India: Constitutional Validity Of Proviso To Section 167(1)(a) Of The Companies Act 2013 Upheld
The Division Bench of the Hon’ble Madras High Court (“Madras High Court“) in G. Vasudevan1, vide judgment dated December 2, 2019, adjudicated and decided upon the constitutionality of proviso to Section 167(1)(a)2 (“Impugned Proviso/Proviso“), which the Petitioner contended was irrational, manifestly arbitrary, unreasonable and ultra vires to Article 14 of the Constitution of India. The Impugned Proviso, inserted vide Companies (Amendment) Act, 20173, reads as follows: –
“Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section;”
The Madras High Court upheld the constitutional validity of the Impugned Proviso. Relying on numerous judicial precedents such as Hon’ble Supreme Court in Shayara Bano4 and Hon’ble Karnataka High Court in Yashodhara Shroff5, the Madras High Court held in G. Vasudevan as follows:
“The impugned proviso cannot be seen to be irrational as it bears a direct nexus to the object that it seeks to achieve. It therefore cannot be said or contended that the impugned amendment to Section 167(1) by inserting the proviso is so manifestly arbitrary that it offends Article 14 of the Constitution of India. The impugned provisions are intravires”.
The Madras High Court observed that before the insertion of Impugned Proviso in the Companies Act 2013, directors of a company who had defaulted under Section 164(2)6 would have to vacate their position of director of the defaulting company only. It was observed that the same was leading to a situation where any person who became a director of a company which had defaulted under Section 164(2) automatically attracted Section 167(1)7. Thus, it was observed that no person could be appointed as a director in those companies which had defaulted under Section 164(2).
The Madras High Court observed that in order to rectify such situations, the Proviso was inserted by the Companies (Amendment) Act, 2017. Further, it was noted that the 2016 report of Company Law Committee had duly provided justification for the suggested proviso to Section 167(1)(a). The purpose of the amendment was that if the post of Directorship is vacated under the Section 167(1)(a) read with Section 164(2) (as it was), then the post would remain vacant as these provisions would automatically apply to any individual subsequently appointed.
The Madras High Court held that the object of inserting the Proviso is to ensure that a person, who is a director in a company that does not file its returns for a period of three years or does not return the money back to its investors or creditors, does not continue as director in other companies. It was observed that the Impugned Proviso will also act as a deterrent from incorporating shell companies to park illegally obtained money and thus, there is a rational nexus between the amendment and the object for which the amendment was brought about in the Companies Act, 2013.
1. G. Vasudevan v. Union of India and Ors.(WP No.32763 of 2019 and WMP No.33188 of 2019)
2. Section 167 of Companies Act, 2013 – Vacation of office of director (enforced w.e.f. April 1, 2014) 167(1) – The office of a director shall become vacant in case:
(a) he incurs any of the disqualifications specified in section 164;
Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.
3. Inserted by Section 54 of Companies (Amendment) Act, 2017 (No. 1 of 2018) (notified on January 3, 2018)
4. Shayara Bano v. Union of India (2017) 9 SCC 1
5. Yashodhara Shroff v. Union of India (2019) SCC Online Kar 682
6. 164. Disqualifications for Appointment of Director – (2) No person who is or has been a director of a company which— (a) has 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.
7. Supra n. ii
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