2020 (3) TMI 808 - HC - Companies Law

Stay on operation, enforcement and effect of the law itself - directors of the defaulting company - Section 167(1) clause (a) of the Act - HELD THAT - The order dated 15th October, 2019 passed on these petitions raising legal queries, sufficiently protects the interest of both sides. This Court has performed a balancing act. Therefore, taking that order and the queries further it is clear that Section 164 of the Companies Act, 2013 provides for disqualifications for appointment of director. By sub-section (1), the eligibility for appointment of the director of a company is the aspect dealt with. By sub-section (2), it is said that no person, who is or has been a director of a company, which has not filed financial statements or annual returns for any continuous period of three 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. Then, there is a proviso, which has been inserted by Act 1 of 2018. As far as Section 167(1)(a) is concerned, there, the vacancy would not occur in the case of a director, who has incurred the disqualifications specified in Section 164 more so, when he incurs that disqualification is sufficiently set out in the statute itself and in the order passed on 15th October, 2019. Applicability of principle of retrospectivity - HELD THAT - The interpretation of the legal provision is a job or task to be performed by the Court and understanding of the legal provisions by a member of Executive or any Executive functionary cannot be a substitute for that exercise. The Court cannot rely upon them to interpret the legal provisions. The interpretation of the legal provisions must be based on the language of the statute. In such circumstances, we do not think that the interim relief as sought can be granted. A blanket stay or a relief having far reaching legal consequences as sought cannot be granted. The prayers in that behalf are rejected. The application for interim reliefs is disposed of in these terms.

Summary

Issues:
Interpretation of Sections 164 and 167 of the Companies Act, 2013 regarding disqualifications for appointment of directors and vacation of office, applicability of retrospective operation, balancing interests of petitioners and government, and the role of the Court in interpreting legal provisions.

Analysis:
The High Court considered multiple writ petitions concerning the disqualification of directors under Sections 164 and 167 of the Companies Act, 2013. The Court noted that the petitions sought to stay the operation of the law itself, particularly regarding the disqualification of directors who failed to file financial statements or annual returns for three consecutive years. The Additional Solicitor General argued that while the constitutional validity challenge was not upheld, various High Courts had interpreted the provision differently, with some ruling against retrospective application. The Court highlighted the importance of transparency and accountability in corporate governance under Section 167(1)(a) and the necessity for directors to comply with filing requirements to avoid disqualification.

The Court analyzed the provisions of Sections 164 and 167, emphasizing that disqualifications under Section 164(2) lead to the vacation of office under Section 167. The proviso to Section 167(1)(a) clarified that directors of defaulting companies would not vacate office in the defaulting company to prevent leaving it without any director. The Court's queries indicated that directors could continue until the end of their term but were ineligible for reappointment for five years if disqualified under Section 164. The Court opined that the Central Government's stance before the Karnataka High Court adequately protected the petitioners' interests.

Regarding the retrospective operation of Section 164, the Court rejected arguments against its applicability, stating that the filing of financial statements triggered disqualification and was a ministerial act. The Court emphasized that statutory provisions must prevail over circulars issued by the Ministry of Corporate Affairs. While acknowledging the interim relief sought, the Court declined to grant a blanket stay, ensuring that the Section would operate in line with its observations. The Court clarified that its order expressed a tentative view and would not influence the final decision, especially concerning any constitutional challenges.