While upholding the Constitutionality of Sections 164 (2) and 167 (1) of the companies Act, 2013, which affect the disqualification of Directors from companies, the Kerala court recently made pertinent observations on the impact of those provisions (Zacharia Maramkandathil Mohan and Ors v. Union Of India).
Justice N Nagaresh held that the disqualification of Directors under Section 164(2) isn't applicable retrospectively to the amount before the companies Act, 2013 came into force.
The Court added that "This would be especially so because up to March 31, 2014, the provisions of Section 274(1)(g) of the Act,1956 were governing the sector ."
Among other important conclusions, the Court has also held that the Director number (DIN) can't be deactivated only on account of the temporary disqualification of Directors under Section 164 (2). The Court proceeded to direct the reactivation of the DINs of the petitioners forthwith. However, the authorities got the freedom to cancel or deactivate the DINs of the petitioners for any reasons laid down in Rule 11.
Other Important Court findings
Constitutionality of Sections 164 (2) and 167
The Court ruled that Section 164(2) and Section 167(1) of the Companies Act, 2013 are not ultra vires Article 14 or Article 19(1)(g) of the Constitution of India.
The petitioners contended that the incidents leading to disqualification under 164(2) aren't directly due to Directors and will flow from factors outside their control like pandemics or internet restrictions. However, the consequences to Directors are grave. These legislative provisions are excessively arbitrary and would and would be hit by Article 14 of the Constitution, they stated.
The Judge, however, disagreed.
"The purpose of disqualification of defaulting Directors in other Companies is to form the administrators answerable to the company sector. The purpose is to save the corporate community from the consequences of mismanagement. It is intended to increase the standards of corporate governance. It is intended to guard creditors and therefore the general public from mismanagement of Companies. Therefore the provisions Section 164 and Section 167 will fall within the exceptions under Article 19(6)", he observed. The Court concurred with the Karnataka High Court's judgment in Yashodhara Shroff v Union of India which had upheld the Constitutional validity of said sections.
Section 164 (2) and principles of natural justice, The petitioners submitted that the results under Section 164 (2) are grave since the disqualified persons are barred from being directors at the other company for five years. They argued that directors should a minimum be extended a chance of hearing. Principles of natural justice or audi alteram partem (listen to the opposite side) should necessarily be read into Section 164 (2), it had been contended. The Court, however, found that the supply doesn't contemplate the incorporation of such natural justice principles.
"Companies Act, 2013 does not contemplate extension of opportunity of hearing to Directors of a Company while incurring disqualification under Section 164(2), and going by the scheme of the Act the principles of natural justice can't be read into Section 164(2) or Section 167(1)", the Court observed.
The Court also noted that the disqualification is done by the operation of law and is only for a few years, not perpetual. Therefore, Justice Nagaresh stated that the need for a hearing doesn't arise which the principles of natural justice can't be read into the Act.
Impact of provisos to Sections 164(2) and 167(1)(a)
Another question addressed was the impact of the provisos to Sections 164 (2) and 167(1)(a) of the Act, 2013, which was inserted by the Companies (Amendment) Act, 2017 with effect from May 7, 2018. While upholding the Constitutional validity of those provisions the Court also found that a neighborhood of the proviso to Section 167 (1)(a) was prospective, whereas another part was only clarificatory and, therefore, retrospective. While the words "provided that where he incurs disqualification under 164(2), the office of director shall become vacant ... aside from the corporate which is in default thereunder subsection“ will have retrospective operation, the words "in all companies" will have an only prospective operation, the Court said.
The Court observed that the intention behind inserting the said provisos was to enable the defaulting companies to file annual returns/financial statements for defaulted years and to ensure the Director's vacation from office altogether other companies upon a default. Whether notice under Section 455(4) may be a sine qua non before disqualification of Directors under Sections 164 (2), 167? On this issue, the Court said that Section 455 of the Companies Act may be a provision intended for an altogether different purpose i.e. to enable certain inactive companies to use for the status of a dormant company. It didn't concern the disqualification of directors for the failure to file returns, the Court opined. Rather, the Court observed that "the provision is primarily intended to apply to Companies formed and registered for a future project or to hold an asset or intellectual property and haven't any significant financial transaction and also to an inactive company, to enable such companies to use for the status of a dormant company."
The Court, therefore, held:
"Section 455 can't be construed as a provision to issue notice to defaulting Companies before their Directors become amenable to disqualification under Section 164(2). This court, therefore, holds that a notice under Section 455(4) isn't a sine qua non for applying the provisions of Section 164(2) or 167." Before parting with the matter, the Court also added, "Where the names of any Companies stand struck off, the petitioners in respect of such Companies are at liberty to invoke Section 252 of the companies Act, 2013 to challenge striking off the names of their companies from the Register of Companies and to resort to legal remedies available to them, to challenge their disqualification for holding the office of Director."
With these directions, the petitions were disposed of.