Calcutta HC passes interim order allowing disqualified directors to continue despite disqualification under Section 164(2) of Companies Act

Calcutta High Court:  The Court recently passed an interim order where it allowed certain people who were directors in multiple companies to continue in their posts despite the disqualification laid down in Section 164(2)(a) of the Companies Act, 2013 (“Act”). This interim relief was only with respect to those companies which had been complying with the norms of the Act and not the particular company which was non-functional and hence hit by the section.

Petitioners are directors of some companies, one of which was incorporated in 2010 but as no certificate of commencement of business was obtained and no annual returns were filed for 3 consecutive years, the directors were disqualified from holding the post of director in any company effective from November 1, 2016, under Section 164(2) (a) of the Act, which reads:

“No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years.

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.”

It was contended by the petitioners that since Section 164(2) (a) of the Act came into force from April 1, 2014, it cannot be applied to incidents prior to the financial year (FY) 2013-14. Reliance was placed on Arun Seth v. Union of India, 2017 SCC OnLine Cal 17624.

It was contended by the respondents that the original writ petition from which the appeal in the Arun Seth case arose has been withdrawn. Further, the section intends to penalize cases where the annual return has not been filed for any continuous period and not necessarily one taking place subsequent to the insertion of the section, hence the application of the same even for FY preceding 2013-14 is valid.

Taking the above arguments into consideration, the Court held that the petitioners had presented a valid point regarding the application of Section 164 to them, especially to the end that proceedings under the section disallowed them from continuing as directors of other companies which were. As of yet, functioning in accordance with the provisions of the Act.

Hence an interim order was passed, staying the application of the list of disqualified directors released by the Registrar of Companies with respect to the petitioners and the other companies they were acting as directors of. [Mukul Somany v. Registrar of Companies, West Bengal, 2018 SCC OnLine Cal 2496, decided on 18-05-2018]

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