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Companies Act Provisions on Disqualification and Vacation of Directorship can’t be applied Retrospectively: Delhi HC [Read Judgment]

Directors’ Disqualification - Taxscan

In a recent case, the Delhi High Court has held that the operation of the provisos to Section 164(2) ( Disqualification ) and Section 167(1)(a) (Vacation of Directorship) of the Companies Act cannot be read to operate retrospectively.

The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies.  Such being the nature of the amendment, the same cannot be applied retrospectively.

The petitioners in the present petitions were directors in various companies. By way of the impugned list, the petitioners have been disqualified from being appointed/reappointed as directors for a period of five years under Section 164(2)(a) of the Act. Further, the names of some of the companies, in which the petitioners were holding the office of directors, have been struck off from the Register of Companies. The impugned action was taken against the petitioners on account of default on the part of the companies in not filing the annual returns for the preceding financial years.

The petitioners have challenged the impugned list, essentially, on four grounds. First, the action of the respondents in disqualifying the petitioners is arbitrary inasmuch as the petitioners were not afforded an opportunity to be heard. The petitioners contend that the said action is in violation of principles of natural justice. Second, Section 164 of the Act, which mandates the disqualification of directors, being penal in nature, could not be applied retrospectively.

Third, that on the plain interpretation of Section 164(2)(a) of the Act, the petitioners cannot be disqualified to act as directors of the companies, which have not defaulted in filing their annual returns and financial statements for a period of three consecutive years. And fourth, that the defaults under Section 164(2) of the Act result in the directors being disqualified from being appointed/re-appointed as directors but does not result in them demitting office as directors.

The respondents dispute the aforesaid contentions and contend that sufficient opportunity had been provided to the petitioners to correct the default of not filing the statutory documents.  The petitioners were appointed as directors in various companies in the period of 2005-2010.

In view of the above, this Court finds no infirmity with the impugned list to the extent it includes the names of the petitioners as directors disqualified under Section 164(2) of the Act. This Court also rejects the contention in the view of the judgment in Gaurang Balvantlal Shah v Union of India that the impugned list is void as having been drawn up in violation of the principles of natural justice.

The Scheme of Section 164(2) and Section 167(1)(a) of the Act was materially amended by the Companies Amendment Act, 2018 by the introduction of the provisos to Section 164(2) and Section 167(1)(a) of the Act with effect from 07.05.2018.  All directors who incur disqualification under Section 164(2) of the Act after the said date, would also cease to be directors in other companies (other than the defaulting company) on incurring such disqualification. However, the operation of the provisos to Section 164(2) and Section 167(1)(a) of the Act cannot be read to operate retrospectively.

The proviso to Section 167(1) of the Companies Act imposes a punitive measure on directors of defaulting companies.  Such being the nature of the amendment, the same cannot be applied retrospectively. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018.

However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act.  It is clarified that the petitioners would continue to be liable to pay penalties as prescribed under the Act. The petitions are disposed of in the aforesaid terms.

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