9911796707
TMI Blog2020 (1) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... est Litigation. The petitioner has subsequently filed the instant writ petition. It is to be noted that the petitioner was not granted any liberty to institute a fresh petition for the same relief upon the earlier writ petition being withdrawn. The permission to withdraw the Public Interest Litigation was granted by this Court, without prejudice to the rights of any person aggrieved or otherwise entitled to file such a petition relating to the vires of the proviso, which has been questioned herein. Even though the present petition is not labelled as Public Interest Litigation, it in fact is a Public Interest Litigation. The petitioner's rights have not been in any manner affected by the insertion of the proviso in as much as the petitioner is not a Director in any company and has not had to vacate his office by virtue of the proviso inserted in Section 167(1)(a) of the Companies Act by the Companies (Amendment) Act 2017. The petitioner therefore has no locus to institute the present writ petition. The conduct of the petitioner in repeatedly approaching the Court by filing petitions for same relief is not appreciated. The writ petition deserves to be dismissed on this score alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not filed financial statements or annual returns for any continuous period of three financial years; or (b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, 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 Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment. (3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2): Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification. 167. Vacation of office of director.- (1) The office of a dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting. (4) A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1). " 5. Section 164(2) provides that if a company does not file financial statements for annual returns for any continuous period of three financial years, or fails to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continuous for one year or more then, a Director of such company is not eligible to be reappointed as a Director of that company or appointed in any other company for a period of five years from the date on which the said company fails to fulfil its commitments as prescribed in Clause b of sub-section 2 of Section 164. 6. Section 167 of the Companies Act as stated earlier gives instances where the office of a Director s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his application is pending ; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence ; (e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; (f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section ; or 1 [(g) such person is already a director of a public company which, - (A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999 ; or (B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more : Provided that such person shall not be eligible to be appointed as a director of any other public co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295 ; (i) he acts in contravention of section 299 ; (j) he becomes disqualified by an order of Court under section 203 ; (k) he is removed in pursuance of section 284 ; or (l) having been appointed a director by virtue of his holding any office or other employment in the company, 1 [***] he ceases to hold such office or other employment in the company 2 [***]. (2) Notwithstanding anything in clauses (d), (e) and (j) of sub-section (1), the disqualification referred to in those clauses shall not take effect - (a) for thirty days from the date of the adjudication, sentence or order ; (b) where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of ; or (c) where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disqualification as specified in Section 164(1) of the Act not to those who incurred the disqualification under Section 164(2) of the Act. It was contended that introduction of the proviso brought about a material change in the import of clause(a) of Section 167(1) of the Act and therefore the same would be applicable only prospectively. The learned counsel appearing for the petitioners relied upon the decision of the Bombay High Court in Kaynet Finance Limited vs. Verona Capital Limited: Appeal Lodging No. 318 of 2019 in Arbitration Petition No. 716 of 2019 and Notice of Motion Lodging No. 662 of 2019, decided on 09.07.2019 in support of their contention. In that case, the Division Bench of the Bombay High Court had read down the provisions of Section 167)(1)(a) of the Act to be applicable only in cases where a director had incurred disqualification under Section 164(1) of the Act. The said clause was held wholly inapplicable in cases where a director had incurred disqualification under Section 164(2) of the Act. The Court had reasoned that directors of company that had defaulted in filing returns and financial statements for a period of three consecutive years would be disqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company which is in default under sub-section 164(2) of the Act." 12. It was in order to rectify such situations the proviso to Section 167(1)(a) was inserted by the 2017 Amendment Act. It is worthwhile to mention that the Company Law Committee had also made its recommendations to this effect. The relevant portion of the 2016 Company Law Committee report reads as under:- "11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc. The Committee acknowledged that this Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies while not providing for the same in the defaulting company. It is the contention of the petitioner that the impugned proviso provides for vacating of the post of Directorship in all other companies without any justification being provided for the same. The petitioners have contended that the reasoning behind inclusion of this proviso finds scarce reference in the Statement of Objects and Reasons of the 2017 Amendment Act and that this Act merely states that the justification can be found in the 2016 Company Law Committee report. 15. As stated above, Section 164(2) is nearly identical to, and has borrowed from, Section 274(1)(g) of the Companies Act 1956, the object and purpose of these two Sections can be accepted as being the same. It is thus vital to analyse the justification behind Section 274(1)(g) of the erstwhile Companies Act. In this regard, reference can be made to two judgments one of the Gujarat High Court in Saurashtra Cement Ltd. & another Vs. Union of India, (2006) SCC Online Guj 258 and the other of the Bombay High Court in Snowcem India Ltd & Ors Vs. Union of India, (2004) SCC Online Bombay 1085. In both these cases, the vires of Section 274(1)(g) was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic company for a period of 5 years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in clause (b). The purpose of the amendment is to disqualify certain person from directorship in public companies. The intention and the purpose of the above amendment is to disqualify errant directors, protect the investors from mismanagement, ensure compliance in filing of annual accounts and annual returns. The purpose of the said provision is as such not to punish those who are disqualified but to save the community from the consequences of mismanagement and also to prescribe some standards of corporate managership. It appears that the primary purpose of the disqualification is not to punish the individual but to protect the public against future conduct by person whose past record as directors shows a great danger to creditors and others. Failure is often a sign of incompetence from which the community should be protected. Thus, considering the Statement of Objects and Reasons, what emerge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that investors do not lose their life time savings; (6) Once a person becomes a director, it is his primary duty to ensure that there is proper governance and investors' money is protected; (7) The amendment is not violative of article 14; (8) Amendment to section 274(1)(g) has been made primarily in larger public interest to protect large number of investors, particularly small and poor investors who had invested their life time savings with these companies and in majority of the case neither principal amount nor interest is paid." (emphasis supplied) 16. A perusal of the above mentioned paragraphs would show that Section 273(1)(g) was brought into the Companies Act only for the purpose of good governance by regulating defaulting directors and saving companies from mismanagement. The legislature intended to ensure that companies adhere to the mandate under the Companies Act by ensuring compliance and filing of annual accounts and annual returns which was the only method by which the public could know the financial health of the company. The object was to ensure transparency in the conduct of the business of the company intended to protect investors from mismanagement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es becoming defaulters. It is a matter of common knowledge that millions of small investors, who had deposited their lifetime savings with these companies, in order to get reasonable returns, have been totally ruined. In most cases, they neither receive the principal amount nor any interest. A number of such petitions are pending in various courts of the country. We find no merit in the submission of the petitioners that this amendment, in any manner, violates the petitioners' fundamental rights guaranteed under article 19(1)(g) of the Constitution. 16. We do not see any merit in the petitioners' submission that this amendment, in any manner, violates the rules of natural justice. Once the company failed to repay the interest or the principal amount, there is nothing required, but surely, when this fact is not disputed by the company, the challenge that this amendment being violative of rules of natural justice becomes hollow and without any merit. 17. The petitioners' submission is that no distinction is made between its failure and failure beyond the means of the directors of the company. It is pertinent to note that section 274(1)(g) does not penalise the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects and reasons and/or the above provision has no nexus to the objects sought to be achieved, namely good corporate governance and protection of the investors. Section 274(1)(g), is reproduced hereinabove and the statement of objects and reason is also reproduced hereinabove. The primary object of enactment of section 274(1)(g) is better corporate governance as well as protection of investment of the depositors. The intention and purpose of the above amendment is to disqualify the errant directors and to protect the investors from mismanagement. The amendment becomes absolutely imperative to protect large number of investors, particularly small and poor investors who had invested their life time savings with such companies and in majority of the cases neither the principal amount nor the interest is paid back. It is an admitted position that so far as petitioner No. 1 company is concerned, the said company is unable to redeem the debentures which fell due on September 30, 2003. Thus, it cannot be said that section 274(1)(g) has no nexus to the objects sought to be achieved, namely good corporate governance and protection of investors. ...27. So far as the submission on behalf o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ints has to be allowed to the Legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved... The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry; that exact wisdom and nice adaption of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts, cannot, as pointed out by the United States Supreme Court in Secretary of Agricultur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecially with regard to the company whose securities are traded in public market. Disclosure of information about the company is, therefore, crucial for the accurate pricing of the company's securities and for market integrity. Records maintained by the company should show and explain the company's transactions, it should disclose with reasonable accuracy the financial position, at any time, and to enable the Directors to ensure that the balance sheet and profit and loss accounts will comply with the statutory expectations that accounts give a true and fair view. The Companies (Amendment) Act, 2000 has added clause (iii) to Section 209-A(1) of the Companies Act, 1956 under which SEBI has also been given the power of inspection of listed companies or companies intending to get listed through such officers, as may be authorised by it. " 21. An analysis of the above mentioned extract reveals that filing of returns and disclosures regarding the finances of the company are vital to ensure greater transparency and accountability to the public which is the need of the hour in today's corporate set up. These measures are extremely necessary in the interest of fair trade and ens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that irrespective of whether directors are described as trustees, agents or representatives, they have a duty to act for the benefit of the company and must not derelict their duty towards the shareholders and investors in the company. The relevant portion reads as under:- "(d) We may also test the alleged act of allotment of equity shares in favour of Ramanujam from a legal angle. Could it be said to be a bona fide act in the interest of the company on the part of Directors of the company? At this stage it may be appropriate to consider the legal position of Directors of companies registered under the Companies Act. A company is a juristic person and it acts through its Directors who are collectively referred to as the Board of Directors. An individual Director has no power to act on behalf of a company of which he is a Director unless by some resolution of the Board of Directors of the company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the Board of Directors. The Directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have absolute freedom in the matter of management of affairs of the company. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close-knit group. Therefore, if the Directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets." 23. A Director, irrespective of the nature of Directorship, by virtue of the fact that he holds the position of Directorship cannot claim immunity for the defaults of the company in the filing of returns or the business of the company, and therefore cannot be made to vacate his post in other companies. This Court can take judicial notice of the fact that people invest their hard earned money in companies in which there are persons of repute holding the position of a Director. The Director therefore cannot absolve himself of the misdeeds of the company after holding a position in the company. Section 166 of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready seen that one of the tests for challenging the constitutionality of subordinate legislation is that subordinate legislation should not be manifestly arbitrary. Also, it is settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. [See Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] , SCC at p. 689, para 75.] 43. The test of "manifest arbitrariness" is well explained in two judgments of this Court. In Khoday Distilleries Ltd. v. State of Karnataka [Khoday Distilleries Ltd. v. State of Karnataka, (1996) 10 SCC 304] , this Court held: (SCC p. 314, para 13) '13. It is next submitted before us that the amended Rules are arbitrary, unreasonable and cause undue hardship and, therefore, violate Article 14 of the Constitution. Although the protection of Article 19(1)(g) may not be available to the appellants, the Rules must, undoubtedly, satisfy the test of Article 14, which is a guarantee against arbitrary action. However, one must bear in mind that what is being challenged here under Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14. " 26. A perusal of the principles as reaffirmed by the Hon'ble Supreme Court in Shayara Bano v. Union of India(supra), reveals that for a legislation to be manifestly arbitrary, it must be shown that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of five years. The said consequence stems immediately after the company in which a person is a director does not comply with Section 164(2) of the Act. When a director cannot be re-appointed in the defaulting company or in any other company for a period of five years from the date of disqualification, by the same logic, the director cannot be permitted to continue as a director in any other company. The short term effect of the non-compliance of Section 164(2) of the Act by a company is that the director of such a defaulting company would have to vacate his office as a director in all companies where he is a director. The whole object and purpose of such a provision is to ensure that a director of a defaulting company does not continue to hold the office of the director in any company, while at the same time, he is ineligible to be appointed as a director in the defaulting company or in any other company. In other words, when there is ineligibility for a director of a defaulting company to be re- appointed as a director of the defaulting company or appointed as a director of any other company, then by the same logic he cannot be permitted to be continued as a director in the defa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to which it has been enacted as a proviso and to no other. However, if a proviso in a statute does not form part of a section but is itself enacted as a separate section, then it becomes necessary to determine as to which section the proviso is enacted as an exception or qualification. Sometimes, a proviso is used as a guide to construction of the main section. Thirdly, when there are two possible construction of words to be found in the section, the proviso could be looked into to interpret the main section. However, when the main provision is clear, it cannot be watered down by the proviso. Thus, where the main section is not clear, the proviso can he looked into to ascertain the meaning and scope of the main provision. (c) The proviso should not be so construed as to make it redundant. In certain cases, "the legislative device of the exclusion is adopted only to exclude a part from the whole, which, but for the exclusion, continues to be a part of it", and words of exclusion are presumed to have some meaning and are not readily recognized as mere surplusage. As a corollary, it is stated that a proviso must be so construed that the main enactment and the proviso should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lands (Ceiling on Holdings) Act, 1961, in the context of Article 31B of the Constitution and the second proviso thereto, reiterated what was stated inIshverlals case, supra. InS. Sundaram Pillaiv.V.R. Pattabiraman, [(1985) 1 SCC 591:AIR 1985 SC 582], while dealing with the scope of a proviso and explanation to sub-section (2) of Section 10 of Tamil Nadu Buildings (Lease and Rent Control) Act, 1960, the Hon'ble Supreme Court held that a proviso may have three separate functions. Normally, a proviso is meant to be an exception to something within the main enactment or qualifying some thing enacted therein which, but for the proviso, would be within the purview of the enactment. In other words, a proviso cannot be torn apart from the main enactment, nor can it be used to nullify or set at naught the real object of the main enactment. Sometimes, a proviso may exceptionally have the effect of a substantive enactment. (e) After referring to several legal treatises and judgments, the Apex Court held in the above judgment as under:- "43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
