Madras HC upholds Provision mandating Vacation of Directorship by Defaulting Directors under Companies Act [Read Judgment]

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The Madras High Court held that Section 167(1)(a) Companies Act not Violative of Articles 14, and 19(1)(g) of the Constitution of India.

The judgement was rendered by the divisional bench consisting of Chief Justice A.P.Sahi and Justice Subramonium Prasad, in the case of G.Vasudevan v. Union of India.

The issue raised was that the Section 167(1)(a) of the Companies Act 2013, as inserted vide the Companies (Amendment) Act 2017 was ultra vires the Articles 14, 19(1)(g) of the Constitution of India. Section 167 of the Companies Act gives instances where the office of a Director shall become vacant. The proviso which is under challenge in the instant writ petition states that, when a company commits a default as stipulated in sub-section 2 of Section 164, then a Director of such defaulting company does not vacate the post in the company in which the default is committed but a Director of such a company has to vacate his seat as a Director in all other companies in which he is Director.

The petitioner contends that proviso to Section 167(1)(a) of the Companies Act, leads to unequal treatment being met out to Directors of a defaulting company based on whether they are Directors in other companies or not. The petitioner claims that this leads to unfair treatment to those Directors who hold such posts in multiple companies. The petitioner also claims that this differential classification is not based on an intelligible differentia and that there is no justification provided for mandating the vacation of Directorship in other companies, thus leading to this provision being arbitrary and violative of Article 14 of the Constitution of India.

The Court observed that the  “purpose of the amendment was that if the post of Directorship is vacated under the provision (as it was) then, this post would remain vacant as these provisions would automatically apply to any individual subsequently appointed”.

The Court held that “A Director, irrespective of the nature of Directorship, by virtue of the fact that he holds the position of Directorship cannot claim immunity for the defaults of the company in the filing of returns or the business of the company, and therefore cannot be made to vacate his post in other companies”.

The Court also observed that, “The intention of the impugned amendment is to ensure proper governance of companies, transparency in working of companies and also to ensure more effective enforcement of the provisions of the Companies Act 2013”.

The Court agreed with the Karnataka High Court in the case of Yashodhara Shroff Vs. Union of India (supra), wherein it was “reveals that the Court has found that the proviso to Section 167(1)(a) must be interpreted in ordinary terms and would apply to the entirety of Section 164 including sub-section 2. The Court has further held that this proviso can be justified on two grounds. Firstly, it has been reiterated that the exclusion of Directors from vacating their posts in the defaulting company while doing so in all other companies where they hold directorship has been done in order to prevent the anomalous situation wherein the post of Director in a company remains vacant in perpetuity owing to automatic application of Section 167(1)(a) to all newly appointed Directors. Secondly, the underlying objective behind the proviso to Section 167(1)(a) is seen to be the same as that of Section 164(2) both of which exist in the interest of transparency and probity in governance. Owing to these justifications, the Court thus holds that the proviso to Section 167(1)(a) is neither manifestly arbitrary nor does it offend any of the fundamental rights guaranteed under Part III of the Constitution of India”.

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