Disqualification Of Directors Under Sec.164(2)(a) Companies Act 2013 For Default Before April 1, 2014 Is Illegal : Karnataka HC [Read Judgment]

Disposing of a batch of nearly three hundred writ petitions, the High Court of Karnataka has declared that period prior to April 1, 2014 cannot be taken into consideration for disqualification under Section 164(2)(a) of the Companies Act.The petitions challenged the list published by the Ministry of Commercial Affairs in September 2017, disqualifying nearly three lakh directors under Section 164(2)(a) and Section 167(1)(a) for failing to file annual returns and statements for a period of three consecutive years.The petitioners pointed that at the time of disqualification notified by the MCA, the period for filing annual returns and statements had not got over after April 1, 2014, the date when Companies Act 2013 came into force. The Annual General Meeting has to be held within six months of the closing of the financial year. The annual returns could be filed within 60 days of the AGM and financial statements could be filed within 30 days of the date of AGM. Hence, for filing annual returns and financial statements, the directors had time till November 30, 2017 and October 30, 2017,respectively. However, the list of disqualified directors was published on September 12, 2017. Accepting this plea, Justice B V Nagarathna observed "The continuous period of three financial years must commence with effect from 01.04.2014 onwards. No period prior to 01.04.2014 can be taken into consideration to be a part of the continuous period of three financial years and thereby impact a director of a defaulting private limited company"The Court noted that under the earlier law - Companies Act 1956 - such default did not lead to disqualification of directors of a private company. "As far as directors of private companies are concerned, a provision like Section 164(2) is applicable for the first time. Thus, no period antecedent 01.04.2014 could be taken into consideration when there has been a efault in the filing of the annual returns or the statements by such a private company. This is because, prior to the enforcement of the Act, such a disqualification was not imposed on a director of a private company under Section 274(1)(g) of the 1956 Act. Therefore, as far as private companies are concerned, Section 164(2) being made applicable to them for the first time under the Act, no period prior to 01.04.2014 could be taken into consideration for the purpose of reckoning three continuous financial years under Section 164(2) of the Act", observed the 614 pages judgment.The Court however repelled the challenge to the constitutionality of Sections 164 and 167. It was also held that no prior hearing was required before imposing disqualification, as it took place by automatic operation of law.Disqualification Of Directors : Companies Act 2013 Takes Effect Only From FY 2014-15; Gujarat HC Quashes MCA List [Read Judgment] Public companies.As far as public companies are concerned, though a disqualification as stated under Section 274(1)(g) of the 1956 Act applied to the directors of a public company, which was in default, nevertheless, the consequence was not to the extent stipulated under the 2013 Act. Under 1956 Act such a director became ineligible to be appointed as a director in any other company, but he could be re-appointed as a director in the defaulting company. Moreover, under Section 283 of the 1956 Act, there was no vacation of the office of such a director. But under the Act, a director of a defaulting company becomes ineligible to be re-appointed as a director of the defaulting company as well as any other company. Moreover, in terms of the proviso to Section 167(1)(a) of the Act, such a director would have to vacate office as a director in all companies where he is a director other than the defaulting company. Since the cumulative effect of the consequences in respect of directors of public companies are greater in 2013 Act than the 1956 Act, the Court held that while reckoning three financial years during which annual returns or financial statements have not been filed, no period prior to 01.04.2014 could be considered."there has been an arbitrary exercise of power by the respondent authority in disqualifying the petitioners as directors of public companies by taking into consideration the period prior to 01.04.2014 as well as subsequent thereto for the purpose of reckoning the continuous period of three financial years. It is observed that even in respect of public companies, having regard to the nature of the consequences envisaged under Section 164(2) of the Act as compared to Section 274(1)(g) of the 1956 Act, the period prior to 01.04.2014 and subsequent thereto could not have been considered for reckoning three continuous financial years for disqualifying the directors of public companies. Such disqualification is hence quashed"The Court however added that a disqualification already sustained by a director of public company under 1956 Act will have a bearing while applying Section 164(2) of 2013 the Act...

Disqualification Of Directors Under Sec.164(2)(a) Companies Act 2013 For Default Before April 1, 2014 Is Illegal : Karnataka HC [Read Judgment]

Manu Sebastian

"The continuous period of three financial years must commence with effect from 01.04.2014 onwards. No period prior to 01.04.2014 can be taken into consideration to be a part of the continuous period of three financial years and thereby impact a director of a defaulting private limited company"

Tags