2004 (9) TMI 393 - HC - Companies Law

Challenged the constitutional validity of section 274(1)( g ) of the Companies Act 1956 as amended with effect from December 13 2000 by the Companies (Amendment) Act 2000 - Violation of Articles 14 19(1)(g) and 21 of the Constitution - Validity of Circular No. 8 dated March 22 2002 and Circular No. 5 of 2003 dated January 14 2003 - HELD THAT - We find no merit in the submission of the petitioners that this amendment is violative of article 14 of the Constitution. The provision of section 274(1)( g ) does not make distinction between the Government-nominated directors and other directors. The Government of India Ministry of Law Justice and Company Affairs letter dated March 22 2003 has interpreted the composite effect of the non obstante clause in the statute of public financial institutions like Industrial Development Bank of India Life Insurance Corporation of India Unit Trust of India etc. and gave an opinion that the directors appointed by these institutions cannot be disqualified as appointment as directors is by virtue of section 274(1)( g ) and also directors appointed on the boards of assisted companies etc. Regarding the grievance of the petitioners that the name of the disqualified directors are given on the website it is desirable for the public to know the names of some defaulting directors of the other companies so that they would be wary of such persons who are directors of such companies. This can also be justified in the large public interest. In our considered opinion this amendment of section 274(1)( g ) of the Companies Act 1956 has been made primarily in larger public interest. This amendment became absolutely imperative to protect large number of investors particularly small and poor investors who had invested their lifetime savings with these companies and in majority of cases neither the principal amount nor interest is repaid. We find no merit in any of the submissions of the petitioners. We do not find that the said amendment violates the petitioners fundamental rights or any other right in any manner. The petition being wholly devoid of merit is accordingly dismissed.

Summary

Issues Involved:
1. Constitutional validity of section 274(1)(g) of the Companies Act, 1956.
2. Violation of Articles 14, 19(1)(g), and 21 of the Constitution.
3. Validity of the Companies (Disqualification of Directors u/s 274(1)(g) of the Companies Act, 1956) Rules, 2003.
4. Validity of Circular No. 8 dated March 22, 2002, and Circular No. 5 of 2003 dated January 14, 2003.
5. Alleged violation of natural justice.

Summary:

1. Constitutional Validity of Section 274(1)(g):
The petitioners challenged the constitutional validity of section 274(1)(g) of the Companies Act, 1956, as amended by the Companies (Amendment) Act, 2000. They argued that the section is ultra vires the Constitution and should be declared illegal, invalid, null, void, and unenforceable. The court noted that the amendment aims to ensure proper governance, transparency, and effective enforcement in companies, thereby protecting investors from mismanagement.

2. Violation of Articles 14, 19(1)(g), and 21 of the Constitution:
The petitioners contended that section 274(1)(g) is arbitrary, unreasonable, and violates Articles 14, 19(1)(g), and 21 of the Constitution. The court found no merit in these arguments, stating that the amendment does not debar the petitioners from carrying on any business but only renders them incapable of becoming directors in other companies. The court emphasized that the amendment aims to protect small investors who have deposited their lifetime savings with these companies.

3. Validity of the Companies (Disqualification of Directors u/s 274(1)(g) of the Companies Act, 1956) Rules, 2003:
The petitioners argued that the rules are ultra vires the rule-making power of the Central Government and should be declared null and void. The court upheld the validity of the rules, emphasizing that they are in line with the objectives of the amendment to ensure better corporate governance and protection of investors.

4. Validity of Circular No. 8 dated March 22, 2002, and Circular No. 5 of 2003 dated January 14, 2003:
The petitioners sought the withdrawal and cancellation of these circulars, arguing that they are invalid. The court did not find merit in this argument and upheld the validity of the circulars.

5. Alleged Violation of Natural Justice:
The petitioners claimed that the amendment violates the rules of natural justice by not distinguishing between wilful failure and failure beyond the means of the company. The court rejected this argument, stating that the amendment does not penalize the company but renders directors incapable of functioning as directors for a certain period. The court emphasized that the amendment aims to ensure that directors discharge their obligations properly and protect investors' money.

Conclusion:
The court dismissed the petition, finding no merit in the petitioners' arguments. The amendment to section 274(1)(g) of the Companies Act, 1956, was upheld as being in the larger public interest, aiming to protect small and poor investors who have invested their lifetime savings with these companies. The court found that the amendment does not violate the petitioners' fundamental rights or any other rights in any manner.