2020 (8) TMI 432 - HC - Companies Law

High Court upholds director disqualification for non-compliance with Companies Act, emphasizes statutory duties

The Calcutta High Court dismissed a writ petition challenging a communication disqualifying a director for not filing audited financials. The Court ... Disqualification of Director - newly appointed Director was not allowed to operate the bank account since she was declared disqualified along with other Directors due to non-filing of audited financials of the company with the Register of Companies - Section 164(2) of the Companies Act - HELD THAT:- Section 167(1)(a) of Companies Act makes it clear that if a director of a company who has failed to file financial statements incurs disqualification for appointment of a director in another company or re-appointment as a director as the case may be would immediately forfeit his right to continue as director in all the companies which may have filed the financial statements of annual returns as required under the Companies Act. The inclusion of the said proviso has an object as it is found that directors in several companies act in a perfunctory manner and with a view to evade the provisions of the Companies Act remain as director of different companies and continue to remain in the Board of such companies by virtue of the fact that no default had occurred in the other company. It is significant to mention here that director of Regatta Techno-Com System Private Limited and S & H Manufacturing and Trading Private Limited are common and keeping in view the object of the said amendment which fastens the liability on the directors and in clear terms specify the disqualification that a director would earn irrespective of the fact that he may not be the director of the company which has not committed any default, there are no reason in the communication made by the State Bank of India. Petition dismissed. Issues:1. Disqualification of a director for non-filing of audited financials.2. Interpretation of Sections 164(2) and 167 of the Companies Act.3. Impact of the proviso added to Section 167(1)(a) by an amendment.4. Liability of directors in multiple companies.Analysis:The judgment by the Calcutta High Court dealt with a writ petition challenging a communication from the State Bank of India regarding the disqualification of a newly appointed director of a company due to non-filing of audited financials. The petitioner argued that under Section 164(2) of the Companies Act, a person may be ineligible for reappointment as a director for five years if the company fails to file financial statements. However, the petitioner relied on a previous decision by a Division Bench which suggested that disqualification under Section 164(2) would not prevent a director from continuing in companies that are not in default. The Court noted that the Division Bench's view was not conclusively decided and highlighted the amendment to Section 167(1)(a) which specified that a director in default in one company would vacate office in all companies except the defaulting one.The Court emphasized that the proviso in Section 167(1)(a) aimed to prevent directors from evading the Companies Act by remaining in non-defaulting companies. The judgment clarified that a director who incurs disqualification for appointment or reappointment due to non-filing of financial statements forfeits the right to continue as a director in all companies that have complied with the filing requirements. The Court found no merit in the petitioner's argument and suggested that compliance with the Companies Act was necessary instead of attempting to circumvent it. Consequently, the writ petition was dismissed, and the application was disposed of without costs.Overall, the judgment underscores the importance of directors fulfilling their statutory obligations under the Companies Act and the consequences of non-compliance on their directorship in multiple companies, as clarified by the relevant provisions and amendments.