Disqualification of Directors: Penalty u/Section 164(2) of Companies Act not to apply Retrospectively - SSRANA

Disqualification of Directors: Penalty u/Section 164(2) of Companies Act not to apply Retrospectively

December 27, 2019

 

By Rupin Chopra and Reetika Wadhwa

The Hon’ble Delhi High Court on November 04, 2019, clarified the position on disqualification of directors in the case of Mukut Pathak and Ors. v. Union of India and anr.[1] This judgment has come in resonance with other similar judgements passed by Hon’ble High Courts of Gujrat, Madras and Karnataka, on Section 164(2)(a) of the Companies Act, 2013 (hereinafter referred to as ‘Act’).

What does Section 164(2)(a) of Companies Act say?

Section 164(2)(a) of the Act deals with the disqualification of directors. It states that when a company has not filed financial statements or annual returns, for any three consecutive years, it will result in the disqualification of its directors for a period of five years.

 Brief facts –

  • Directors of various companies had collectively approached the Hon’ble Delhi High Court upon their disqualification from being appointed/reappointed as directors by the Ministry of Corporate Affairs (hereinafter referred to as ‘MCA’).
  • As the companies had failed to file financial statements or annual returns the past three years, the directors were disqualified under Section 164(2)(a) of the Act.
  • Following which, the directors sought directions to be issued to the MCA for reinstating their qualification as directors.

Observations made by the Hon’ble Delhi High Court –

  • The significant question that arose before the Hon’ble High Court is whether the disqualification of directors under Section 164(2) of the Act is to be applied retrospectively? The Act came into force w.e.f. April 01, 2014, and the financial statements or annual returns considered for the directors disqualifications were of Financial Year 2013-2014.
  • It is well settled that no statute shall be construed to apply retrospectively, unless such a construction appears clear from the language of the enactment or otherwise necessary by implication. It was also equally agreed that a statute is not retrospective merely because it affects existing rights or because a part of the requisites for its action is drawn from a time antecedent to its passing.
  • The court rejected the claim of the directors by opining that non-filing of financial statements or annual returns was already prohibited under the Companies Act, 1956. Therefore, when the same prohibition was envisaged under Section 164 of the Act, the retrospective application of the same has no significant adverse effect on the rights of the defaulting companies.
  • Therefore, the Court held that Section 164(2) of the Act operates prospectively. However, such prospective operation would entail taking into account failure to file the financial statements or annual returns pertaining to the Financial Year ending March 31, 2014 on or before October 30, 2014. The penalty under Section 164(2) of the Act would not extend to defaults committed prior to April 01, 2014.
  • In this regard, the Hon’ble Supreme Court, also directed the Respondents to reactivate the DIN and DSC of the petitioners. While doing so, the Court noted that the Central Government having framed the rules specifying the conditions in which a DIN may be cancelled, cannot cancel the same on any other ground and without reference to such rules.

The Delhi High Court has now clarified the position of Section 164 (2) of the Act regarding the provisions of disqualification of directors. The Hon’ble Court observed that Section 164 (2) of the Act can apply to failure for not filing returns for Financial Years prior to 2014, the year in which the said section came into force. While aligning with the High Courts of Madras, Gujrat and Karnataka, the Hon’ble Delhi High Court has now reinstated that operation of the Section 164(2) in the present case, does not amount to retrospective application of a penal provision.

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[1] W.P.(C) 9088/2018 &CM Appln. No.35006/2018

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