The Karnataka High Court (“HC”) had passed a common order on June 12, 2019, thereby disposing around 400 writ petitions and held that the time frame prior to April 1, 2014 cannot be taken into consideration for disqualification of a director as per the provisions of Section 164(2)(a) of the Companies Act 2013 (“Act”).
FACTS
The Ministry of Corporate Affairs had, on September 6, 2017 published a list, disqualifying nearly three lakh directors under Section 164(2)(a) and Section 167(1)(a) (“Provisions”) of the Act (“List”) for failure to file annual returns and financial statements (“Disclosures”) for a period of three consecutive years.
The aggrieved parties were disqualified as directors for a period of five years from the date on which the said company failed to file the above said Disclosures. Such aggrieved parties i.e., the aggrieved directors had filed writ petitions against the List.
Besides, the insertion of the proviso to Section 167(1)(a) of the Act on May 7, 2018 (i.e. during the pendency of most of the writ petitions filed by the aggrieved directors) had resulted in the vacation of the office of such aggrieved directors, as director in all other respective companies where they were functioning as directors, even though there was no default in filing of Disclosure required under Section 164(2) of the Act, by the other respective companies. The proviso under Section 167(1)(a) of the Act stated that – where a director incurred disqualification under Section 164(2), the office of the director would become vacant in all companies, other than the company which is in default under Section 164(2) of the Act.
POINT OF CONTENTION
The aggrieved disqualified directors, had filed writ petitions to:
- challenge the legality of the said List; and
- challenge the constitutionality of Provisions of the Act.
ARGUMENTS
The petitioners stated that when the List was published, the period for filing annual returns and statements did not end after April 1, 2014 (date on which Act came in force). The Annual General Meeting (“AGM”) could be held within six months of the closing of the financial year. The annual returns could be filed within 60 days of the AGM and financial statements could be filed within 30 days of the date of AGM. Hence, for filing the Disclosures, the directors had time till November 30, 2017 and October 30, 2017, respectively. However, the list of disqualified directors was published on September 12, 2017.
HELD
Justice B.V. Nagarathna, in his verdict stated that the disqualification of directors of private companies under Section 164(2)(a) wherein, a continuous time frame of three years prior to April 1, 2014 is taken for consideration, is illegal. The HC observed that under the earlier law, i.e. Companies Act, 1956, such norms for disqualification of directors of a private company did not exist; and the same were only introduced under the Act in 2013 for the first time.
However, the HC further held that, in case of disqualification of directors from a public company, wherein a continuous time frame of three years prior to April 1, 2014 is taken for consideration, disqualification as a director of any company for a period of five years would be applicable to such individuals under the Act on account of the retroactive operation of Section 164(2) of the Act.
In cases where the disqualification of the directors from a company (public or private) is based on a continuous time frame of three financial years subsequent to April 1, 2014, such disqualifications are upheld under the new Act.
The HC vide its verdict, directed the Registrar of Companies to restore the Director Identification Number of such directors whose disqualification had been quashed.
The HC also upheld the legal and constitutional validity of the Provisions under the Act.
CONCLUSION
This verdict will serve as a relief for all directors who were disqualified pursuant to the List, and reinstating such directors as directors in their respective companies,
as per HC’s interpretation stated above, will ensure that no director faces any such disqualification in future. Disclaimer: This article is meant for information purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Pioneer Legal does not intend to advertise its service through this article.
