2020 (3) TMI 806 - HC - Indian Laws

Clarification on Director Disqualification under Companies Act: Impact on Multiple Companies

Subhas Kumar Biswas, Bankim Kumar Biswas, Gautam Kumar Biswas, Sanjay Das, Ramesh Kumar Agarwal, Ramkrishna Das, Subham Agarwal and another, Vijay Kumar Singhal and another, Radheyshyam Jajoo Versus Union of India and others

The High Court of Calcutta clarified that disqualification of a Director Identification Number (DIN) under Section 164(2) of the Companies Act, 2013 ... Disqualification of petitioner's Director,s DIN - Whether the disqualification of the petitioner's Director Identification Number (DIN) would operate in respect of the defaulting company only or all other companies in respect of which the petitioner is a Director? - HELD THAT:- Section 164(2) of the 2013 Act, if construed in proper perspective, indicates that the legislature intentionally made a distinction in the language of the first part of the said sub‐section with the second part thereof. Sub‐section (2) of Section 164 starts with the expression 'no person, who is or has been a Director of a company', which has committed defaults specified therein, while the sub‐section ends with the expression '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' - a specific distinction is made in the sub‐section between the directorship of a person of a defaulting company, in respect of which the eligibility of 're‐ appointment' as a Director has been prevented, whereas, as regards other companies, the term 'appointed', as opposed to 're‐appointed' has been deliberately used, thereby indicating only fresh appointments. There could not be any other meaning attributed to the user of the terms 're‐appointed' and 'appointed' in two parts of the said sub‐section, in respect of directorship in the defaulting company and in respect of other companies respectively. Section 167 of the 2013 Act and the proviso to sub‐section (1)(a) thereof shows that the said proviso came into force after disqualification of the petitioner by the respondents. Hence, the proviso is not applicable to cases where the disqualification took place before enactment of the said amendment - Applicability of Rule 14 of the 2014 Rules pertains ex facie to the company at default and not to other companies and, as such, it cannot be mandatory for the Director to comply with the provisions thereof in respect of all other companies of which she/he is a Director but which are not at default, but in respect of defaulting company only. The disqualification of the DIN of the respective petitioners in respect of other companies, than the company in respect of which the default has been allegedly committed, is set aside - petition disposed off. Issues:Interpretation of Section 164(2) of the Companies Act, 2013 regarding disqualification of Director Identification Number (DIN) for defaulting companies and other companies. Applicability of provisos to Section 164(2) and Section 167(1)(a) of the Companies Act, 2013. Distinction between 're-appointed' and 'appointed' Directors. Applicability of Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014.The High Court of Calcutta addressed the common question in multiple writ petitions regarding the scope of disqualification of a Director Identification Number (DIN) under Section 164(2) of the Companies Act, 2013. The issue was whether the disqualification would impact only the defaulting company or extend to all other companies where the individual serves as a Director. The Court considered previous judgments, including those of the Delhi High Court, which held that disqualification under Section 164(2) operates solely in relation to the defaulting company and not all other companies. The Court analyzed the language of Section 164(2) and noted a deliberate distinction between 're-appointed' and 'appointed' Directors, indicating that disqualification affects re-appointment in the defaulting company but only fresh appointments in other companies.The Court further examined Section 167(1)(a) of the Companies Act, 2013 and observed that the proviso to this section, which came into force after the disqualification of the petitioners, does not apply retroactively to cases where disqualification occurred before the amendment. The Court clarified that Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 applies explicitly to the defaulting company and not to other companies where the Director serves. Therefore, compliance with Rule 14 is mandatory only for the defaulting company and not for non-defaulting ones.The judgment emphasized a logical interpretation where disqualification for default in one company should not lead to disqualification in all other non-defaulting companies where the individual serves as a Director. The Court disposed of the writ petitions by setting aside the disqualification of the petitioners' DINs for companies other than the defaulting entity. However, the disqualification was maintained for the defaulting company. The Court specified that post the Amendment to the Companies Act, 2013 dated May 7, 2018, Directors would be deemed disqualified in all companies except the defaulting one if they incur disqualifications under Section 164(2) after the amendment.In conclusion, the Court's ruling provided clarity on the application of disqualification under Section 164(2) of the Companies Act, 2013, distinguishing between defaulting and non-defaulting companies and ensuring that penalties are proportionate to the offenses committed. The judgment highlighted the importance of interpreting statutory provisions in a manner that upholds the principles of justice and fairness in corporate governance.