Default Before 2014-15 FY Can’t Be Considered : Kerala HC

The amendments were made in the Companies Act inserting the provisions mandating Vacation of Directorship are valid and are not retrospectively applicable is ruled by the Kerala High Court. In the year 2018, the Government, had disqualified a huge number of persons from the directorship of the Companies to avoid sham Companies. Challenging Section 164(2)(a) and 167(1)(a) of The Companies Act, more than 200 petitions were filed. The disqualification thrust upon the petitioners for acting as Directors of companies, according to Sections 164 and 167.Section 167(1)(a) says that the office of a director shall become vacant in case he incurs any of the disqualifications specified in Section 164, and Section 164(2) deals with 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 financial years or has failed to repay the deposit 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 in other company for a period of 5 years from the date on which the said company fails to do so.The main purpose of Section 167(1)(a) is to bring responsibility in corporate governance and the provision is to make Directors of defaulting companies to continue to hold office, but at the same time to vacate them from the office of Directors in all other companies.Considering The Companies Act 2013, the petitioner argued that it has only prospective operations. Hence, we cannot apply Section 164(2) retrospectively. It was urged, that any retrospective implementation of Section-164(2) would be ultra vires. It was considered that there will be no disqualification of Directors in accordance with Section164(2) until the year 2017.Section 164 and 167 is regarded as retrospective operation. So, the petitioner’s council argued that Section 164(2)(a) would apply only prospectively. Therefore, the respondent cannot take any consideration for the period before 01.04.2017 for examining default for three consecutive years.In the case of Sajjan Singh v. State of Punjab [AIR 1964 SC 464] the counsel urged that when an act or conduct is made subject to penalty for the first time, then, only those acts orconduct subsequent to the enactment or amendment that can be taken into account. The Single Judge Bench of Justice N.Nagaresh held that the provisions added below under Section 164(2) and Section 167(1)(a) of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from May 7, 2018 are constitutionally valid and the same being  they are clarificatory in nature,  they would apply retrospectively. However, the words “in all the companies” appearing in the provision to Section 167(1)(a) will have only prospective operation.These observations made by the Kerala High Court are similar to the decisions of Gujarat, Madras, Karnataka, Allahabad and Madhya Pradesh High Courts on the position of law in disqualification of directors under Section 164(2) of the Companies Act.The Delhi High Court has considered that in case of MukutPathak &Ors. v. Union of India &Anr., WP (C) No. 9088/2018, held that the said section can apply to failure in filing returns for financial years prior to 2014, that is the year in which the said section came into force.

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