Court upholds Companies Act proviso requiring Directors of defaulting companies to vacate posts.

The court upheld the validity of the proviso to Section 167(1)(a) of the Companies Act, inserted by the Companies (Amendment) Act 2017, dismissing the writ petition. The proviso was found to be constitutionally valid, not violating Article 14 of the Constitution of India. It aims to ensure transparency, probity, and accountability in corporate governance by requiring Directors of defaulting companies to vacate their posts in other companies. This decision aligns with the legislative intent to prevent mismanagement, protect investors, and promote good corporate governance.

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Issues Involved
1. Vires of the proviso to Section 167(1)(a) of the Companies Act, as inserted by the Companies (Amendment) Act 2017.
2. Locus standi of the petitioner.
3. Constitutionality and arbitrariness of the proviso to Section 167(1)(a) under Article 14 of the Constitution of India.

Detailed Analysis

1. Vires of the Proviso to Section 167(1)(a)
The central issue in the writ petition is the challenge to the vires of the proviso to Section 167(1)(a) of the Companies Act, 2013, which states: "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 petitioner contends that this proviso leads to unequal treatment of Directors based on whether they hold positions in multiple companies. The petitioner argues that this differential classification lacks intelligible differentia and is arbitrary, thus violating Article 14 of the Constitution. The petitioner also claims that the provision irrationally affects non-defaulting companies and punishes individual Directors for the defaults of a company even when fault cannot be directly attributed to them.

2. Locus Standi of the Petitioner
The petitioner, a Company Secretary, previously challenged the impugned proviso through another writ petition, which was withdrawn. The court noted that the petitioner was not granted liberty to file a fresh petition for the same relief. The petitioner’s rights were not affected by the proviso as he is not a Director in any company and has not had to vacate his office. Therefore, the petitioner lacks locus to institute the present writ petition. Despite this, the court chose to address the substance of the challenge rather than dismissing the petition solely based on locus standi.

3. Constitutionality and Arbitrariness of the Proviso
The court examined the constitutionality of the proviso in light of Article 14. It was noted that prior to the 2017 amendment, Directors of a defaulting company would have to vacate their post only in the defaulting company, leading to a situation where no person could be appointed as a Director in such companies. The amendment aimed to rectify this by ensuring that a Director of a defaulting company does not vacate his post in the defaulting company but must vacate his post in all other companies.

The court referred to the legislative intent and the Company Law Committee’s recommendations, which aimed to prevent a paradoxical situation where the office of all Directors in a defaulting company would become vacant, leaving no one to manage the company. The amendment was intended to ensure good governance and transparency, protecting investors and ensuring compliance with statutory requirements.

The court also referenced judgments from the Gujarat High Court in Saurashtra Cement Ltd. and the Bombay High Court in Snowcem India Ltd., which upheld similar provisions in the Companies Act 1956, emphasizing the importance of good corporate governance and protection of investors.

The court concluded that the proviso to Section 167(1)(a) has a rational nexus with the object it seeks to achieve, which is to ensure transparency, probity, and accountability in corporate governance. The proviso was found to be neither manifestly arbitrary nor violative of Article 14. The court upheld the validity of the proviso, dismissing the writ petition.

Conclusion
The court dismissed the writ petition, holding that the proviso to Section 167(1)(a) of the Companies Act is constitutionally valid and does not violate Article 14. The proviso serves the purpose of ensuring good corporate governance and protecting investors by mandating that Directors of defaulting companies vacate their posts in other companies, thereby preventing the perpetuation of mismanagement and ensuring accountability.

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