Kar HC | Court enunciates guidelines for disqualification of directors; demarcates boundaries, crossing which, it would be rendered bad in law

Karnataka High Court: B.V. Nagarathna, J., disposed of the petitions seeking the provisions of Sections 164(2) and 167(1)(a) and the proviso to Section 167(1)(a) of the Companies Act, 2013, to be held unconstitutional.

In the pertinent matter, the petitioner sought for declaring Section 164(2) of the Companies Act, 2013 (Act) and the press release dated 06-06-2017 vide Annexure-A as unconstitutional and in violation of the fundamental rights of the petitioner as guaranteed under the provisions of Part III of the Constitution. The petitioners further contended that there was an arbitrary exercise of power by the concerned respondent authority in disqualifying the petitioners as directors of the respective companies by giving retrospective operation to the aforesaid provisions of the Act. That the disqualification is not on account of any act/omission of the director per se, but due to the default committed by the company in which he is a director. Also, the consequence of the default so made was serious, almost penal and disproportionate to the same; therefore, it is in violation of Article 14 of the Constitution.

The respondents vehemently contended that the object of the provision is to keep away directors of defaulting companies from being reappointed as directors in the same company or other companies. It was further contended that if the said object and purpose is not given its complete effect and meaning, then it would be unviable. Moreover, holding the post of a director of a company is not pursuant to any fundamental right since it is a statutory right or one arising under the Memorandum of Association or Articles of Association of the company and thus contractual. Lastly, Section 164(2) of the Act is a reasonable restriction imposed in public interest vide Article 19(6) of the Constitution.

The Court while appreciating the assistance rendered by the respective counsels, was of the opinion that:

  1. Where the disqualification considering any financial year “prior to 01-04-2014 as well as subsequent thereto” while reckoning continuous period of three financial years under Section 164 (2)(a) of the Act, is made irrespective of whether the petitioners are directors of public companies or private companies, is bad in law.
  2. Writ petition would stand dismissed if the disqualification of the directors has occurred under the provisions of the 1956 Act in respect of the public companies.
  3. Directors would stand disqualified if the disqualification was on the basis of three continuous financial years subsequent to 01-04-2014, irrespective of whether the petitioners are directors of public companies or private companies among other things.

The Court further directed the respondents to restore the DIN of those directors whose disqualification has been quashed by the Court. And those petitioners who have challenged only the striking off of the companies in which they are directors have an alternative remedy of filing a proceeding before National Company Law Tribunal (NCLT) under Section 252 of the Companies Act, 2013.[Yashodhara Shroff v. Union of India, 2019 SCC OnLine Kar 682, decided on 12-06-2017]

Join the discussion

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.