Madras HC Upholds Constitutionality Of Proviso To Section 167(1)(a) Companies Act [Read Judgment]

Protecting the interests of the investors, a Division bench of the High Court of Madras has upheld the validity of the 'proviso' to Section 167(1)(a) of the Companies Act 2013 .

In the instant case, the petitioner had contended that the newly inserted proviso in the Companies Act, 2013 was arbitrary and violated the principles of natural justice as Directors of a defaulting company would have to vacate Directorship in other companies while retaining the same in the defaulting company.

The Bench rejected this contention and examined the issue in detail.

THE NEED FOR THE PROVISO:

While relying on the judgment passed by the Hon'ble Delhi High Court in Mukut Pathak & Ors Vs. Union of India, WP.No.9088 of 2018 it was stated that prior to the insertion of impugned proviso in the Companies Act 2013, Directors of a company who had defaulted under Section 164(2) would have to vacate their post as Director of the defaulting company only. Thus a Director of a company who had defaulted was automatically attracted under Section 167(1). Thus, no person could be appointed as a Director in those companies which had defaulted under Section 164(2). To rectify such situations the proviso was inserted by the Amendment Act.

THE INTENT:

The Bench examined the legislative intent of the impugned proviso and relied on the judgments of the Gujarat High Court in Saurashtra Cement Ltd. &another Vs. Union of India, (2006) SCC Online Guj 258 and Snowcem India Ltd & Ors Vs. Union of India, (2004) SCC Online Bombay 1085 where the vires of Section 274(1)(g) of the Companies Act 1956, (which is a similar provision to the Section 167 (1) (a) of Companies Act 2013) was challenged as being violative of the fundamental rights. The Gujarat High Court held that the intention and the purpose of the section was 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 was 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.

The Supreme Court in Snowcem India Ltd & Ors Vs. Union of India emphasized that this amendment did not debar the petitioners from carrying on any business, trade or occupation. Such directors had only been rendered incapable of becoming directors in other companies. This amendment became imperative in view of a large number of companies becoming defaulters and did not create any unreasonable classification and was merely a penal measure in cases where a Director had failed to carry out his duties.

The legislative intent behind the inclusion of the proviso to Section 167(1)(a) was also to ensure good governance and inculcate a sense of security in investors through transparent disclosures and control over erring Directors and the same was reiterated by the Supreme Court in N.Narayanan Vs. Adjudicating Officer, Security and Exchange Board of India, (2013) 12 SCC 152.

The Division bench while approving judgment of the High Court of Karnataka in Yashodhara Shroff Vs. Union of India stated that validity of the proviso to subsection 1 of Section 167 was on two grounds. Firstly, the exclusion of Directors from vacating their posts in the defaulting company, while doing so in all other companies where they held Directorship has been done in order to prevent the anomalous situation wherein the post of Director in a company remains vacant in perpetuity owing to automatic application of Section 167(1)(a) to all newly appointed Directors. Secondly, the underlying object behind the proviso to Section 167(1)(a) is seen to be the same as that of Section 164(2) both of which exist in the interest of transparency and probity in governance.

Dismissing the writ petition, the Madras High Court held that the proviso to Section 167(1)(a) is neither manifestly arbitrary nor does it offend any of the fundamental rights guaranteed under the Constitution of India.

Case Details

Title : G Vasudevan v Union of India

Case No. : WP(c) No.32763/2019

Coram    : Chief Justice A P Sahi, Justice Subramonium Prasad

Click here to download judgment

Read Judgment