The Supreme Court has shown a preliminary agreement, prima facie with the Allahabad High Court’s ruling that Section 164(2) of the Companies Act 2013, which mandates the disqualification of directors for five years due to the non-filing of balance sheets and annual returns for three consecutive financial years, does not apply retrospectively to periods before the Financial Year 2014-15.
Section 164(2) was notified on April 1, 2014. Various High Courts have delivered differing opinions on its retrospective applicability. While the High Courts of Allahabad, Gujarat, Kerala, and Karnataka have ruled that Section 164(2) applies prospectively, the Delhi High Court has held that it can be applied to periods before 2014.
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Section 164(2) states that, 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 debenture 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.
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.
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The Allahabad High Court judgement, which has been appealed to the Supreme Court, stated that the provision, being adverse and penal in nature, cannot be retroactively applied to a financial year when such a disqualification condition did not exist.
The High Court had noted that since the provision was enforced from April 1, 2014, it should only apply to financial years starting from that date onwards.
Moreover, the Allahabad High Court upheld the validity of Section 164(2), stating that it validly distinguishes between compliant and non-compliant directors based on an intelligible classification, which does not violate Article 14 of the Constitution.
Contrarily, the Delhi High Court ruled that Section 164(2) could apply to failures in filing returns for financial years prior to 2014. The court argued that since the Companies Act already prohibited non-filing of financial returns, the retrospective application of Section 164(2) would not significantly adversely affect the defaulting companies’ rights.
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However, the court noted that the provision would take into account failures to file financial statements for the year ending March 31, 2014, by the due date of October 30, 2014.
The Two-Judge Supreme Court bench comprising Justices Sanjiv Khanna and Sanjiv Kumar has scheduled the matter for further review in the week starting December 12, 2024.
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