands. The question is not whether audi alteram partem is implicit, but whether the occasion for its attraction exists at all. Further, the denial of natural justice may justify the fact when “the facts speak for themselves”. In such a case, no prejudice would be caused to the affected person.
117. Moreover, hearing is excluded when the administrative action in question is recorded as legislative character as contrasted with an administrative function. An order of general nature and not applying to one person or a few persons may be regarded as legislative. Thus, in the following cases denial of natural justice has been upheld by Courts as the function was considered to be legislative. E.g. a notification issued by the Cane Commissioner prohibiting power crushers and khandsari units from making their units in any reserved areas for a sugar mill for a few months with a view to increase sugar production vide Laxmi Khandsari vs. State of U.P. [AIR 1981 SC 873]; a notification issued by the Government extending the limits of the Town Area Committee vide The Tulsipur Sugar Co. Ltd. vs. Notified Area Committee [AIR 1980 SC 882]; price fixation in Union of India vs. Cynamide India Ltd. [1987 SC 1802]; declaration of an area as a dry area in S.M. Mallewar & others vs. State of Maharashtra [AIR 1993 Bombay 237]. The distinction is that where a number of persons are affected and if the principles of natural justice is to be observed, it would not be possible to take timely action. Further, when the administration is discharging a function by following the prescription in the statute and on the occurrence of the circumstances mentioned in the provision if a result ensues, in such an event, the principle of audi alteram partem is excluded.
[Source: Principles of Administrative Law by M.P.Jain & S.N.Jain, 7th Edition (2011)].
118. If the aforesaid principles are to be applied in the instant case, it becomes apparent that under Section 164(2)(a) or (b), if a person who is or has been a director of a company which has not filed financial statements or annual returns for a continuous period of three financial years; or 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 not be eligible to be re-appointed as a director of the defaulting company or appointed in any other company for a period of five years from the date on which the said default occurs. On a reading of the above, it becomes clear that there would be no dispute with regard to the fact that financial statements or annual returns are not filed by a company for three continuous financial years. Similarly, when there is a failure to repay the debentures accepted by a company or to pay interest thereon or to redeem debentures on the due date or to pay interest due thereon or to pay any dividend declared and such failure to pay or redeem continues for one year or more the ineligibility for re-appointment applies. When such facts are apparent and show a failure by the company, for whatsoever reason or cause, the director of such a company sustains a disqualification in the form of an ineligibility. There may be a variety of reasons as to why there has been non-compliance of Section 164(2)(a) or (b) of the Act by the company. The said provision is not concerned with the reasons for non-compliance by the company. But it is only concerned with there being violation of Section 164(2)(a) or (b) of the Act, as the Act considers the same to be a serious lapse on the part of the company and it affects the directors of such a company.
119. The object and purpose of making such a provision in the Act need not be reiterated as it has been discussed while answering point No.1 above, particularly with reference to the judgments of the Bombay and Gujarat High Courts. When the making of such a provision is justified, the consequences for non-compliance of the same must follow. In this regard the discussion on point No.1 above is relevant and apposite. There may be a plethora of reasons for non-compliance of Section 164(2) of the Act, the section is not concerned with those reasons, justification or explanations leading to non-compliance of Section 164 (2)(a)or(b). The existence of the circumstances mentioned under Section 164(2)(a)or(b) of the Act are sufficient for the directors of defaulting company to be visited with an ineligibility for re-appointment albeit, vicariously.
120. Thus, when the ineligibility for being appointed as a director of the defaulting company or in all the companies is for a period of five years from the date of the default is by operation of law, there is no necessity to give a prior hearing or comply with the provisions of audi alteram partem before such consequences visit a director of such a company. The ineligibility is in the nature of suspension of a director for a period of five years. Therefore, in my view, the need to hear a director of a company before the ineligibility to be reappointed as a director of a company in default or to be appointed in any other company on account of default of a company in which he is a director, for a period of five years from the date of default of the company is rightly not envisaged under Section 164(2) of the Act. Even in the absence of a prior hearing the section is valid and not in violation of Article 14 of the Constitution.
121. However, the controversy does not end, as a contention raised by learned senior counsel, Sri Holla is, if not a prior hearing at least a provision for a post-decisional hearing ought to be read into Section 164(2) of the Act. In other words, the question is, whether, a post-disqualification hearing, i.e., the need to hear a director who has been disqualified under Section 164(2) of the Act, is envisaged under Section 164(2) of the Act? The Hon’ble Supreme Court has propounded the notion of post-decisional hearing, if, for certain reasons, a pre-decisional hearing cannot be envisaged. The leading cases in this regard are Maneka Gandhi vs. Union of India [AIR 1978 SC 597] and Swadeshi Cotton Mills vs. Union of India [AIR 1981 SC 818].
122. Learned senior counsel Dr.Aditya Sondhi placed reliance on D.K.Yadav vs. J.M.A. Industries Ltd. [(1993) 3 SCC 259] to contend that the Hon’ble Supreme Court has observed, where a private employer terminated an employee under Certified Standing Orders, due to absence from duty without or beyond the period of sanctioned leave for more than eight days, it is a case of automatic termination which is in violation of principles of natural justice and a duty to act in just, fair and reasonable manner, must be read into Standing Orders. That termination under the Standing Orders without holding any domestic enquiry or affording any opportunity to the workman was held to be violative of principles of natural justice. Drawing my attention to Clause 13(2)(iv) of the Standing Orders therein, he contended that under the said Standing Orders, an opportunity to explain to the employer his reasons for absence or inability to return to duty on the expiry of leave was provided and therefore, the principles of natural justice was read into the same. Otherwise, it would be arbitrary, unjust and unfair violating Article 14 of the Constitution.
123. Reliance was also placed on Hyderabad Karnataka Education Society vs. Registrar of Societies and Others, [(2000) 1 SCC 566] wherein it was held that under Rule 7(A) of the appellant Society therein, if an ordinary member did not pay his annual subscription in advance in the month of December and in case of his failure to pay subscription before the end of March of any year, he automatically ceased to be a member of the Society therein, was contrary to Section 2(b) of the Karnataka Societies Registration Act, 1960. In order to save the Rule from the vice of unreasonableness and arbitrariness, it was held that it would be open to the alleged defaulter-ordinary member, to point out to the society relevant grounds or defence before the year in question ran out, and if his defence was accepted by the authorities concerned of the society, then his membership would not be hit by the provisions of Rule 7(A). The Hon’ble Supreme Court stated that if an opportunity would be given to the defaulting member to show sufficient cause for non-payment of dues and once such a case is made out by a defaulting member to the satisfaction of the society then he would not have incurred automatic cessation of his membership for that year.
124. It was also thus contended by the learned senior counsel that at least a post-disqualification hearing must be provided under Section 164(2) of the Act after a director is visited with disqualification on the circumstances stated under the said provision. However, the aforesaid cases deal with termination from employment or cessation of membership of a society, as the case may be, in which circumstances, principles of natural justice must be complied with. But the present case is not one of cessation of directorship permanently, but it is only a suspension for a period of five years on the coming into existence the circumstances mentioned in the section. It is by operation of law and not by passing of an administrative order by exercise of discretion. No order disqualifying a director of a defaulting company need be made. It is not by an administrative process but by a legislative intent and by operation of law.
125. Reliance has also been placed on another decision of the Hon’ble Supreme Court in the case of C.B.Goutam vs. Union of India and others [(1993) 1 SCC 78] wherein the constitutional validity of Chapter XX-C of the Income Tax Act, 1961 was questioned. Section 269-UD of the said Act permitted compulsory purchase by the Central Government of immoveable property. The said provision did not contain an opportunity to be heard before an order for compulsorily purchase of property by the Central Government was made. Although, Chapter XX-C did not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase was made under Section 269-UD of the said Act, by quoting Judge Learned Hand of the United States of America, it was observed, not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of Chapter XX-C “to make a fortress out of the dictionary”. The Hon’ble Supreme Court observed that an opportunity to show cause must be given before an order for purchase by the Central Government was made by an appropriate authority under Section 269-UD and same must be read into Chapter XX-C. It was observed that even if the reasons must be recorded in writing before the purchase is made under Section 269-UD, the same is not a substitute for a provision requiring a reasonable opportunity of being heard, before such an order is made. It was held that the requirement of an opportunity to show cause being given before an order for purchase by the Central Government was made by an appropriate authority under Section 269-UD must be read into the provisions of Chapter XX-C and that there was nothing in the language of Section 269-UD or any other provision in the said Chapter which would negate such an opportunity of being heard is given. If such a requirement was not read into the provisions of the said Chapter, it would be open for challenge on the ground of violation of Article 14 on the ground of non-compliance with principles of natural justice. By holding so, the vires of the said provision was upheld.
126. The aforesaid judgment is also not applicable to the present case as in the aforesaid case, an order had to be made giving reasons before taking action under Section 269-UD of the Income Tax Act, 1961. But under the Act, the ineligibility to be reappointed or appointed as a director, as the case may be, is by operation of law. It affects the entire class of directors of all defaulting companies. It does not affect an individual director or any particular company as such. It is also not necessary to pass any administrative order disqualifying a director of a defaulting company. As already observed it is by operation of law as per the intention of Parliament. Further, the consequence is temporary, for a period of five years and not a permanent one.
127. Swadeshi Cotton Mills vs. Union of India [(1981) 1 SCC 664] is a leading judgment on post-decisional hearing. In the said case, the facts were that on 13.04.1978, the Government of India, in exercise of power under Section 18-AA(1)(a) of the Industries (Development and Regulation) Act, 1951, passed an order for taking over the management of Swadeshi Cotton Mills Limited by the National Textile Corporation Limited, stating that the Central Government was satisfied from the documentary and other evidence in its possession, that the persons in charge of the six industrial undertakings, had, by creation of encumbrances on the assets of the said industrial undertakings, brought about a situation which had affected and was likely to further affect the production of articles manufactured or produced in the said industrial undertakings and that immediate action was necessary to prevent such a situation. The company assailed the said order on the ground that compliance of principle of audi alterm partem was inbuilt in Section 18-AA(1) of the said Act and its nonobservance had vitiated the order. The Hon’ble Supreme Court by a majority judgment held that the provision did not exclude audi alteram partem rule and observed that it was not reasonably possible to construe Section 18-AA(1) of the said Act as universally excluding either expressly or by an inevitable intendment, the application of audi alteram partem rule of natural justice at the pre-taking-over stage, regardless of the facts and circumstances of the particular case. However, in the said case, Hon’ble Chinnappa Reddy, J., dissented by observing that the exclusion of natural justice, where such exclusion is not express, has to be implied by reference to the subject, the statute and the statutory situation. Where an express provision in the statute itself provides for a post-decisional hearing, the other provisions of the statute will have to be read in light of said provision and the provision for post-decisional hearing may then clinch the issue where pre-decisional natural justice appears to be excluded on the other terms of the statute.
128. In Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another, (2008) 14 SCC 151, [Shara India], the question was whether in every case where the assessing officer issues a direction under Section 142(2)(a) of the Income Tax Act, 1961, the assessee has to be heard before such an order is passed. After referring to the development of law on the principles of natural justice, it was held that Section 142(2)(a) of the said Act led to serious civil consequences and therefore, even in the absence of express provision for affording an opportunity of a pre-decisional hearing to an assessee, the requirement of observance of principles of natural justice had to be read into the said provision. In the said case, it was held that the proceedings before an assessing officer are deemed to be judicial proceedings.
129. In Institute of Chartered Accountants of India vs. L.K.Ratna & others [(1986) 4 SCC 537], the question inter alia, was whether a member of the Institute of Chartered Accountants of India was entitled to a hearing by a Council of the Institute after the Disciplinary Committee had submitted its report to the Council of its enquiry into allegations of misconduct against the member. It was held that a member accused of misconduct was entitled to a hearing by the Council when, on receipt of report of the Disciplinary Committee, it proceeded to find whether he is or is not guilty.
130. However, one significant aspect noted is that a post-decisional hearing is envisaged when a decision making authority in the first instance makes a decision which is tentative and after giving an affected person a right of hearing, makes a final decision. In other words, a post-decisional hearing is normally envisaged in the exercise of administrative power. But, the question is as to whether a post-disqualification hearing is envisaged when a consequence occurs on account of an operation of law as in Section 164(2) of the Act. Having regard to the object and reasons of having a provision in the nature of Section 164(2) of the Act, in my view, even a post-decisional hearing, is not contemplated. Hence, in my view, the need to provide or read the requirement of a post-disqualification hearing under Section 164(2) of the Act also does not arise.
131. The reasons for the same are not far to see. In the circumstances, it is held that Section 164 of the Act applies by operation of law on the basis of circumstances stated therein. The said provision does not contemplate any hearing, either pre or post-disqualification hearing. In fact, no decision in the nature of administrative or quasi-judicial decision is envisaged. It is by operation of law on the occurrence of the circumstances mentioned in Section 164(2) of the Act. The publication of the list of disqualified directors is only a ministerial Act and not by an administrative process involving the making of a decision on the facts, by application of law or by exercise of discretion; it is neither an adjudicatory process. The disqualification is by operation of law on an emerging and coming into existence of a set of facts. There is no legal infirmity in the said provision as there is no violation of principles of natural justice and Article 14 of the Constitution is not violated. Accordingly, point No.2 is answered against the petitioners.
Part – 10
Re. Point Nos.3 & 4:
(3) “Whether Section 164(2)(a) of the Act has retrospective operation and therefore, is unreasonable and/or arbitrary as per Article 14 of the Constitution?
(4) Whether there has been any illegal exercise of power by the concerned respondent-authority in publishing the List of Directors, including the names of petitioners as disqualified directors, under Section 164(2)(a) of the Act?”
132. The aforesaid points are inter-linked and shall be considered and answered together.
133. As already noted, Section 274(1)(g) of the 1956 Act dealt with disqualification of a director only of a public company on account of circumstances stipulated therein. As a result, a director of such a company in default was not 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 comply with sub-clauses (a) and (b) of Section 274(1)(g) of the 1956 Act. But under Section 164(2) of the Act, a director of a company, which is in default either under sub-clause (a) or (b) thereof would be ineligible to be re-appointed as a director in the defaulting company and also appointed as a director of any other company. The crux of the matter vis-à-vis Section 164(2)(a) of the Act is with regard to the argument that Section 164(2)(a) of the Act, having a retrospective effect is unreasonable and arbitrary as per Article 14 of the Constitution. The said argument is with regard to material period i.e., continuous period of three financial years. The argument proffered on behalf of the petitioners is that continuous period of three financial years must be with effect from 01.04.2014 onwards as on that date, Section 164 was enforced as different Sections of the Act were enforced on different dates. If it is so, then a continuous period of three financial years must commence from 01.04.2014 onwards i.e., 2014-15; 2015-16 and 2016-17 during which period there would be non-filing of financial statements or annual returns, in which event, the disqualification could occur for the first time only in the year 2017 and thereafter. But in the instant case, the disqualification has been made on 01.11.2016 by taking into consideration period prior to 01.04.2014. That the respondent-authorities have given a retrospective operation to the provision when it could not do so. In other words, the argument is that for reckoning the continuous period of three financial years, no period prior to 01.04.2014 could be considered. That the said Section having a prospective operation, the continuous period of three financial years must commence only from 01.04.2014 onwards. It is contended by the petitioners that by taking into consideration a period prior to 01.04.2014 and reckoning continuous period of three financial years, petitioners have been disqualified as directors, which is illegal. In this regard, the distinction between Section 274(1)(g) of 1956 Act and Section 164(2) of the Act have been reiterated by petitioners’ counsel.
134. It is thus contended by the petitioners that, the respondent-authorities by giving a retrospective effect to Section 164(2) of the Act have disqualified the petitioners which is illegal. In support of their submissions, they have relied upon the following judgments:
(a) In Commissioner of Income Tax (Central)-I, New Delhi vs. Vatika Township Private Limited, [(2015) 1 SCC 1] (Vatika Township), the facts were that a search and seizure operation under Section 132 of the Income Tax Act, 1961 on the premises of the assessee was conducted. Thereafter an order was made under Section 154 of the said Act, by which the surcharge was levied by the assessing officer, which was challenged in appeal by the assessee. The said order was cancelled by CIT (Appeals) I, New Delhi. The said order was sought to be revised by the Commissioner of Income Tax (Central-I), New Delhi and the order dated 09.09.2003 passed by the assessing officer by which he had given effect to the order of CIT (Appeals) and in the process did not charge any surcharge. That order was cancelled as being erroneous and prejudicial to the interests of the Revenue. The assessee therein had filed an appeal before the Income Tax Appellate Tribunal (ITAT) against the said order. The ITAT by order dated 23.06.2006 allowed the appeal, against which the Revenue had approached the High Court of Delhi by way of an appeal filed under Section 260-A of the said Act. The appeal was dismissed by the Delhi High court, against which the matter was before the Hon’ble Supreme Court. The Delhi High Court had taken a view that the proviso inserted to Section 113 of the Income Tax Act, 1961 by the Finance Act, 2002 was prospective in nature and the surcharge as leviable under the aforesaid proviso could not be made applicable to the block assessment in question of an earlier period i.e., from 01.04.1989 to 10.02.2000 in the said case. The question was whether the proviso to Section 113 of the Act was clarificatory in nature and thereby having retrospective effect.
The Hon’ble Supreme Court held that one of the rules guiding how a legislation has to be interpreted is, unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. According to the Hon’ble Supreme Court, “if we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset.”
In the aforesaid decision, Phillips vs. Eyre, [(1870) LR 6 QB 1] was relied upon to observe that a retrospective legislation is contrary to the general principle that legislation, by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. That the principle against retrospectivity is the principle of ‘fairness’, which must be the basis of every legal rule. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. Sometimes, retrospective legislation, which would confer a benefit on the community as a whole, may be accepted as the same would not be opposed to the doctrine of fairness. But, where the provision imposes some burden or liability, it is always to be interpreted as being prospective.
In the aforesaid decision, proviso to Sub-section (3) of Section 2 of the Finance Act, 2003 was held to be prospective in operation as the proviso was not clarificatory giving it a retrospective effect.
(b) In Govind Das vs. ITO [(1976) 1 SCC 906], it was held that Section 171(6) of the Income Tax Act, 1961 was prospective and inapplicable for any assessment year prior to 01.04.1962, the date when the Income Tax Act, 1961 came into force. In the said case, it was held that if the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.
(c) Similarly, in I.T., Bombay vs. Scindia Steam Navigation Co. Ltd. [1962 (1) SCR 788], it was held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year.
(d) Learned Senior Counsel, Sri Udaya Holla, appearing for the petitioners in Writ Petition Nos.25683-684 of 2018 and connected cases placed reliance on the judgment of the House of Lords in the case of L’Office Cherifien Des Phosphates and Another vs. Yamashita – Shinnihon Steamship Co. Ltd. [(1994) 1 All.E.R. 20], wherein on the question as to whether a provision has retrospectivity, it has been observed as under:
“Parliament was presumed when enacting legislation not to have intended to alter the law applicable to past events and transactions in a manner which was unfair to those concerned in them unless a contrary intention appeared. Accordingly, the question whether an Act was retrospective was to be determined according to whether in a particular case the consequences of reading the statute with the suggested degree of retrospectivity was, having regard to the degree of retrospectivity involved, the value of the rights affected, the clarity of the language used and the circumstances in which the legislation was enacted, so unfair that the words used by Parliament could not have been intended to mean what they might appear to say. ….”
(e) Reliance was also placed on the Commissioner of Income Tax 5, Mumbai, vs. Essar Tele Holdings Limited, through its Manager [(2018) 3 SCC 253], wherein the question was, whether Section 14-A(2) and (3) inserted to Income Tax Act, 1961 with effect from 01.04.2007 would apply to all pending assessments and whether Rule 8D was applicable retrospectively. Section 14-A of the said Act dealt with expenditure incurred in relation to income not being included in total income. Section 14A of the Act being retrospective in operation with effect from 01.06.1962 was being used by the Assessing Officers for reopening assessments and Circular No.11 of 2001 dated 23.07.2001 was issued by way of clarification. The said clarificatory Circular was statutorily engrafted as a proviso by the Finance Act, 2002 by stating that “provided that nothing contained in the Section shall empower the assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April 2001”. By Finance Act, 2006, Section 14-A was numbered as sub-section (1) and after sub-section (1), sub-sections (2) and (3) were inserted with effect from 01.04.2007. Also the Income Tax Rules, 1962 were amended by notification dated 24.03.2008 by which Rule 8-D was inserted. The same dealt with the method for determining amount of expenditure in relation to income tax not includable in total income.
While considering the same, the Hon’ble Supreme Court observed that it is a well-settled principle of statutory construction that every statute is prima facie prospective in nature unless it is expressly made to have retrospective operation. A new law ought to regulate what is to follow, not the past, contained in the principle of presumption of prospectivity of a statute. Reference was made to Govind Das wherein Halsbury Laws of England (III Edition) was cited and observed that if the enactment is expressed in a language which is fairly capable of either interpretation, it ought to be construed as prospectively only. That retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.
Reference was also made to Vatika Township and Jayam and Co. vs. CVAT, [(2016) 15 SCC 125], wherein reliance was placed on R.C.Tobaco (P) Ltd. vs. Union of India, [(2005) 7 SCC 725]. In the latter case, the Hon’ble Supreme Court stated the broad legal principles while testing a retrospective statute in the following manner:
(i) A law cannot be held to be unreasonable merely because it operates retrospectively;
(ii) The unreasonability must lie in some other additional factors;
(iii) The retrospective operation of a fiscal statute would have to be found to be unduly oppressive and confiscatory before it can be held to be unreasonable as to violate Constitution norms;
(iv) Where taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of tax or that is confiscatory, courts will be justified in striking down the impugned statute as unconstitutional;
(v) The other factors being period of retrospectivity and degree of unforeseen or unforeseeable financial burden imposed for the past period;
(vi) The length of time is not by itself decisive to affect retrospecitivity.”
It was further observed that it is well settled that the mere date of enforcement of the statutory provisions does not conclude that the statute is prospective in nature. The nature and content of statute have to be looked into to find out the legislative scheme and the nature, effect and consequence of the statute. In the said case it was held that the methodology as provided under Rule 8-D was neither a well-known nor well-settled mode of computation. That no Assessing Officer could have applied methodology, which was brought in place of Rule 8-B. Thus, retrospective operation of Rule 8-B was not accepted.
135. The aforesaid arguments made on behalf of petitioners have been countered by learned ASG by contending that it is immaterial whether the disqualification occurs by taking into consideration any period prior to 01.04.2014 while reckoning continuous period of three financial years as what is pertinent to be considered under Section 164(2) is eligibility to be re-appointed as a director of a company which is in default or in any other company after the coming into force Section 164(2) of the Act.
136. In support of his submission, Learned Additional Solicitor General, Sri Navadagi, relied upon a decision of the Hon’ble Supreme Court in the case of Ishwar Nagar Co-operative Housing Building Society vs. Parama Nanda Sharma & Others [(2010) 14 SCC 230] (Ishwar Nagar Cooperative Housing Building Society). In the aforesaid case, as per Rule 25 of the Rules made under the Delhi Co-operative Societies Act, 1972, one of the grounds for disqualification as a member of the co-operative society was, in the case of membership of a housing society, a person owned a residential house or a plot of land for the construction of residential house in any of the approved or unapproved colonies or other localities in the National Capital Territory of Delhi, in his own name or in the name of his spouse or any of his dependent children, on lease-hold or free-hold basis or on the basis of power of attorney or on agreement for sale. The question considered therein was, whether Rule 25 of the Rules was retrospective or not, as the alleged basis for disqualification was purchase of property prior to the adoption of the Rules; whether the same could be a basis of ineligibility for membership of a cooperative society when the said rule was enforced. It was held that a statute does not become a retrospective one because a part of the requisites for its action is drawn from a time antecedent to its passing. The Hon’ble Supreme Court held that all that Rule 25(2) of the Rules did was that it operated in future, though the basis for taking action is the factum of acquiring a plot in the past. Thus, by virtue of Rule 25(2), a member was deemed to have ceased to be a member of the society, but the cessation operated from 02.04.1973, when the Rule came into force.
137. In the aforesaid case, reference was made to Solicitor’s Clerk, In Re. [(1957) 3 All. E.R. 617(DC)] (Solicitor’s Clerk), wherein the bone of contention revolved around Solicitor’s Act of 1956 which provided that no solicitor should employ any person who was convicted of larceny without the permission of the Law Society. The clerk in that case was convicted of larceny in 1953, while the ban was imposed in 1956. It was urged that the provisions of the 1956 Act cannot be applied to him because he was convicted before that Act came into operation and to do otherwise, it would make its operation retrospective. The said contention was rejected by Lord Goddard, C.J. by observing that the provision enabled an order to be made disqualifying a person from acting as a solicitor’s clerk in the future and what happened in the past as the cause or reason for the making of the order; but the order has no retrospective effect. It would be retrospective if the Act provided that anything done before the Act came into force or before the order was made should be void or voidable, or if a penalty were inflicted for having acted in this or any other capacity before the Act came into force or before the order was made. But it simply enables a disqualification to be imposed for the future which in no way affects anything done by the appellant therein in the past.
138. Reliance was also placed on State of Bombay vs. Vishnu Ramachandra [AIR 1961 SC 307] (Vishnu Ramachandra), where Section 57 of the Bombay Police Act, 1951 authorised removal of a person from an area if he had been convicted of certain offences including theft. It was held that Section 57 of the said Act did not create a new offence nor make punishable that which was not an offence. It was designed to protect the public from the activities of undesirable persons who had been convicted of offences of a particular kind. The Section only enabled the authorities to take note of their conviction and to put them outside the area of their activities so that the public may be protected against a repetition of such activities. That so long as the action taken against a person was after the Act comes into force, the statute cannot be said to be applied retrospectively.
139. Reliance was also placed on Lily Thomas vs. Union of India and others [(2013) 7 SCC 653] (Lily Thomas), wherein Section 8(4) of the Representation of the People Act, 1951 (for short “RP Act”) was assailed on the ground that it was ultra vires the Constitution. Section 8 of the aforesaid Act deals with the disqualification on conviction for certain offences, in the context of being chosen as, and for being, a Member of either House of Parliament or of the Legislative Assembly or Legislative Council of a State. Sub-section (1) of Section 8 and sub-section (2) thereof deal with offences under the Acts specified therein and conviction for the offences under any of the Acts leading to disqualification. Sub-section (3) of Section 8 of the RP Act deals with conviction for any offences and for any other offences as per the stipulation contained therein leading to disqualification. Section 8(4) of the RP Act states that notwithstanding anything contained in sub-section(1), sub-section(2) or sub-section(3), a disqualification under either sub-section shall not, in the case of a person, who on the date of the conviction, is a Member of Parliament or the Legislature of a State, take effect until three months have elapsed from that date or, if within that period an appeal or application for revision is brought in respect of the conviction or the sentence, until that appeal or application is disposed of by the Court. The contention advanced was that Section 8(4) of the RP Act did not provide a rationale for making an exception in the case of Members of Parliament or a Legislature of a State and hence was arbitrary and discriminatory and violative of Article 14 of the Constitution. It was submitted that persons elected as Members of Parliament and State Legislature stand on the same footing as sitting Members of Parliament and State Legislatures so far as disqualifications are concerned and sitting Members of Parliament and State Legislatures cannot enjoy the special privilege of continuing as Members even though they are convicted of the offences mentioned in sub-sections (1), (2) and (3) of Section 8 of the RP Act.
140. The Hon’ble Supreme Court, after referring to Article 102(1)(e) and Article 191(1)(e) of the Constitution regarding disqualification for being chosen as, and for being, a Member of either House of Parliament or Legislative Assembly or Legislative Council of the State, mandating a law to be made in that regard held, Parliament does not have the power under Articles 102(1)(e) and 191(1)(e) of the Constitution to make different laws for a person to be disqualified from being chosen as a Member and for a person to be disqualified for continuing as a Member of Parliament or the State Legislature. Relying on Election Commission vs. Saka Venkata Rao [AIR 1953 SC 210] (Saka Venkata Rao), it held that the same set of disqualification for election as well as for continuing as a Member applied in both circumstances and the disqualification has to be same.
141. Learned ASG also relied upon the order of the Calcutta High Court in the case of Nabendu Dutta and others vs. Arindam Mukerjee and others, [(2004) 121 Comp.case 150 (Cal)] (Nabendu Dutta), wherein Section 274(1)(g) of the 1956 Act came up for consideration. It was observed that under the said provision, if a person was already a Director in a defaulting company on the date of the commencement of the Amendment Act (of 2000), he would be affected by the said provision. That the language of Section 274(1)(g) contextually made the provision retrospective in operation. The expression “is already a director” was interpreted to mean as one who has continued to be a director till the date of commencement of the Act. The expression “has failed to repay its deposits” was observed to be in present perfect tense, which suggested that the failure started even before the commencement of the Act. According to the Calcutta High Court, if the language was intended to refer to a future event or occurrence, then the words “has failed to deposit” or “is already a Director” would not have been employed in the subsection. It was further observed that the amending Act was enacted to protect the interest of deposit holders by prohibiting the entry of tainted directors against possible act of misappropriation and/or breach of trust, meaning thereby to curb the wrong deeds, mis-deeds to be perpetrated by wrongful act or omission by the same directors. In order to check and prevent public wrong the moment it is discovered, which is part of good governance in any form of Government by legislative or executive action, the amendment to 1956 Act had been introduced. It was further observed by the Calcutta High Court that if the aforesaid words were to be treated for future occurrence, then the amendment portion could not be given any effect at all for a period of one year. One year is the minimum period of default as far as nonpayment of deposits or interests is concerned. That if the operation of the provision cannot be suspended for a period of one year unless it is provided expressly or at least by giving an interpretation of the words and language of the Section itself. It was further observed that interpretation of the words of any statute cannot be to frustrate or defeat the object of the Act or lead to an absurdity. While holding so, the Calcutta High Court held at the interlocutory stage, prima facie, that defendant No.1 therein was disqualified to be appointed as a director in defendant No.3/company therein.
142. In reply, learned counsel for the petitioners contended that there is a distinction between Section 274(1)(g) of the 1956 Act and Section 164(2)(a) of the Act. Firstly, that Section 274(1)(g) of the 1956 Act, applied only to public companies and not to private companies. That for the first time, a director of a private company is brought into the fold of such a disqualification. Secondly, under Section 274(1)(g) of the Act, the ineligibility was only with regard to appointment as a director of any other company. But under the Act, the ineligibility is two pronged: reappointment in the defaulting company as well as appointment in any other company. That a director of a defaulting company would also have to vacate his office in all companies, where he is a director other than in the defaulting company as per the proviso to Section 167(1)(a) of the Act. The consequences of the operation of Section 164(2) when read with Section 167(1)(a) are harsh, almost penal and have been introduced for the first time since the enforcement of the Act. Therefore, if such severe consequences have to be faced by a director of a defaulting company, then the continuous period of three years of default under Section 164(2)(a) of the Act must be with effect from 01.04.2014 onwards and no prior period that could be taken as the basis for disqualifying of director of a company. It was contended that, taking into consideration any period prior to 01.04.2014 as the basis for reckoning continuous period of three financial years, which may extend to after the enforcement of the Act (with effect from 01.04.2014) is illegal.
143. At this stage, it is necessary to delineate on the concept of retrospectivity. The normal rule is presumption against retrospective operation of a provision of a statute. The said rule is a fundamental rule of law to the effect that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. According to the Hon’ble Supreme Court in State Bank’s Staff Union vs. Union of India, [AIR 2005 SC 3446], the Parliament or the legislature has the power to legislate retrospective statutes. But when a challenge is made to a retrospective legislation, it is necessary to note the distinction between retrospective and retroactive laws. E.A. Driedger, in “Statutes: Retroactive Retrospective Reflections” [(1978), 56 Can. Bar Rev. 264] (Driedger), has arrived at the following definitions:
(i) A retroactive statute is one that operates as of a time prior to its enactment, but a retrospective statute is one that operates for the future only. It is prospective, but it imposes new results in respect of a past event.
(ii) A retroactive statute operates backward, but a retrospective statute operates forward, but it looks backward in that it attaches new consequences for the future to an event that took place before the statute was enacted.
(iii) A retroactive statute changes the law from what it was; a retrospective statute changes the law from what it otherwise would be with respect to a prior event.
144. Applying the distinction, Driedger in “Construction of statutes (2nd Edition 1983 @ page 192)” could be quoted as under:
“These past facts may describe a status or characteristic, or they may describe an event. It is submitted that where the fact situation is a status or characteristic (the being something), the enactment is not given retrospective effect when it is applied to persons or things that acquired that status or characteristic before the enactment, if they have it when the enactment comes into force; but where the fact-situation is an event (the happening of or the becoming of something), then the enactment would be given retrospective effect if it is applied so as to attach a new duty, penalty or disability to an event that took place before the enactment.”
(underlining by me)
145. In the words of Canadian Supreme Court in Hornby Island Trust Committee vs. Stormwell [1988 CanLII 3143 (BC C.A.)] retrospective statute operates further in time, starting from a point back in time than the date of its enactment as if the law existed at the time the events occurred. But a retroactive statute operates from the date of the enactment and changes legal consequences of past events in the future. According to the Hon’ble Supreme Court of India, a retroactive law “creates a new obligation on transactions or considerations already past or destroys or impairs vested rights”, but a retrospective law “takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect or transactions or considerations already past.”
146. According to learned ASG, if after the enforcement of the Act a person has to be appointed as a director of a company, then the question as to whether he has been a director of a defaulting company would assume importance, as such a director cannot be re-appointed as a director of the defaulting company or any other company for a period of five years. That while considering the qualifications of a director, it is necessary to ascertain as to whether a person has been a director of a company which has violated Section 164(2) of the Act, in that the annual returns or statements have not been filed by such a company for a continuous period of three financial years. According to learned ASG, while reckoning the three financial years, it could be a period either prior to 01.04.2014 or subsequent thereto. It makes no difference. Once for a continuous period of three financial years, a company has failed to file annual returns or statements would result in the director of that company being visited with an ineligibility of being re-appointed as a director of that very company or of any other company for a period of five years.
147. But, the contra contention of learned counsel for the petitioners is that, while reckoning the continuous period of three years, no financial year prior to 01.04.2014 can be taken into consideration. That having regard to the stringent, almost penal consequences which follow under Section 164(2) of the Act, the continuous period of three financial years must commence from 01.04.2014 only. It is their contention that if any period prior to 01.04.2014 is taken into consideration, then the provision would have a retrospective effect which is unreasonable and therefore, in violation of Article 14 of the Constitution of India.
148. On considering the aforesaid rival submissions, it is noted that under the 1956 Act, if a director was disqualified under Section 274(1)(g) of the Act, it did not result in vacating office of the director under Section 283 of the said Act. The only consequence was that a director of such a defaulting company could not be appointed as a director of any other company for a period of five years. He could however be re-appointed as a director of the defaulting company. But under the Act, the consequences are three-fold which can be categorized as immediate and long term. The immediate consequences are that a director of the default company would have to vacate his office as a director in all companies other than the company in default as per the proviso to Section 167(1)(a) of the Act. Whereas the long term effect is that he cannot be reappointed as a director in the defaulting company. He is also not eligible to be appointed as a director in any other company for a period of five years.
149. The other important distinction between Section 274(1)(g) of the Act and Section 164(2) of the Act is that the latter Section applies to both private as well as public companies. Whereas, Section 274(1)(g) of 1956 Act applied only to public companies. That means for the first time, the disqualification in the form of an ineligibility under Section 164(2) of the Act is also applicable to private companies. When for the first time under the Act the disqualification of a director of a private company is stipulated under the Act in the form of Section 164(2), the said provision must be given only a prospective operation. In the sense, that the continuous period of three financial years must commence with effect from 01.04.2014 onwards. No period prior to 01.04.2014 can be taken into consideration to be a part of the continuous period of three financial years and thereby impact a director of a defaulting private limited company.
150. In my view, the same logic and reasoning would also apply in respect of directors of public limited companies also as the consequences that are to be faced by directors of such companies under Section 164 (2) read with Section 167(1)(a) of the Act are as enumerated above. Whereas, the consequences under Section 274(1)(g) read with Section 283 of 1956 Act were less severe and almost minimal.
151. In the circumstances, it is observed that if the three years period is referable to a period prior to the enforcement of the Act i.e., prior to 01.04.2014, then Section 274(1)(g) would apply. This is having regard to Section 465 of the Act which is the repeal and saving provision. Further if the continuous three financial years is with effect from 01.04.2014 onwards, then the provisions of the Act would apply. But if the continuous period of three financial years during which financial statements or annual returns are not filed by any company, which is the basis for disqualifying the director of a company encompasses a period prior to 01.04.2014 as well as subsequent to 01.04.2014, it is held that the period prior to 01.04.2014 cannot be reckoned for the purpose of applying the disqualification under the said provision along with a period subsequent thereto. If for example, the three continuous period of three financial years are with effect from 01.04.2013 onwards, then it will be up to 01.04.2016. In which event, only two financial years would be subsequent to the enforcement of the Act, which is from 01.04.2014. In such a situation, the consequences envisaged under Section 164(2) read with Section 167(1)(a) of the Act cannot be applied.
152. Thus, if the default occurred in any financial year prior to 01.04.2014, but such a director seeks re-appointment in the defaulting company or in any other company, the ineligibility as envisaged under the Act would apply. Also, after the enforcement of the Act with effect from 01.04.2014 onwards, if a director is disqualified the consequences that would follow is as per Section 164(2)(a) of the Act. In other words, up to 31.03.2014, Section 274(1)(g) of the 1956 Act would apply, but with effect from 01.04.2014, Section 164(2) of the Act would apply if a director seeks re-appointment in the defaulting company or appointment in any other company. But, if the continuous period of three financial years is spread prior to 01.04.2014 as well as subsequent thereto, then the consequences under Section 164(2) of the Act would not apply. This is so, where the company is a public limited company. In this regard, the judgments relied upon by the learned counsel for the petitioners would apply.
153. However, it is necessary to distinguish the cases relied upon by learned ASG. In Ishwar Nagar Co-operative Housing Building Society, it was held that Rule 25(2) considered thereunder operates in future, though the basis for taking action was the factum for acquiring a plot in the past i.e., prior to the introduction of the Rule. Applying the above to the present case, learned ASG submitted that with effect from 01.04.2014 onwards, if a person is to be appointed as a director of a company, then he must possess the eligibility as stipulated under Section 164(2) of the Act. That if a person is a director of a defaulting company as per Section 164(2)(a) of the Act, it does not matter whether the default has occurred prior to the enforcement of the Act or subsequent thereto and whether the basis of the default is spread over a period either prior to enforcement of the Act or subsequent thereto.
154. Further, reliance was also placed on Solicitor’s Clerk’s case to contend that the said decision is in support of the stand taken by the Union of India and other respondents and hence, there is no arbitrary action on the part of the respondents in disqualifying the petitioners as directors on 01.11.2016 by taking into consideration a period prior to 01.04.2014 as part of continuous period of three financial years during which the financial statements or annual returns have not been filed by the company. In the said judgment it has been observed that the provision considered therein would have retrospective effect if the Act provided that anything done before the Act came into force or before the order was made should be void or voidable, or if a penalty was inflicted for having acted in a particular way before the Act came into force or before the order was made or if a disqualification to be imposed for the future which in no way affects anything done by the appellant in the past.
155. The aforesaid decisions no doubt state that the respective rules considered therein were prospective and they did not have any retrospective effect inasmuch as they only took into consideration action drawn from a time antecedent to the passing of the rule and did not apply to any period prior to its enforcement. The said cases are applicable to a case of disqualification of a director under Section 274 (1)(g) of the 1956 Act and Section 164(2) of the Act (new law) being applicable to antecedent situations/facts. As already noted, Section 164(2) of the Act would apply to a director who has been disqualified under the provisions of the 1956 Act (old Act) if, after coming into force of the same i.e., with effect from 01.04.2014, he seeks appointment as a director in any company. Thus, where a disqualification affects a director of a public company under Section 274(1)(g) of the 1956 Act and question arises as to whether he could be appointed as a director of the company after the enforcement of the Act, the fact that he had sustained a disqualification under the 1956 Act could be taken into consideration after the enforcement of the Act from 01.04.2014. Section 164(2) of the Act would accordingly apply. Therefore, a past event can be taken into consideration for the purpose of Section 164(2) of the Act after it comes into effect. Therefore, if a past event has to be taken note of while applying Section 164(2) subsequent to its enforcement and while ascertaining the antecedents of a person, it is noted that he had sustained a disqualification on account of Section 274(1)(g) of the 1956 Act, the said disqualification under the 1956 Act would have a bearing at the time of considering eligibility of a person to be appointed as a director subsequent to 01.04.2014 by applying Section 162 of the Act. In such a situation the application of Section 164(2) is retroactive and not retrospective. In this regard, the expression “has been” is significant. It means a person who has been a director of a public company, which has defaulted under Section 274(1)(g) of 1956 Act and who after the enforcement of the Act is seeking re-appointment in the defaulting company or in any other company. It is in such circumstances that the cases cited by learned ASG discussed above in Ishwar Nagar Co-operative House Building Society and Soliciter’s Clerk In Re. would apply.
156. There would also be no difficulty in applying the Section if the three continuous financial years are with effect from 01.04.2014 onwards, in which event, if in the year 2017 it is found that a company has for three continuous financial years (with effect from 01.04.2014 onwards) not complied with Section 164(2) of the Act, then a director of such a defaulting company would suffer a disqualification or an ineligibility as stated under Section 164(2) of the Act when his case for re-appointment as a director of the defaulting company or in any other company is to be considered. In such an illustration also Section 164(2) has a prospective operation whether in respect of a public company or a private company. Thus, with effect from 01.04.2014 onwards if for three continuous financial years, there is non-compliance of Section 164(2)(a) of the Act, the disqualification would occur by operation of law.
157. But, the difficulty arises in those cases where the continuous period of three financial years spell over a period prior to enforcement of the Act i.e., 01.04.2014 and a period subsequent thereto, during which period of three continuous financial years a company would not have filed its annual statements or returns. What would be the position in such a case? It is noted that in most of the cases herein, the disqualification has been notified on 01.11.2016 and the ineligibility is up to 01.11.2021. That means, three continuous financial years prior to that date has been reckoned during which period there has been non-compliance of Section 164(2) of the Act. On 01.11.2016, the list of the disqualified directors has been published. That means the period of three continuous financial years is inclusive of not only a period prior to 01.04.2014, but also subsequent thereto, unless specifically stated otherwise. The contention of the petitioners is that no period prior to 01.04.2014 could be reckoned for the purpose of counting three continuous financial years under Section 164(2)(a) of the Act. That the said period of three continuous financial years must have begun with effect from 01.04.2014 onwards for the consequences under Section 164(2) to apply. The reasons for such a submission are two-fold: firstly, because of the severity of the consequences envisaged under Section 164(2) of the Act as compared to the consequence under Section 274(1)(g) of the 1956 Act. Secondly, for the first time, under the Act, a director of a private company also sustains such a disqualification under Section 164(2) of the Act, whereas under the 1956 Act, it was only a director of a public company who could be visited with such a disqualification.
158. I find, substance in the contentions advanced on behalf of the petitioners, inasmuch as directors of private companies are concerned, a provision like Section 164(2) is applicable for the first time. Thus, no period antecedent 01.04.2014 could be taken into consideration when there has been a default in the filing of the annual returns or the statements by such a private company. This is because, prior to the enforcement of the Act, such a disqualification was not imposed on a director of a private company under Section 274(1)(g) of the 1956 Act. Therefore, as far as private companies are concerned, Section 164(2) being made applicable to them for the first time under the Act, no period prior to 01.04.2014 could be taken into consideration for the purpose of reckoning three continuous financial years under Section 164(2) of the Act.
159. As far as public companies are concerned, though a disqualification as stated under Section 274(1)(g) of the 1956 Act applied to the directors of a public company, which was in default, nevertheless, the consequence was not to the extent stipulated under the Act. Such a director became ineligible to be appointed as a director in any other company, but he could be re-appointed as a director in the defaulting company. Moreover, under Section 283 of the 1956 Act, there was no vacation of the office of such a director. But under the Act, a director of a defaulting company becomes ineligible to be re-appointed as a director of the defaulting company as well as any other company. Moreover, in terms of the proviso to Section 167(1)(a) of the Act, such a director would have to vacate office as a director in all companies where he is a director other than the defaulting company. The cumulative effect of the consequences being greater than under the 1956 Act, in my considered view, even in respect of a public company while reckoning three financial years during which annual returns or financial statements have not been filed, no period prior to 01.04.2014 could be considered while reckoning the continuous period of three financial years i.e., commencing from prior to the commencement of the Act and ending after the coming into force of the Act.
160. It is necessary to reiterate and distinguish the aforesaid position from the disqualification of a director of a public company under the provisions of Section 274(1)(g) of the 1956 Act which would have occurred prior to the enforcement of the Act. In such an event, the disqualification already sustained by a director of a public company was prior to 01.04.2014 would have a bearing while applying Section 164(2) of the Act when a director has to be re-appointed in a defaulting company or in any other company. Thus, the new law can be applied to an act or transaction which has been completed before it is enforced. In such a case, the provision is not retrospective because a part of the requisite for its action is drawn from a time antecedent to its passing. The new law imposes consequences in respect of past events, with effect from 01.04.2014 which is prospective. But on the other hand, when the new law is applied to an act or event or transaction which is in the process of completion i.e., when the continuous period of three financial years is spread prior to 01.04.2014 when the Act was not in force and subsequent thereto, then in such a case, the consequences stipulated under Section 164(2) of the Act would not apply to a director of a defaulting company.
161. The reason for the same have been stated above and are reiterated. As far as a private company is concerned, till 01.04.2014, there was no provision akin to Section 164(2) which applied to a director of such a private company. In fact, Section 274(1)(g) of the 1956 Act expressly stated that it applied only to a public company. Secondly, as already indicated, the severity of the consequences of a director of a public company which is in default being apparent under the Act, in my view, the said consequences cannot be imposed on a director of a public company, which is in default under Section 164(2)(1) of the Act by taking into consideration any financial year prior to 01.04.2014. Doing so, would be unreasonable as a retrospective effect would be given to Section 164(2) of the Act so as to impose a higher degree of disability or ineligibility by taking into consideration a period prior to 01.04.2014, which is impermissible in law. This is because a new law imposing a disqualification, which is more severe cannot be applied to facts which have not fructified so as to result in a concluded or completed event i.e., when the time to apply it is not ripe as on the date of the enforcement of the new law i.e., the Act. It could be applied only after the commencement of the new law, but not by taking into consideration any period prior to the enforcement of the law. This is because when the material period of three continuous financial years is to be reckoned, no period prior to 01.04.2014 can be taken into consideration as and when such a period commenced the new law with different consequences were not envisaged. This is different from applying the new law to an event which is a past, concluded one prior to the enforcement of the new law as the same could be taken into consideration. In such a case, the law is being applied retroactively and not retrospectively, which is permissible.
162. The learned ASG has relied upon the interim order of the Calcutta High Court in the case of Nabendu Dutta wherein Section 274(1)(g) of the 1956 Act came up for consideration. Under the said provision, the expression was “is already a director”. The expression “has failed to repay its deposits” was observed to be in present perfect tense with reference to the date of commencement of the amendment. In the said context, it was held that immediately after the amendment being enforced, the said provision would be effective and that if there was any disqualification under Section 274(1)(g) of the 1956 Act, it would result in consequences as stipulated under the Act pursuant to the amendment. The same line of reasoning has been adopted in the instant case while considering any disqualification which has occurred on or before 31.03.2014 under the provisions of the 1956 Act. Thus, even in respect of such disqualification after the enforcement of Section 164(2)(a) of the Act, any such director who has been disqualified cannot be reappointed in the defaulting company or in any other company for a period of five years.
163. In the circumstances, point No.3 is answered by holding that Section 164(2) of the Act is not unreasonable or violative of Article 14 of the Constitution as it does not violate the rule against retrospectivity.
164. The petitioners being directors of public and/or private companies could not have been disqualified on 01.11.2016 by taking into consideration three continuous financial years prior thereto, which includes a period prior to 01.04.2014, on which date Section 164(2) was enforced as on that date the basis for application of the provision did not exist so as to disqualify the directors of public and/or private company.
165. It may be that, after the coming into force of the Act, if a person has to be considered to be appointed as a director of the company, then inter alia, the ineligibility on account of the operation of Section 164(2)(a) of the Act would apply and while so considering, what has to be reckoned is, a default made by the company in not filing financial statements or annual returns for a continuous period of three financial years. But what has to be seen is that, the basis for the ineligibility has reference to the date of enforcement of the Act. What is necessary to bear in mind is, what the position of law upto 31.03.2014 was and how the provision has been drastically altered with effect from 01.04.2014. The consequences that would visit a director of a defaulting company as per Section 164(2) of the Act being distinct from what was envisaged under the 1956 Act, it is held that no period commencing prior to 01.04.2014 and ending after the said date can be the basis for reckoning the continuous period of three financial years during which financial statements or annual returns are not filed by any company. Thus, point No.4 is answered by holding that the List of directors disqualifying the petitioners herein with effect from 01.11.2016 till 31.10.2021 could not have published by taking into consideration a period prior to 01.04.2014 as well subsequent thereto while computing continuous period of three financial years under Section 164(2)(a) of the Act.
Part – 11
Re. Point Nos.5 & 6:
(5) “Whether Section 167(1)(a) of the Act is ultra vires Article 14 and/or Article 19(1)(g) of the Constitution as being manifestly arbitrary?
(6) Whether proviso to Section 167(1)(a) of the Act is ultra vires Articles 14 and/or 19(1)(g) of the Constitution as being manifestly arbitrary?”
166. The aforesaid points shall be considered together. As already noted, a disqualification incurred by a director of a public company under Section 274(1)(g) of the 1956 Act, did not result in vacating of the office of the director under Section 283 of the said Act, either in the defaulting company or any other company in which he was functioning as a director. But, under Section 167(1)(a) of the Act, a director who has incurred disqualification under Section 164 of the Act would also have to vacate his office as a director. However, by virtue of the Amendment Act, 2017 and by the insertion of the proviso to Section 167(1)(a) of the Act, a director of a defaulting company would not have to vacate office in the company which is in default under Section 164(2) of the Act, but, he would have to vacate office in all other companies where he is a director. On a reading of Section 167 of the Act, it is evident that Section 167(1)(a) of the Act deals with the disqualifications specified in Section 164. Section 164(1)(a) to (h) of the Act deals with those grounds of disqualification, which according to petitioners’ counsel are personal to a director of a company, but under Section 164(2) of the Act, the disqualification occurs on account of the default of the company, either under clause (a) or (b) thereof, resulting in an ineligibility for a director to be re-appointed as a director either in that company or in any other company for a period of five years.
167. An argument advanced on behalf of the petitioner is, under Section 167(1)(a) of the Act, vacating of office of a director on account of the disqualification is limited to only Section 164(1) of the Act; it does not extend to Section 164(2) of the Act. If it is interpreted otherwise, it would be in violation of Articles 14 and 19(1)(g) of the Constitution as the said provision would be unreasonable and arbitrary.
168. The said argument is rebutted by learned Additional Solicitor General and other counsel for respondent-Union of India by contending that when Section 167(1)(a) of the Act refers to Section 164 of the Act, it would mean the entire Section 164, which inter alia, includes both Section 164(1) as well as 164(2) of the Act. That the proviso applies only to a disqualification incurred by a director under Section 164(2) of the Act. Hence, it is not right to contend that Section 167(1)(a) of the Act refers to only Section 164(1) of the Act.
169. The aforesaid argument of learned ASG is countered by Sri Dhyan Chinnappa, learned senior counsel for the petitioners by contending that Section 167(1)(a) of the Act states that the office of a director shall become vacant in case he incurs any of the disqualifications specified in Section 164 of the Act. Assuming for the sake of argument, it also encompasses within its scope a disqualification incurred under Section 164(2) of the Act, it would mean that such a director would vacate his office from the defaulting company also, which would lead to a situation where the entire Board of Directors would have to vacate office resulting in the company not having any Board at all! In this context, my attention was drawn to clauses (b) to (h) of Section 167(1) of the Act, wherein even without incurring a disqualification, the office of the director would become vacant for the reasons, such as, on account of the absence of the director 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; if he acts in contravention of the provisions of Section 184 of the Act relating to entering into contracts or arrangements in which he is directly or indirectly interested; if 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 of the Act; if he becomes disqualified by an order of a court or the Tribunal; he is convicted by a court for 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); he is removed in pursuance of the provisions of the Act; 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. That, clauses (b) to (h) of Section 167(1) of the Act deal with the conduct of a director in the discharge of his duties as a director of the Board of Directors whereas Clause (a) of Section 167(1) deals with incurring a disqualification specified in Section 164 of the Act. It was contended on behalf of the petitioners that under Clauses (b) to (h) of Section 167(1) of the Act, a director would vacate his office as a director only from the Board of Directors of that company in which his conduct contravenes or comes within the scope and ambit of clauses (b) to (h). But, under clause (a) of Section 167(1)(a) of the Act, the director would vacate his office if he incurs any of the disqualifications specified in Section 164 of the Act in respect of all companies where he is a director. But, under Section 167(1)(b) to (h) of the Act, he would vacate office as a director of that company only which has defaulted under Section 164(2) of the Act. That there is also a distinction between Section 164(1) and (2) of the Act. Under Section 167(1)(a) of the Act, if the director has to vacate office on account of disqualification incurred under Section 164(2) of the Act, it could only be as a director of the company which is in default. But, any disqualification under Section 164(1) of the Act would entail a vacation of office in respect of all companies where he is a director. That, for all the aforesaid reasons, Section 167(1)(a) of the Act is manifestly arbitrary and has to be struck down was the submission.
170. That under the newly inserted proviso to Section 167(1)(a) of the Act (by the Amendment Act, 2017), the director who has incurred disqualification under Section 164(2) of the Act would not vacate his office as Director of the company in default, but would have to vacate the office in all other companies in which he is a director. It was contended that the proviso is manifestly arbitrary, as a director, who does not vacate his office as a director of a defaulting company, cannot vacate the office of the director in all other companies in which he is a director, as there is no nexus between the directorship of a defaulting company and directorship in all other companies, where there is no default. It was contended that by a proviso, a distinction could not have been made, insofar as Section 164(2) of the Act is concerned. That a proviso cannot enlarge the scope of the main provision. That Section 167(1)(a) of the Act does not extend to Section 164(2) at all. In this context, it was contended that the reason as to why Section 167(1)(a) has to be restricted to only disqualification incurred under Section 164(1) of the Act is because a director who is disqualified under Section 164(1)(a) to (h) of the Act cannot continue to remain in office on account of the very nature of the disqualification and hence, Section 167(1)(a) of the Act has to be read only in the context of Section 164(1)(a) to (h) of the Act as such a director would have to vacate office in all companies. This is having regard to the basis or grounds for incurring a disqualification under Sections 164(1)(a) to (h) of the Act, namely on account of the director being declared by a competent court to be of unsound mind; or he is an un-discharged insolvent; or he is adjudged as an insolvent; or he has applied to be adjudged as an insolvent; he is convicted by any court for an offence, etc. But, Section 164(2) of the Act is a disqualification incurred by a director vicariously on account of the company being in default. In such an event, even according to the proviso, he continues to hold office of the director in the defaulting company. It was contended on behalf of the petitioners that, when such a director could continue to hold office in a company which is in default under Section 164(2) of the Act, there is no reason as to why he should vacate office of the director in all other companies in which he is a director, which are not at all in default under Section 164(2) of the Act. In other words, the disqualification under Section 164(1)(a) to (h) of the Act would render a director being disqualified vis-à-vis all companies in which he is holding office of a director and he has to vacate the said office. But, when disqualification is on account of Section 164(2)(a) or (b) of the Act, the same is not in the nature of a disqualification which is “incurred” by a director as under Section 164(1) of the Act, as contended by Sri Prashanth.
171. Therefore, the plausible interpretation suggested by petitioners’ counsel at the Bar is that a director who incurs disqualification on account of Section 164(2) of the Act, does not vacate his office under Section 167(1)(a) of the Act. If so interpreted, Section 167(1)(a) is valid and constitutional, but not otherwise. Further, if Section 167(1)(a) of the Act does not per se take within its ambit Section 164(2) of the Act, then by a proviso, the main provision cannot be enlarged. In other words, it is contended on behalf of the petitioners, while the proviso inserted by the Amendment Act 2017 categorically states that a director who has incurred a disqualification under subsection (2) of Section 164 of the Act, does not vacate the office of the company which is in default, by the same logic, he cannot also vacate the office of a director in all other companies in which he is director.
172. Bearing in mind the aforesaid arguments, it is noted that, under 1956 Act, a disqualification of a director under Section 274(1)(g) which was in respect of public companies did not result in vacation of office of the defaulting company. Therefore, insofar as any disqualification which has occurred under the provision of 1956 Act would not, on the coming into force of 2013 Act, result in vacating the office of the director as Section 167(1)(a) of the Act cannot have a retrospective operation. But, insofar as any disqualification which takes place subsequent to the enforcement of the Act, the same would result in a two-fold consequence. What is stated in Section 164(2) of the Act is a long term consequence. But, the short term consequence is that the director of a defaulting company has to vacate his office as director. In this regard, it has been contended that the vacation of office of a director is per se a harsh consequence and is disproportionate to the object sought to be achieved and therefore, Section 167(1)(a) must be struck down as being arbitrary and being in violation of Articles 14 and 19(1)(g) of the Constitution.
173. However, I do not find that the said provision is arbitrary inasmuch as a director who suffers disqualification as per Section 164(2) of the Act cannot be re-appointed as a director of the defaulting company as well as any other company for a period of five years. The said consequence stems immediately after the company in which a person is a director does not comply with Section 164(2) of the Act. When a director cannot be re-appointed in the defaulting company or in any other company for a period of five years from the date of disqualification, by the same logic, the director cannot be permitted to continue as a director in any other company. The short term effect of the non-compliance of Section 164(2) of the Act by a company is that the director of such a defaulting company would have to vacate his office as a director in all companies where he is a director. The whole object and purpose of such a provision is to ensure that a director of a defaulting company does not continue to hold the office of the director in any company, while at the same time, he is ineligible to be appointed as a director in the defaulting company or in any other company. In other words, when there is ineligibility for a director of a defaulting company to be re-appointed as a director of the defaulting company or appointed as a director of any other company, then by the same logic he cannot be permitted to be continued as a director in the defaulting company or in any other company. The disqualification on account of non-compliance under Section 164(2) of the Act implies that the director is a part of the Board of Directors of a company who has not complied with the requirements of Section 164(2) of the Act. Such a director cannot be permitted to hold the office of a director in any other company also. In other words, the object and purpose of vacating the office of a director of a defaulting company in the defaulting company and in all other companies in which he is a director is in the interest of transparency, probity and protection of share-holders’ rights. It is also in order to achieve greater accountability in corporate governance. For the same reason, it is held that Section 167(1)(a) of the Act is also not unreasonable as it has been made in public interest and is not in violation of Article 19(1)(g) of the Constitution as it is saved under Article 19(6) of the Constitution.
174. The alternative contention of the petitioners is that Section 167(1)(a) of the Act is restricted to a disqualification incurred under Section 164(1)(a) to (h) of the Act and does not refer to a disqualification under Section 164(2) of the Act no doubt is attractive. Such a line of argument is also in consonance with the fact that under Section 283 of the 1956 Act, a director who incurred disqualification under Section 274(1)(g) of the 1956 Act did not have to vacate the office of the director. In fact, on other hand, a reading of Section 283(1)(a) to (l) of the 1956 Act would clearly indicate that the director would have to vacate the office on the grounds mentioned under Section 274(1)(a) to (f) of the 1956 Act, which are almost in pari materia with Section 164(1)(a) to (h) of the Act.
175. Further, it is noted that Section 167(1)(a) of the Act is also distinct from Section 167(1)(b) to (h) of the Act, which deal with the conduct of a director vis-à-vis a company. Therefore, it is deduced by petitioners that Section 167(1)(a) of the Act per se refers to only Section 164(1) of the Act, which are grounds for disqualification personal to a director and which grounds are distinct from Section 164(2). Hence, the latter provision which would not result in the director who has incurred disqualification on account of the default committed by the company to vacate office of the said company or of other companies in which he is a director. It is no doubt true that under Section 167(1)(b) to (h) of the Act, a director has to vacate office on the grounds stated therein, but only from that particular Board of Directors where he is a director and on account of his acts of commission or omission, as the case may be. But, the same is not extended to all other companies in which such a director holds the position of a director. In other words, absenteeism, contravention of the provisions of the Act etc. mentioned under Section 167(1)(b) to (h) of the Act would result in vacating the office of only the Board of Directors of that company in respect of which the misconduct or omission has occurred and not in other companies in which such a director is also holding the office of a director.
176. Section 167(1)(a) of the Act uses the expression “any of the disqualifications specified in Section 164”. On a plain reading of the same, it cannot be restricted to only Section 164(1) of the Act.
177. While holding so, reliance could be placed on the guiding principles of interpretation of statute. One such principle is that the Court is not entitled to ignore words or read words into a provision of an Act, for the meaning is to be found within the four corners of the provision of the Act, as in the instant case. Therefore, while it is not permissible to add words or to fill in a gap or lacuna, on the other hand effort should be made to give meaning to each and every word used by the legislature.
178. Thus, the golden rule of construction is that the words of the statute in the instant case must be first understood in the natural or ordinary sense. Phrases and sentences must be construed according to their complete grammatical meaning, unless that leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary. In other words, the golden rule is that the words of a statute prima facie be given an ordinary meaning. Natural and ordinary meaning of words should not be departed from “unless it can be shown that the legal context in which the words are used requires a different meaning”. Such a meaning cannot be departed from by the judges “in light of their own views as to policy” unless it is shown to adopt a purposive interpretation of the statute. However, if the words used in the statute would result in injustice, absurdity, contradiction or stultification of statutory objective, the language may be modified sufficiently to avoid such disadvantage and no further.
179. Further, when Section 167(1)(a) of the Act is juxtaposed with Section 167(1)(b) to (h) of the Act, it would imply that the disqualification is only in respect of the office of a director of that particular Board of Directors wherein a person has incurred disqualification or has committed acts of omission or commission. While a disqualification incurred by a director under Section 164(1)(a) to (h) would result in that particular director vacating the office in all companies where he is a director. In other words, he has to vacate office of director in the company, which is in default as well as in all other companies as ineligibility to be appointed occurs in all the above companies. Hence, vacating the office of a director who has incurred the disqualification in all other companies where he is a director would arise is the argument of respondents. Therefore, such a director would have to vacate office in the defaulting company as well as in all other companies.
180. If indeed by the proviso, a director who is disqualified, by virtue of Section 164(2) of the Act has to vacate his office in all other companies in which he is a director, other than the defaulting company, then the same logic could have extended to clauses (b) to (h) of Section 167(1) of the Act also, which deal with the misconduct of a director of Board of Directors is the argument proffered on behalf of the petitioners. But, in such a situation, the director who has misconducted himself by being absent or failing to disclose his interest, etc., does not lose his position as a director in all other companies. In other words, he will have to vacate the office of the director in only that company in respect of which he has misconducted himself. Hence, it is contended by petitioners that there can be no vacation of office for a disqualification incurred under Section 164(2) of the Act under Section 167(1)(a) of the Act. If the aforesaid logic is now applied, in a reverse manner, to Section 167(1)(a) of the Act, the director who has incurred a disqualification under Section 164(2) of the Act, under the proviso to Section 167(1)(a) of the Act, while he continues to be in office in the defaulting company, according to the petitioners, for no reason or in the absence of any nexus has to vacate his office in all other companies wherein he is a director. Hence, in the proviso to Section 167(1)(a) of the Act, the words “the office of the director shall become vacant in all the companies” is assailed by the petitioners.
181. But, by insertion of the proviso to Section 167(1)(a) of the Act, a director who has incurred disqualification under Section 164(2) of the Act would continue being in office in the defaulting company, but in all other companies (other than the company which is in default) he would vacate office. It is contended that the insertion of the proviso by an amendment cannot seek to enlarge the scope of the main provision being Section 167(1)(a) of the Act. If really, the disqualification incurred under sub-section (2) of Section 164 of the Act results in vacating the office of the director, then the same ought to have been stated expressly under Section 167(1)(a) of the Act itself, is the contention.
182. But, it is observed that if indeed Section 167(1)(a) of the Act resulted in vacation of all the directors on account of Section 164(2) of the Act, then the company would be bereft of directors on the Board. Such a company cannot function at all! Keeping in mind the said aspect, even under Section 283 of the 1956 Act, disqualification of a director under Section 274(1)(g) of the said Act did not result in vacating of office in the defaulting company. But, Section 167(1)(a) also encompasses Section 164(2) of the Act. The reasons are already stated while considering point No.1 but it can be emphasized further with reference to a judgment of the Hon’ble Supreme Court.
183. The Hon’ble Supreme Court in Narayanan vs. Adjudicating Officer, Securities and Exchange Board of India, [(2013)12 SCC 152], (N.Narayanan) has observed as under:
“30. Responsibility is cast on the Directors to prepare the annual records and reports and those accounts should reflect “a true and fair view”. The over-riding obligation of the Directors is to approve the accounts only if they are satisfied that they give a true and fair view of the profits or loss for the relevant period and the correct financial position of the company.
31. A company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence. This Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602 that:
“45…..A Director may be shown to be placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of a Company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially.”
184. But, in order to avoid an incongruent situation where all the directors of a defaulting company would have to vacate their office, the proviso has been added, by which the directors who incur disqualification on account of Section 164(2) of the Act would not vacate their office in the defaulting company. The proviso to the said extent is clarificatory in nature and would apply to any disqualification that occurs after the enforcement of the Act. Even according to the petitioners, the remedy provided in the proviso to that extent is just and proper.
185. But the further grievance of the petitioners is, by a proviso, the directors who incur disqualification under Section 164(2) of the Act in respect of a defaulting company would have to vacate their office of director in all other companies other than the defaulting company which is manifestly arbitrary. It is contended that while on the one hand, the amendment is made by the insertion of a proviso to set right an absurdity which is justified, the question is as to whether by a proviso, the directors, who are disqualified on the ground of Section 164(2) of the Act in respect of the defaulting company, ought to vacate the office of directors in all other companies where they hold such office.
186. As already noted, such a proviso did not find a place under Section 283 of the 1956 Act, as well as when the Act was enforced. As a result of default committed by the company under Section 164(2) of the Act, the directors of such a company are disqualified. The consequence of such disqualification are mentioned in Section 164(2) of the Act, which could be termed as a long term consequence or effect, but the immediate or the short term effect is vacating of office of a director. While the directors of a company, which is in default under Section 164(2) of the Act, would not vacate their office as per the proviso to Section 167(1)(a) of the Act on account of the said disqualification, nevertheless have to vacate their office as directors in all other companies even where there is no default in those companies. In other words, whether the provision is unreasonable having no nexus to the object sought to be achieved is the pertinent question to be answered.
187. At the outset, it would be relevant to delineate on the scope and object of a proviso to the provision.
(a) The normal function of a proviso is to except something out of the provision or to qualify something enacted therein which, but for the proviso, would be within the purview of the provision. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule. In other words, a proviso qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Further, a proviso cannot be construed as nullifying the enactment or as taking away completely a right conferred by the enactment.
(b) In this regard, learned Author, Justice G.P.Singh has, in “Principles of Statutory Interpretation”, enunciated certain rules collated from judicial precedents. Firstly, a proviso is not to be construed as excluding or adding something by implication i.e., when on a fair construction, the principal provision is clear, a proviso cannot expand or limit it. Secondly, a proviso has to be construed in relation to which it is appended i.e., normally, a proviso does not travel beyond the provision to which it is a proviso. A proviso carves out an exception to the main provision to which it has been enacted as a proviso and to no other. However, if a proviso in a statute does not form part of a section but is itself enacted as a separate section, then it becomes necessary to determine as to which section the proviso is enacted as an exception or qualification. Sometimes, a proviso is used as a guide to construction of the main section. Thirdly, when there are two possible construction of words to be found in the section, the proviso could be looked into to interpret the main section. However, when the main provision is clear, it cannot be watered down by the proviso. Thus, where the main section is not clear, the proviso can be looked into to ascertain the meaning and scope of the main provision.
(c) The proviso should not be so construed as to make it redundant. In certain cases, “the legislative device of the exclusion is adopted only to exclude a part from the whole, which, but for the exclusion, continues to be a part of it”, and words of exclusion are presumed to have some meaning and are not readily recognized as mere surplusage. As a corollary, it is stated that a proviso must be so construed that the main enactment and the proviso should not become redundant or otiose. This is particularly so, where the object of a proviso sometimes is only by way of abundant caution, particularly when the operative words of the enactment are abundantly clear. In other words, the purpose of a proviso in such a case is to remove any doubt. There are also instances where a proviso is in the nature of an independent enactment and not merely, an exception or qualifying what has been stated before. In other words, if the substantive enactment is worded in the form of a proviso, it would be an independent legislative provision concerning different set of circumstances than what is worded before or what is stated before. Sometimes, a proviso is to make a distinction of special cases from the general enactment and to provide it specially.
(d) At this stage, the construction or interpretation of a proviso could be considered. In Ishverlal Thakorelal Almaula vs. Motibhai Nagjibhai [AIR 1966 SC 459], while dealing with the Bombay Tenancy and Agricultural Lands Act, 1948, the Hon’ble Supreme Court held, that a proper function of a proviso is to except or qualify something enacted in the substantive clause, which but for the proviso, would be within that clause. In Kaviraj Pandit Durga Dutt Sharma vs. Navaratna Pharmaceutical Laboratories [AIR 1965 SC 980], while considering proviso to Section 6 of Trade Marks Act, 1940, it was observed that it would not be a reasonable construction for any statute, if a proviso which in terms purports to create an exception and seeks to confer certain special rights on a particular class of cases included in it should be held to be otiose and to have achieved nothing. In Kedarnath Jute Manufacturing Co. Ltd. vs. The Commercial Tax Officer and Others, [AIR 1966 SC 12], it was observed that “the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment or to qualify something enacted therein, which, but for the proviso, would be within it”. [See “Craies” on Statute Law – 6th Edition – P.217]. In this case, the Court was considering Section 5(2) (a) (ii) of Bengal Finance Sales Tax Act, 1941 and Rule 27-A of Bengal Sales Tax Rules. In Dattatraya Govind Mahajan and Others Vs. The State of Maharashtra and another, [AIR 1977 SC 915], a Constitution Bench of the Apex Court, while considering the amendment made to Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961, in the context of Article 31B of the Constitution and the second proviso thereto, reiterated what was stated in Ishverlal’s case, supra. In S.Sundaram Pillai, etc, vs. V.R.Pattabiraman, [AIR 1985 SC 582], while dealing with the scope of a proviso and explanation to sub-section (2) of Section 10 of Tamil Nadu Buildings (Lease and Rent Control) Act, 1960, the Hon’ble Supreme Court held that a proviso may have three separate functions. Normally, a proviso is meant to be an exception to something within the main enactment or qualifying some thing enacted therein which, but for the proviso, would be within the purview of the enactment. In other words, a proviso cannot be torn apart from the main enactment, nor can it be used to nullify or set at naught the real object of the main enactment. Sometimes, a proviso may exceptionally have the effect of a substantive enactment.
(e) After referring to several legal treatises and judgments, the Apex Court held in the above judgment as under:-
“43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes:
(1) qualifying or excepting certain provisions from the main enactment;
(2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable;
(3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision.”
(f) The approach to the construction and interpretation of a proviso are enunciated in the following cases. In M. Pentiah & others vs. Muddala Veeramallappa & others, [AIR 1961 SC 1107], it was observed that while interpreting a section or a proviso, if the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, one should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result. In Superintendent & Remembrancer of Legal Affairs to Govt. of West Bengal vs. Abani Maity, [AIR 1979 SC 1029], the Apex Court observed that the statute is not to be interpreted merely from the lexicographer’s angle. The Court must give effect to the will and inbuilt policy of the Legislature as discernible from the object and scheme of the enactment and the language employed therein. The words in a statute often take their meaning in the context of a statute as a whole. They are, therefore, not to be construed in isolation.
188. The further argument of learned counsel for the petitioners is that the petitioners herein were disqualified on 01.11.2016. On that date, they did not have to vacate office as it was not envisaged under Section 167(1)(a) of the Act. But, by the Amendment Act, 2017, by insertion of a proviso, the petitioners who were disqualified on 01.11.2016 cannot now be forced to vacate the office of director in all other companies in which they are holding the position of directors as the said provision cannot have a retrospective operation.
189. Therefore, it is necessary to understand the operation of the proviso in question and as to whether it has a retrospective operation or a prospective one.
190. It is noted that the amendment to Section 167(1)(a) of the Act by the Amendment Act, 2017 has been with effect from 07.05.2018. However, the disqualification in most of these cases has been with effect from 01.11.2016. The question then is whether the proviso to Section 167(1)(a) of the Act inserted by virtue of the Amendment Act, 2017 can be made applicable to the petitioners herein, in which event, the petitioners who have been disqualified as on 01.11.2016 would not vacate the office of the directors in the defaulting company, but would vacate the office of director in all other companies. In other words, whether the proviso to Section 167(1)(a) of the Act has a retrospective operation? In this regard, the contention of the learned counsel for the petitioners is that the said proviso cannot be construed to have retrospective operation so as to be applicable to the petitioners herein, but it operates only prospectively, in which case, the petitioners would not have to vacate their office either in the defaulting company or in any other company.
191. This argument is countered by learned ASG by contending that the proviso inserted by virtue of the Amendment Act, 2017 is only clarificatory in nature and therefore, it has retrospective operation by which the petitioners herein would continue as directors of the defaulting company but they would vacate office in all other companies. He submitted that the said position is envisaged even under Section 167(1)(a) of the Act and therefore, the proviso only clarifies that the directors of the defaulting company would not vacate office in the defaulting company in order to ensure that the defaulting company is not left without any director.
192. By way of reply, learned counsel for the petitioners relied upon the following decisions touching upon the rule against retrospectivity in the context of an amendment made to a provision:
(a) In Union of India vs. Tushar Ranjan Mohanty, [(1994) 5 SCC 450], the Hon’ble Supreme Court declared that when an amendment has a retrospective operation and takes away vested rights, it is unreasonable, arbitrary and violative of Article 14 of the Constitution.
(b) Similarly, in D. Aggarwal vs. State of U.P., [(1987) 3 SCC 622], it was held that amendment to Rules which have a retrospective operation and take away the vested rights are arbitrary and not reasonable and such retrospective amendments are subject to judicial scrutiny.
(c) In S.Yadav vs. State of U.P., [(2011) 6 SCC 570], it was observed that a vested right is a right independent of any contingency, which can arise from a contract, statute or by operation of law. A vested right can be taken away only if the law specifically or by necessary implication provides for such a course.
(d) Reference could also be made to Railway Board Vs. C.R.Rangadhamaiah, (1997) 6 SCC 623, wherein it has been held that an amendment having retrospective operation which has the effect of taking away a benefit already available to the employee under the existing rule is arbitrary, discriminatory and violative of the rights guaranteed under Articles 14 and 16 of the Constitution.”
(e) Similarly in Tulsi Das V. Government of A.P., (2003) 1 SCC 364, it has been held that wherever the amendment purports to restore the status quo ante for the past period taking away the benefits already available, accrued and acquired by them, the law may not be valid.
193. But, I find much force in the argument of learned ASG that the proviso is only clarificatory in nature as Section 167(1)(a) of the Act categorically states that the office of the director shall become vacant in case he incurs “any of the disqualification specified in Section 164 of the Act”. The aforesaid expression cannot be read down to refer only to those disqualifications under Section 164(1)(a) to (h) of the Act. It even incorporates a disqualification incurred under Section 164(2) as well as (3) of the Act. Thus, 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 higher degree of transparency and accountability in corporate governance so as to ensure control over the companies in the interest of share-holders and the public in general and in the interest of Indian economy. Therefore, I do not think that it could be contended by the petitioners that Section 167(1)(a) of the Act did not envisage vacation of office of a director under Section 164(2) of the Act.
194. However, the submission of the learned counsel for the petitioners that Section 167(1)(a) of the Act did not specifically refer to vacating of office of a director of a defaulting company in all other companies in which he is a director and that has been incorporated by a proviso which cannot be applied to the petitioners herein retrospectively, as the said proviso has been enforced from May 2018 and the petitioners have all been disqualified prior to that date requires consideration.
195. I find considerable force in the argument of petitioners’ counsel as, on 01.11.2016, when the petitioners were disqualified, while they had to vacate the office of the director, it necessarily referred to the defaulting company under Section 164(2) of the Act. But, realizing the fact that if all the directors in the defaulting company had to vacate office, then such Board of Directors would be bereft of directors and would lead to an absurd situation, the proviso was inserted to the effect that a director of a defaulting company shall not vacate office of the director in the defaulting company. Therefore, the said portion of the proviso could be construed to be clarificatory in nature and therefore, would have a retrospective effect.
196. But, while saying so, the proviso also states that a director of a defaulting company would vacate office of the director in all other companies in which he is a director. The same was not envisaged under Section 167(1)(a) of the Act prior to insertion of the proviso, but by the insertion of the proviso such an immediate consequence is also envisaged. It has also been held above that such a consequence cannot be held to be arbitrary or in violation of Article 14 and 19(1) of the Constitution, but the proviso having come into force on 07th May 2018 cannot have a retrospective operation so as to affect the petitioners herein who were all disqualified on 01.11.2016 i.e., prior to 07th May 2018. That, on account of such disqualification, they cannot be made to vacate the office of the director in all other companies in which they are directors while continuing as a director in the defaulting company. That part of the proviso has to be construed to be prospective and it would imply that the petitioners herein would continue as directors of the defaulting company and would not have to vacate office of the director in all other companies in which they are directors. The proviso would therefore apply only to those directors who sustain disqualification subsequent to 07.05.2018 when the proviso was introduced. Consequently, under Section 167(1)(a) of the Act, a director of a defaulting company who has been disqualified prior to 07.05.2018 would not have to vacate his office of such a company or in any other company. Further, the petitioners who were also protected by the interim order passed by this Court would continue to be the directors of the defaulting company till their term of office ends.
197. In the result, point No.6 is answered by holding that the proviso to Section 167(1)(a) of the Act is not ultra vires Articles 14 and 19(1)(g) of the Constitution. The words “provided that where he incurs disqualification under sub-section (2) of Section 164, the office of the director shall become vacant …………. , other than the company which is in default under that sub-section” being clarificatory in nature has retrospective operation, while the words “in all the companies” being introduced for the first time by way of proviso, pursuant to Amendment Act, 2017, has prospective operation and the proviso would apply only to those directors who sustain a disqualification pursuant to 07.05.2018. While saying so, the doctrine of severability as applicable to interpretation of statutes is applied.
198. In view of the fact that under the proviso to Section 167(1)(a) of the Act, the director of a defaulting company continues to hold the office of Director despite disqualification, his DIN cannot be cancelled. On the issue of cancellation of DIN, reference was made to Companies (Appointment and Qualification of Directors) Rules, 2014. Under Rule 14, the consequences of disqualification of directors under Section 164(2) of the Act are mentioned. That every director shall inform to the company concerned about his disqualification under sub-section (2) of Section 164 of the Act in Form DIR-8 before he is appointed or re-appointed. Further, 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 address of all the directors of the Company during the relevant financial year.
199. That cancellation or surrender or deactivation of DIN is stipulated in Rule 11. It is contended that Rule 11 does not permit cancellation of or deactivation of DIN on account of disqualification of a director under Section 164(2) of the Act at all. That DIN could be cancelled on account of the death of a director or a director being declared as a person of unsound mind by a competent Court or being adjudicated as a insolvent or for other reasons, but, not for suffering a disqualification under Section 164(2) of the Act.
200. I find sufficient force in the contention of the learned counsel for the petitioners in that regard. Hence, DIN cannot be cancelled on account of a disqualification sustained under Section 164(2) of the Act, but at the same time the company must comply with filing Form DIR-9. Point Nos.5 and 6 are accordingly answered.
Part-12
Judgments of Madras and Gujarat High Courts:
201. At this stage, it is necessary to refer to the judgments of Madras High Court and Gujarat High Court.
202. The Madras High Court in Bhagavan Das Dhananjaya Das vs. Union of India & Others, [(2018) 210 Comp. Cases 151 (Mad), at paragraphs 29 & 30 of the judgment has summarized its conclusions as under:
“ 29. In fine,
(a) When the New Act 2013 came into effect from 1.4.2014, the second respondent herein has wrongly given retrospective effect and erroneously disqualified the petitioner-directors from 1.11.2016 itself before the deadline commenced wrongly fixing the first financial year from 1.4.2013 to 31.3.2014.
(b) By virtue of the new Section 164(2)(a) of the 2013 Act using the expression for any continuous period of three financial years’ and in the light of Section 2(41) defining ‘financial year’ as well as their own General Circular No.08/14 dated 4.4.2014, the first financial year would be from 1.4.2014 to 31.3.2015, the second financial year would be from 1.4.2015 to 31.3.2016 and the third financial year would be from 1.4.2016 to 31.3.2017, whereas the second respondent clearly admitted in paras 15 and 22 of the counter affidavit that the default of filing statutory returns for the financial years commenced from 2013-14, 2014-15 and 2015-16 i.e., one year before the Act 2013 came into force. This is the basic incurable legal infirmity that vitiates the entire impugned proceedings.
(c) By virtue of the first proviso to Section 96(1) of the 2013 Act, Annual General Meeting for the year ending on 31.3.2017 can be held within six months from the closing of financial year i.e., 30.9.2017, additionally in the light of Section 164(2)(a) referring to ‘annual return’ and ‘financial statement’, the time limit to file annual return under Section 92(4) of 2013 Act is sixty days from Annual General Meeting or the last date on which Annual General Meeting ought to have been held, hence, the time limit to file balance sheet under Section 137(1) of the 2013 Act is again thirty days from Annual General Meeting. Therefore, in view of these legal position, the disqualification could get triggered off only on or after 30.10.2017 only, if any company fails to file annual forms for three financial years. Importantly, it is to be borne in mind that even beyond that time limit, additional time limit of 270 days was available by virtue of the then first proviso to Section 403.
(d) Although there is no statute or provision expressly spelling out the observance of the principles of natural justice against disqualification of directors, as the legal right of the petitioners to continue as director in other company or to be reappointed in any other company, which are scrupulously following the provisions of the Companies Act, have been deprived of, the principles of natural justice should have been adhered to by issuing proper notice to all the directors.
(e) When the disqualification clause was not attracted to the directors of private companies under the old Act of 1956, the same cannot be allowed to take a retrospective effect under the new Act, when the provision of Section 164(2)(a) came into force only from 1.4.2014. This is also for one more reason that the failure to file the annual returns has been adequately taken care of by the penal provision under Section, making it clear that 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. Again under Section 137, the failure to file the financial statement visits punishment with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. Further, under Section 441(4), the default in filing returns or accounts compoundable by Tribunal or Regional Director or by any officer authorized by the Central Government.
(f) In view of the above legal position, when the default in filing the accounts or returns are made as compoundable offence, Section 164(2)(a) providing the disqualification of director of private company not only in the defaulting company, but also from other company in which the petitioner is a director, diligently and meticulously following every provision of law, is certainly disproportionate to the lapse, as it is only regulatory in nature, because, notice to be sent under Section 248(1) of the Companies Act, 2013 by the Registrar of Companies for striking off the name of the company from the Registrar of Companies on the premise that the company has not been carrying on any business for a period of two financial years, is different from the disqualification under Section 164(2)(a), inasmuch as a company can be struck off, if the company has not been carrying on any business for a period of two financial years, whereas for disqualification, the criteria is three financial years. Therefore, in my considered opinion, although the petitioners have not challenged the provision of Section 164(2)(a), as the respondents have not followed the principles of natural justice, extinguishing the corporate life of the directors to the extent of disqualifying them to hold the directorship in the other companies, the said provision is liable to be read down, hence, Section 164(2)(a) is read down to the extent it disqualifies the directors in other companies which are scrupulously following the requirements of law, making it clear that no directors in other companies can be disqualified without prior notice.
(g) However, it is made clear beyond any pale of doubt that the mischief of removal of the names of the companies by the Registrar of Companies and the disqualification of the directors in the defaulting company will go together, as it is inseparable, and the Registrar of Companies need not give fresh notice to the directors for their disqualification from the dormant company, if there is a failure to file the financial statement or annual return for any continuous period of three financial years as per Section 164(2)(a).
30. For all the aforementioned reasons, the impugned orders are set aside and the writ petitions shall stand allowed. Consequently, all the connected writ miscellaneous petitions are closed. However, there shall be no order as to costs.”
203. I respectfully agree with the summary of conclusions at paragraph (a), (b) and (e). I do not wish to make any observations regarding paragraphs (c) and (g). However, I respectfully disagree with the conclusions at paragraph (d) in view of my conclusion on point No.2 and (f) in view of my conclusion on point Nos.1 and 2 above.
204. The judgment of the Gujarat High Court in the case of Gaurang Balavantlal Shah S/o. Balavantlal Shah vs. Union of India, [Spl. Civil Application Nol.22435/2017 disposed of on 18.12.2018] is based on the challenge made to the action of respondent No.1 therein-Ministry of Corporate Affairs, Union of India, in publishing the list dated 12.09.2017 of directors associated with “Struck off Companies” under Section 248 of the Companies Act, 2013 on the website of the Ministry of Corporate Affairs, Government of India to the extent, the said list shows the status of the petitioners as “disqualified” Directors. At paragraph Nos.33 to 35 of the judgment, Gujarat High Court has observed as under:
“33. The upshot of the aforesaid discussion and findings may be summarized as under:-
a. Section 164(2) of the Act of 2013, which had come into force from 1.1.2014 would have prospective and not retrospective effect.
b. The defaults contemplated under Section 164(2)(a) with regard to non-filing of financial statements or annual returns for any continuous period of three financial years would be the defaults to be counted from the financial year 2014-15 only and not 2013-14.
c. The respondents could not have treated the Directors as disqualified/ ineligible for a period of five years from 1.11.2016 to 1.11.2021, while publishing the impugned list under Section 248 of the Act of 2013.
d. Even if the Registrar removes the name of a company from the register of companies, and even if such company would stand dissolved under Section 248, the statutory liabilities/obligations of such struck of company and its Directors would still remain to be discharged, in view of Section 250 of the said Act of 2013.
e. The respondents could not have deactivated the DINs allotted to the Directors under Section 154 of the said Act, except under the circumstances mentioned in Rule 11 of the said Rules of 2014.
34. In view of the above, the impugned list dated 12.9.2017 of the Directors associated with the “struck off companies” under Section 248 published by the respondent No.1 is quashed and set aside. The respondents are directed to activate the respective Director Identification Numbers of the petitioners forthwith, if not activated so far. However, it is clarified that the respondents shall be at liberty to take legal action against the petitioners for any statutory default or non-compliance, in accordance with law.
35. All the petitions stand allowed accordingly.”
205. I respectfully agree with paragraphs (i), (ii), (iii), (v), while Point No.(iv) is not relevant for the purpose of these cases. However, I have observed that Section 164(2)(a) of the Act has retro-active effect.
206. The only other aspect that remains for consideration is with regard to those writ petitions which have been filed by petitioners assailing the order passed under Section 248 of the Act, as a result of which the companies have been struck off from the list of Companies. Any challenge to the said order could be made under Section 252 of the Act. In the circumstances, those writ petitions are entertained reserving liberty to the petitioners therein to approach the National Company Law Tribunal (NCLT). It is further clarified by following the judgment of the Gujarat High Court in Gaurang Balavantlal Shah S/o. Balavantlal Shah vs. Union of India referred to above, that in striking off the companies under Section 248 of the Act would not result in an automatic disqualification of the directors of such companies under Section 164(2)(a) of the Act.
207. Before parting, I wish to observe that the underlining theme in these cases is about transparent corporate governance, the importance of which is not just in its form, but also of substance. Legislation can, to some extent, impose accountability but the substance of it must be ingrained in all persons in the corporate world. I would, in fact, state that every citizen in all walks of life must endeavour to bring in transparency and accountability in his / her work if our country, India or Bharat is to endure. Thus, the time has come for us citizens, to transform ourselves ethically by erasing all dark spots in our minds and hearts and to work towards a resurgent Nation. Article 51A of the Constitution of India which deals with fundamental duties states that, it shall be the duty of every citizen of India to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavour and achievement, but by ethical means. The Act and the amendments made to it are only small steps taken towards that goal. It is only when a strict implementation of the same by all the stake-holders in the corporate world as well as the authorities concerned is made, that the aims and objects of the legislation could be achieved.
Part-13
Summary of Conclusions:
208. In view of the aforesaid discussion, I have arrived at the following conclusions:
(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.
Re. Point No.7:
209. In the result, I pass the following order:
ORDER
(i) Where the disqualification of the petitioners is based by taking into consideration any financial year “prior to 01.04.2014 as well as subsequent thereto” while reckoning continuous period of three financial years under Section 164(2)(a) of the Act, irrespective of whether the petitioners are directors of public companies or private companies, such a disqualification being bad in law, the Writ Petitions are allowed and the impugned List is quashed to that extent only;
(ii) If the disqualification of the directors is based by taking into consideration any financial year prior to 01.04.2014 only i.e., the disqualification has occurred under the provisions of the 1956 Act in respect of the public companies, the writ petitions are dismissed;
(iii) If the disqualification of the directors is based by taking into consideration three continuous financial years subsequent to 01.04.2014, irrespective of whether the petitioners are directors of public companies or private companies, they stand disqualified under the Act;
(iv) Where the disqualification of the petitioners is based by taking into consideration any financial year prior to 01.04.2014 in respect of private companies, such disqualification being bad in law, the writ petitions are allowed to the aforesaid extent only;
(v) The Writ Petitions, wherein the challenge is also made to the vires of Section 164(2)(a), and/or 167(1)(a) and/or proviso to Section 167(1)(a) of the Act, are dismissed to the aforesaid extent;
(vi) The respondents are directed to restore the DIN of those directors whose disqualification has been quashed by this Court;
(vii) Those petitioners who have challenged only the striking off of the companies in which they are directors have an alternative remedy of filing a proceeding before National Company Law Tribunal (NCLT) under Section 252 of the Companies Act, 2013, which provides for an appeal to be filed within a period of three years from the date of passing of the order dissolving the company under Section 248 of the Act. Hence, those Writ Petitions are dismissed reserving liberty to those petitioners who are aggrieved by the dissolution of the companies under Section 248 of the Act (Struck off companies) to approach NCLT, if so advised;
(viii) Parties to bear their own costs.
Interim orders passed in these writ petitions stand vacated. All pending applications stand disposed.
The appreciation for the assistance rendered by the learned senior counsel and the learned counsel for the petitioners, learned ASG and other counsel for Union of India and other respondents is placed on record.
