After Satyam fiasco, Indian economy was in chaos and urgently needed a system to keep a check on the actions of corporate bodies and reinstate transparency and accountability. The concept of Corporate Governance, then gained popularity in India. The Ministry of Corporate Affairs enacted the Companies Act, 2013 which instilled importance on Corporate Governance by laying emphasis on role of auditors and directors, filing of annual returns and financial statements, corporate social responsibility. Thus, the face of the corporate world in India was reformed.
India again faced a black day when more than 1 lakh companies (both public and private) were struck off for failure to file annual returns for consecutive three years and more than 3 lakh directors associated with these companies were disqualified by twin circulars of the Ministry of Corporate Affairs. Various petitions were filed before different High Courts challenging the list disqualifying these directors under Section 164(2)(a) and Section 167(1)(a) of the Companies Act, 2013 published by the Ministry of Corporate Affairs and contending that the Ministry of Corporate Affairs has acted arbitrary in disqualifying such directors.
In various such cases before the Karnataka High Court, it was conjointly held as follows:
- The Section 164(2)(a) is not ultra vires Article 14 of the Constitution and does not have retrospective applicability, and therefore is neither unreasonable nor arbitrary.
- With respect to the public companies, disqualification of the directors considering the period prior and subsequent to April 1, 2014 for computation of continuous period of three financial years is arbitrary exercise of power by the Ministry of Corporate Affairs. Considering the nature of the consequences provided under Section 164(2) as compared to Section 274(1)(g) of the Companies Act, 1956, the period prior and subsequent to April 1, 2014, could not have been considered for computation of three continuous years for disqualifying directors of public companies. However, if any director of public company has suffered disqualification under the Companies Act 1956, i.e. prior April 1, 2014, then disqualification under Section 164(2) of the Companies Act, 2013 shall have retro-active applicability under such conditions.
- With respect to a private company, there was no provision for disqualification of directors on such grounds in the Companies Act, 1956 and it came into force for the first time only under the Companies Act, 2013. Hence, the disqualifications cannot be imposed on directors of private companies considering any period prior to April 1, 2014 for computing the continuous period of three years under Section 164(2)(a).
- The Court further upheld the disqualification imposed on the directors of public and private companies under Section 164(2)(a) where the period of three continuous years commenced from April 1, 2014 for filing financial statements and annual returns. The Court also held that the insertion of proviso to Section 164(1)(a) of the Act by virtue of the Companies (Amendment) Act, 2017 was subsequent to the date of disqualification of many directors, which in most case is November 1, 2016, or prior to May 2018. This proviso is prospective and does not have a retrospective nature. Hence, the directors who were disqualified before May 7, 2018, would not vacate the office in the defaulting company and all other companies in which they are directors. This provision would be applicable on only those directors who are disqualified on or after May 7, 2018 in the companies other than the defaulting company. [Judgement dated 12th June 2019 by Mrs. Justice B. V. Nagaratahna]
The judgments of different High Courts have granted relief to many directors disqualified by the Ministry of Corporate Affairs, though not all. Disqualification of directors of both public and private companies under Section 164(2)(a), where the period of continuous three years has been computed considering period prior and subsequent to April 1, 2014 is held arbitrary except in case of directors of public companies suffering disqualification under the Companies Act, 1956. The disqualification of directors by computing the three continuous years considering period subsequent to April 1, 2014 has been held just and valid. Further, relief is given to the directors disqualified before May 7, 2018 on whom the proviso of Section 164(1)(a) inserted by virtue of the Companies (Amendment) Act, 2017 was applied retrospectively, as the Court explained that the said provision is prospective in nature and does not have retrospective applicability.