Delhi HC To Hear Challenge Against Disqualification Of Directors Under Sec.164(2)(a) Of Companies Act

Delhi HC To Hear Challenge Against Disqualification Of Directors Under Sec.164(2)(a) Of Companies Act

The Delhi High Court on Monday Cissued notice to Registrar of Companies as well as the Union of India to file counter-affidavits in a PIL challenging the validity of section 164(2)(a) of the Companies Act, 2013. There were around 2000 petitions that were filed before the court for the same prayer and the same were clubbed and heard in batches.

The petitions were filed in consequence of the September 2017 notification of the Ministry of Corporate Affairs that disqualified a number of directors of various companies under section 164(2) of the Companies Act, 2013. The aforesaid section contemplates non-filing of financial statements and returns by a company for any three consecutive years as a ground for director's disqualification for five years.

All the Petitioners had made the following general submissions:

1. section 164(2)(a) is ultra vires of the Constitution as it arbitrarily applies to all the directors which amounts to equal treatment of unequals. Hence, it violates Article 14 of the Constitution

2. No notices were issued, neither any opportunity of being heard was given by the Registrar of Companies, before passing the order was disqualification

3. The impugned provision has erroneously being applied retrospectively. The correct deadline for calculating three financial years should've been 30/11/2017 as the Act was notified in April 2014.

4. There was no malafide intention on part of the directors

5. The deactivation of Director Identity Number (DIN) had rendered the disqualified directors without any remedy

The Division Bench of Chief Justice DN Patel and Justice Hari Shankar did ask the companies about their failure to file the returns. 'You can't be allowed the benefit from your own wrong… Now that DIN has been deactivated, you people have been activated', the court commented.

The Court has asked the RoC to file it's reply by the August 27, and have listed the matter for August 30.

The High Courts of Madras, Gujarat and Karnataka have already held the action of Ministry of Corporate Affairs in disqualifying nearly three lakh directors for failing to file annual returns to be invalid. These High Courts reasoned that period prior to April 1, 2014 cannot be taken into consideration for disqualification under Section 164(2)(a) of the Companies Act.