Introduction
After the implementation of Companies Act, 2013, Ministry of Corporate Affairs have been knocking down the directors by the virtue of Section 164. Aggrieved directors have been knocking the doors of various High Courts and even the Apex Court of the country. The bone of contention in Section 164 lies in regards to its implementation, whether the section is retrospective or prospective in nature. There have been various judicial pronouncements in regards to the same, but various courts tend to differ as to applicability should be prospective or retrospective. Under the old regime, Section 274 (1) (g) of Companies Act 1956, which deals with disqualification of directors, has reigned over public companies. However, the corresponding provision under the new regime, Section 164 (2) of the Act 2013 extended its arms to engulf both private and public companies. It seems Directors are victimized u/s-164(2) for default of corporate, disregarding the facts of separate legal entities attributing a Single Sweep u/s 164 for the disqualification of directors.
The author
here attempts
to
discuss
the applicability of
the
Section
164(2)
of
Companies
Act, 2013. Firstly, the article discusses
the disqualification of director under the Section
164(2)
of the Companies
Act, 2013 (hereinafter referred to as 'CA,2013'). Secondly the articles discuss the corresponding section of
164(2) of CA,2013 in the former Companies Act of 1956 (hereinafter referred to as the 'Former act') that
is section 274(1)(g). Thirdly it
discusses the
judicial
pronouncements
in the
context of applicability of
section 164(2) of CA,2013 and in the fourth part article is concluded.
New Regime: Companies Act
2013
♦ Section 164(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."1
♦ Interpretation
According to Sub-Section (2) of Section 164 there
are
two conditions
owing to
which
directors
of the
company stands disqualified, these two conditions are:
1.
Non-filing of financial statements and
annual return for any continuous
period of 3 financial years;
2. Failure
to repay interest on deposit/
debentures or repayment of deposit/debentures and such
failure continues for a period
of 1
year or more.
If any of the
two situations arises, all the directors of
the company are disqualified from re-appointment as directors
in the same company and also shall not
be liable to be appointed in any other company and have to vacate their office.
The stringent section also clearly marks out the tenure of five
years for such disqualification.
Former Regime: Companies Act 1956
Section 164(2) of the CA,2013, corresponds to
the section 274(1)(g) of Former Act which reads as follows:
♦ Section 274(1)(g)
"274. DISQUALIFICATIONS OF DIRECTORS.
(1) A person shall
not be capable of being
appointed director of a company, if -
(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 Page 137 of 332
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)."3
From the aforesaid provisions
one
can
infer
that
Section
164(2)4 correspond to Section 274(1)(g)5 of Former Act with the notable difference that the directors of the private companies are not covered under the grounds
of disqualification
under section 274(1)(g)6 whereas section
164(2)7 does not differentiate between the private or
the public companies.
Judicial
Pronouncements
The question lies whether, in computing the consecutive three-year period for purposes of section 164(2)
of the
CA,
2013, the financial year
2013-14 ending on
31
March 2014
or the
financial years prior to
2013-14 can be taken into account because according to a 26 March 2014 notification from the Ministry Of Corporate Affairs, section 164 of the Act
(along
with many other provisions)
came into force from 1 April 2014,
i.e.
the
start
of fiscal year
2014-15. The Companies Act itself came
into effect
from
12 September 2013 with some, not all, provisions.
Hence, it is clear that any disqualification arising due to the failure of filing returns or statements before
2014-15 would mean that act is
being applied retrospectively which would be against
the notifications
sought out by
the Ministry of
Corporate Affairs.
♦ Allahabad
High Court
The division bench of Justice Sudhir Agarwal
and Rajeev Misra
in the case of Jai
Shankar Agrahari v Union Of India & Anr. said that owing to the provisions of Section 164(2)(a)
of
CA, 2013 'Financial Year' would commence from 2014-15 and not prior
to that.
"46. A perusal of Section 2(41) of Act, 2013 shows that for a provision, which came into force
on 01.04.2014, 'Financial Year' which ended on 31.03.2014 will not be relevant, inasmuch as, disqualification
under
Section
164(2)(a) of
Act, 2013 is
failure
of submission of
Financial Statements or
Annual
Returns for
any continuous period
of three
Financial
Years
and this provision, which is adverse and penal in nature, cannot be made applicable to a Financial Year which had already lapsed and when there was no such condition attracting any disqualification
on an
event
as provided under Section 164(2) (a)
of Act, 2013."
held in
the judgement delivered by
Justice Sudhir
Agarwal on 16th January
2020.
Observations made by the Allahabad High Court were same as the judgements delivered by the
Gujarat, Magras, Karnataka and Madhya
Pradesh
High court whereby the disqualification
of the
director
of the
company
by
the virtue of
the provision
of Section 164(2) of
the
CA,
2013 would consider the financial year
from 2014-15 and not prior to
that.
♦ Delhi High Court
In a single bench judgement delivered by Justice Vibhu Bakhru on 4th November 2019 in the
case of Mukut Pathak & Ors. vs Union Of India And Anr.9, in reference to the Directors disqualification under
section 164(2) of
the
CA,2013 it was
held that the
although the provisions of said section is prospective in nature but the court finds no merit in passing over the defaults prior
to the applicability of the said section.
"46. The penal consequences of not filing returns for three consecutive financial years would be attracted on section 164 of the Act coming into force. Section 164 of the Act came into force on 01.04.2014
and thus, the failure of
a
company/its
directors
to
file annual returns
(for three
financial years) thereafter would
result
in the directors incurring the
disqualification
as specified under Section 164(2) of the Act. It is of little consequence that such defaults relate to
filing annual returns that pertain to a period prior to 01.04.2014. Undisputedly, the concerned companies (and vicariously the petitioners) were obliged to file the financial statements for the
financial
year 2013-14 after
01.04.2014. As
noticed above, the
failure
to do
so
would
be
in violation of Section 137(2) of the Act and this Court finds no reason why such defaults should
not be considered for the purposes of Section 164 of the Act. Merely, because the returns to be filed pertain to a period prior to 01.04.2014, is of no relevance considering that the default in doing
so
has
occurred
after the provisions
of section 164
of the
act
had
become applicable." held in the judgement delivered by Justice Vibhu Bakhru.
Delhi High court appropriated contrast
and converse decisions
of the Karnataka, Gujarat and
Madras High
Court while considering the above-mentioned case. The contentions of the petitioners that are of disqualified directors
under
the provision
of Section 164(2) were rejected on
the grounds
of being
unmerited.
♦ Karnataka High Court
Justice BV Nagarathana in
the case of Yashodhara Shroff vs Union Of India10 on 12th June 2019 held that for default under the Section 164(2) of the CA,2013, no period antecedent to the 1st April
2014 should be considered and hence the provisions of Section
164(2) should be treated in prospective order.
"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." held in the judgement by Justice BV Nagarathana.
♦ Gujarat High Court
While deciding
the
matter of Gaurang
Balvant
Lal Shah
v. Union Of India11 on 18th December 2018 Justice Bela
M Trivedi held that the Section
164(2) will not be applicable in retrospective manner because if the provision is
to be applicable in the retrospective manner
then it should be explicitly mentioned in the statue moreover the court observed that there is
no corresponding provision in the Former Act to disqualify directors of private company on the
account of
not filing the statements or
returns.
"23.So far as the issue involved in the present petitions is concerned, as discussed earlier, no disqualification
was
attached
to
the directors
of private companies for not filing
the annual returns and the financial statements by the concerned companies under the Act of 1956. Such
provision
of disqualification for
the director
of a company – public or
private company, has been incorporated for the first time in Section 164(2) of the Act of 2013. Such being the case, the
said
provision
has
to
be
construed
as having prospective
effect.
If
retrospective
effect
is given
to it, that would
destroy,
alter and
affect the
right of the
Directors
of private company existing under the Act of 1956." held in the judgement authored by
Justice Bela M Trivedi.
♦ Madras High Court
In the case of Bhagavan Das Dhananjaya Das vs Union Of India12 Justice T Raja on 3rd
August, 2018 set aside the list of 35,000 disqualified directors pertaining to the financial years
2013-14, 2014-15, 2015-16 as the provisions of section 164(2)(a) are applicable to the
defaulters starting from the financial year
of
2014-15.
"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)
defini "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
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."
held
by
Justice T Raja
in the
judgement.
Hence, Madras High Court has cleared the position of Section 164(2) and sought out that the provisions
of
this section would be applicable in prospective manner as notified by the Ministry of Corporate Affairs
itself.
Conclusion
From the above discussion it is clear that only the Delhi High Court is of opposing view as compared to
the
High Courts of Gujarat, Allahabad, Karnataka, and Madras in implementation
of Section
164(2) of
CA,2013, moreover case for the same question lies pending in the Supreme Court as of now.
If the
said section is
applied retrospectively then
it would
be
ultra
vires
to
the
Article
20 of
the Constitution
of India whereby a
person
cannot be convicted for the offence, he committed under a
law
was not in force at such point of time. It reads as follows:
"(1) No person shall be convicted of any offence except for violation of the law in force at
the
time
of the commission of
the
act
charged
as an
offence,
nor
be
subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence"
Moreover, in
the
case
of Govind Das
and others v. Income
Tax
Officer and
another13 The Supreme
Court
concluded that
the retrospective
operation shouldn't
be
applied to
a
statute so as
to affect, alter or destroy an existing right or create a replacement liability or obligation unless that term of the
statute expressly so
provides
or necessarily
requires
it. Therefore, the
actions of
the
Registrar of
Companies of
disqualifying the directors would be deemed as unconstitutional and arbitrary in nature.
It is
also pertinent to note that
the Ministry of Corporate Affairs vide its circular dated 4th
April
2014 had given the clarification in regard to the financial year before 1st April 2014 to be administered by the
Former Act whereas on or
after 1st April 2014, will be represented by
CA, 2013. The relevant excerpt from the circular is given hereby:
"Although the position
in this
behalf
is quite clear,
to
make things
absolutely
clear
it is
hereby
notified that
the
financial statements (and
documents
required to
be attached thereto),
auditors
report
and
Board
report
in respect
of financial
years
that
commenced earlier than 1st
April, 2014
shall be governed by the relevant provisions/ Schedules/ rules of the Companies Act, 1956 and that in respect
of financial years commencing on
or after 1st April, 2014, the provisions of the new Act shall apply."
On perusing the aforementioned excerpt from the circular, it is evident that there is no arrangement in
the CA, 2013 to disqualify the director for the financial related year 2013-14 for a period secured by the
Former Act. Further, the CA, 2013 should be perused prospectively or else the provisions will seek to be unconstitutional.
Now it is
for the Supreme Court to
determine the
applicability
of
the section 164(2) and
clear
the ambiguity and vulnerability of the CA,2013 that influences the large score of the Corporate Sector.
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