TaxTMI 
TaxTMI 
2020 (1) TMI 169
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....e was filed in the nature of a Public Interest Litigation. The petitioner has subsequently filed the instant writ petition. It is to be noted that the petitioner was not granted any liberty to institute a fresh petition for the same relief upon the earlier writ petition being withdrawn. The permission to withdraw the Public Interest Litigation was granted by this Court, without prejudice to the rights of any person aggrieved or otherwise entitled to file such a petition relating to the vires of the proviso, which has been questioned herein. Even though the present petition is not labelled as Public Interest Litigation, it in fact is a Public Interest Litigation. The petitioner's rights have not been in any manner affected by the insertion of the proviso in as much as the petitioner is not a Director in any company and has not had to vacate his office by virtue of the proviso inserted in Section 167(1)(a) of the Companies Act by the Companies (Amendment) Act 2017. The petitioner therefore has no locus to institute the present writ petition. The conduct of the petitioner in repeatedly approaching the Court by filing petitions for same relief is not appreciated. The writ petition ....
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.... of sub-section (1) of section 165.] (2) No person who is or has been a director of a company which - (a) has not filed financial statements or annual returns for any continuous period of three financial years; or (b) has failed to repay the deposits 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 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 Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment. (3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2): Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or pe....
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.... imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. (3) Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting. (4) A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1). " 5. Section 164(2) provides that if a company does not file financial statements for annual returns for any continuous period of three financial years, or fails to repay the deposits 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 continuous for one year or more then, a Director of such company is not eligible to be reappointed as a Director of that company or appointed in any other company f....
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.... shall not be capable of being appointed director of a company, if - (a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force ; (b) he is an undischarged insolvent ; (c) he has applied to be adjudicated as an insolvent and his application is pending ; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence ; (e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; (f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section ; or 1 [(g) such person is already a director of a public company which, - (A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999 ; o....
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.... from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board ; (h) he (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295 ; (i) he acts in contravention of section 299 ; (j) he becomes disqualified by an order of Court under section 203 ; (k) he is removed in pursuance of section 284 ; or (l) having been appointed a director by virtue of his holding any office or other employment in the company, 1 [***] he ceases to hold such office or other employment in the company 2 [***]. (2) Notwithstanding anything in clauses (d), (e) and (j) of sub-section (1), the disqualification referred to in those clauses shall not take effect - (a) for thirty days from the date of the adjudication, sentence or order ; (b) where any appeal or petition is preferred within the thirty days....
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....e decision dated 09.07.2019 of the Hon'ble Bombay High Court in Kaynet Finance Ltd. Vs. Verona Capital Ltd., Appeal Lodging No.318 of 2019 in Arbitration Petition No.716 of 2019 wherein, the Delhi High Court observed as under:- "...78. It was contended by the petitioners that Clause (a) of Section 167(1) as it stood prior to introduction of the proviso could apply only individuals who incurred the disqualification as specified in Section 164(1) of the Act not to those who incurred the disqualification under Section 164(2) of the Act. It was contended that introduction of the proviso brought about a material change in the import of clause(a) of Section 167(1) of the Act and therefore the same would be applicable only prospectively. The learned counsel appearing for the petitioners relied upon the decision of the Bombay High Court in Kaynet Finance Limited vs. Verona Capital Limited: Appeal Lodging No. 318 of 2019 in Arbitration Petition No. 716 of 2019 and Notice of Motion Lodging No. 662 of 2019, decided on 09.07.2019 in support of their contention. In that case, the Division Bench of the Bombay High Court had read down the provisions of Section 167)(1)(a) of the Act t....
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....o be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act." 12. It was in order to rectify such situations the proviso to Section 167(1)(a) was inserted by the 2017 Amendment Act. It is worthwhile to mention that the Company Law Committee had also made its recommendations to this effect. The relevant portion of the 2016 Company Law Committee report reads as under:- "11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence et....
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.... 164(1) are satisfied and not when there is liability under Section 164(2). The second solution suggested that disqualification under Section 167(1)(a) read with Section 164(2) should be applicable only to the individual who was Director at the time of the default. 14. The primary issue in this case relates to whether or not the proviso to Section 167(1)(a) was without justification irrationally mandating the vacating of Directorship in other companies while not providing for the same in the defaulting company. It is the contention of the petitioner that the impugned proviso provides for vacating of the post of Directorship in all other companies without any justification being provided for the same. The petitioners have contended that the reasoning behind inclusion of this proviso finds scarce reference in the Statement of Objects and Reasons of the 2017 Amendment Act and that this Act merely states that the justification can be found in the 2016 Company Law Committee report. 15. As stated above, Section 164(2) is nearly identical to, and has borrowed from, Section 274(1)(g) of the Companies Act 1956, the object and purpose of these two Sections can be accepted a....
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.... of being appointed "director" of a company, if such person is already a director of a public company which has not filed annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April 1998, or has failed to repay its deposits or interest thereon or redeem its debentures on due date or pay dividend and such failure continue for one year or more and such person shall not be eligible to be appointed as a director of any other public company for a period of 5 years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in clause (b). The purpose of the amendment is to disqualify certain person from directorship in public companies. The intention and the purpose of the above amendment is 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 is as such not to punish those who are disqualified but to save the com....
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.... incapable of becoming directors in other companies and the said amendment became imperative in view of a large number of companies becoming defaulters; (4) The said amendment does not violate the rules of natural justice; (5) Section 274(1)(g) does not penalize the company. It is only the directors who are rendered incapable of functioning as directors for certain period. The amendment has been carried out primarily to ensure that directors of the company discharge their obligation properly. They should be more vigilant and careful and ensure that investors do not lose their life time savings; (6) Once a person becomes a director, it is his primary duty to ensure that there is proper governance and investors' money is protected; (7) The amendment is not violative of article 14; (8) Amendment to section 274(1)(g) has been made primarily in larger public interest to protect large number of investors, particularly small and poor investors who had invested their life time savings with these companies and in majority of the case neither principal amount nor interest is paid." (emphasis supplied) 16. A perusal of the above mentioned pa....
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....herefore, if at all there is violation of article 21, it is the violation of fundamental right under article 21 of the children and their parents. 15. Similarly, we are unable to comprehend how the amendment of section 274(1)(g) violates the petitioners' fundamental rights guaranteed under article 19(1)(g) of the Constitution. This amendment does not debar the petitioners from carrying on any business, trade or occupation, only that the persons have been rendered incapable of becoming directors in other companies. Perhaps, this amendment became imperative in view of a large number of companies becoming defaulters. It is a matter of common knowledge that millions of small investors, who had deposited their lifetime savings with these companies, in order to get reasonable returns, have been totally ruined. In most cases, they neither receive the principal amount nor any interest. A number of such petitions are pending in various courts of the country. We find no merit in the submission of the petitioners that this amendment, in any manner, violates the petitioners' fundamental rights guaranteed under article 19(1)(g) of the Constitution. 16. We do not see an....
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....rry on his business, trade or occupation, does not create any unreasonable classification and merely acts as a penal measure in cases where a Director has failed to carry out his duties. Additionally it held that Section 274(1)(g) of the Companies Act 1956, was a necessary provision as it was in the interest of ensuring good corporate governance and transparency. 18. Further, Gujarat High Court in Saurashtra Cement Ltd. another Vs. Union of India, (2006) SCC Online Guj 258, at paragraph 24 and 27 held as under:- "...24. It is also the submission on behalf of the petitioners that section 274(1)(g) is ultra vires the statement of objects and reasons and/or the above provision has no nexus to the objects sought to be achieved, namely good corporate governance and protection of the investors. Section 274(1)(g), is reproduced hereinabove and the statement of objects and reason is also reproduced hereinabove. The primary object of enactment of section 274(1)(g) is better corporate governance as well as protection of investment of the depositors. The intention and purpose of the above amendment is to disqualify the errant directors and to protect the investors from mismanageme....
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....81) 4 SCC 675, 690 : [1982] 133 ITR 239, has held as under (page 255): "... laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved... The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstr....
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....nformation about the company, this, thought the founding fathers of our company law, would be a sure shield. The shield may not have proved quite so strong as they had expected and in more recent times, it has been supported by offensive weapons." 36. The Companies Act casts an obligation on the company registered under the Companies Act to keep the books of accounts to achieve transparency. Previously, it was thought that the production of the annual accounts and their preparation is that of the accounting professional engaged by the company where two groups who were vitally interested were the shareholders and the creditors. But the scenario has drastically changed, especially with regard to the company whose securities are traded in public market. Disclosure of information about the company is, therefore, crucial for the accurate pricing of the company's securities and for market integrity. Records maintained by the company should show and explain the company's transactions, it should disclose with reasonable accuracy the financial position, at any time, and to enable the Directors to ensure that the balance sheet and profit and loss accounts will comply with th....
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....cipating in the commission of fraud. It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the Company." The above mentioned extract has also been reaffirmed in the case of N.Narayanan Vs. Adjudicating Officer, Security and Exchange Board of India(supra). 22. It has also been noted by the Hon'ble Supreme Court in Dale & Carrington Invt. Pvt. Ltd. v. P.K. Prathapan, (2005) 1 SCC 212 that the directors of a company owe an obligation to the shareholders of the company to make all disclosures and to act in the best interest of the company, exercising due diligence and good faith. The Hon'ble Supreme Court also stated that irrespective of whether directors are described as trustees, agents or representatives, they have a duty to act for the benefit of the company and must not derelict their duty towards the shareholders and investors in the company. The relevant portion reads as under:- "(d) We may also test the alleged act of allotment of equity shares in favour of Ramanujam from a legal angle. Could it be said to be a bona fide act in the interest of the company on the part of Directors of the co....
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....cts of Directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non-applicability of Section 81 of the Companies Act in case of private limited companies casts a heavier burden on its Directors. Private limited companies are normally closely held i.e. the share capital is held within members of a family or within a close-knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of Section 81 of the Act to private companies does not mean that the Directors have absolute freedom in the matter of management of affairs of the company. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close-knit group. Therefore, if the Directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for brea....
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....ail by the Hon'ble Supreme Court in Shayara Bano v. Union of India, (2017) 9 SCC 1 where the Court, while placing reliance on Khoday Distilleries Ltd. v. State of Karnataka, (1996) 10 SCC 304 and Sharma Transport v. State of A.P., (2002) 2 SCC 188 states as under: "100. To complete the picture, it is important to note that subordinate legislation can be struck down on the ground that it is arbitrary and, therefore, violative of Article 14 of the Constitution. In Cellular Operators Assn. of India v. TRAI [Cellular Operators Assn. of India v. TRAI, (2016) 7 SCC 703] , this Court referred to earlier precedents, and held: (SCC pp. 736-37, paras 42-44) "Violation of fundamental rights 42. We have already seen that one of the tests for challenging the constitutionality of subordinate legislation is that subordinate legislation should not be manifestly arbitrary. Also, it is settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. [See Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 6....
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....applicable to executive action do not necessarily apply to delegated legislation. In order to strike down a delegated legislation as arbitrary it has to be established that there is manifest arbitrariness. In order to be described as arbitrary, it must be shown that it was not reasonable and manifestly arbitrary. The expression "arbitrarily" means: in an unreasonable manner, as fixed or done capriciously or at pleasure, without adequate determining principle, not founded in the nature of things, non- rational, not done or acting according to reason or judgment, depending on the will alone.' " 101. It will be noticed that a Constitution Bench of this Court in Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India, (1985) 1 SCC 641 : 1985 SCC (Tax) 121] stated that it was settled law that subordinate legislation can be challenged on any of the grounds available for challenge against plenary legislation. This being the case, there is no rational distinction between the two types of legislation when it comes to this ground of challenge under Article 14. The test of manifest arbitrariness, therefore,....
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....o cannot be seen to be irrational that bears a direct nexus to the object that it seeks to achieve. It therefore cannot be said or contended that the impugned amendment to Section 167(1) by inserting the proviso is so manifestly arbitrary that it offends Article 14 of the Constitution of India. 27. The Hon'ble High Court of Karnataka in Yashodhara Shroff Vs. Union of India, (2019) SCC Online Kar 682 has upheld the validity of the proviso to sub-section 1 of Section 167. The learned Single Judge has observed as under:- 181. However, I do not find that the said provision is arbitrary inasmuch as a director who suffers disqualification as per Section 164(2) of the Act cannot be re-appointed as a director of the defaulting company as well as any other company for a period of five years. The said consequence stems immediately after the company in which a person is a director does not comply with Section 164(2) of the Act. When a director cannot be re-appointed in the defaulting company or in any other company for a period of five years from the date of disqualification, by the same logic, the director cannot be permitted to continue as a director in any other company. Th....
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....from the main enactment, a portion which, but for the proviso would fall within the main enactment. Further, a proviso cannot be construed as nullifying the enactment or as taking away completely a right conferred by the enactment. (b) In this regard, learned Author, Justice G.P. Singh has, in "Principles of Statutory Interpretation", enunciated certain rules collated from judicial precedents. Firstly, a proviso is not to be construed as excluding or adding something by implication i.e., when on a fair construction, the principal provision is clear, a proviso cannot expand or limit it. Secondly, a proviso has to be construed in relation to which it is appended i.e., normally, a proviso does not travel beyond the provision to which it is a proviso. A proviso carves out an exception to the main provision to which it has been enacted as a proviso and to no other. However, if a proviso in a statute does not form part of a section but is itself enacted as a separate section, then it becomes necessary to determine as to which section the proviso is enacted as an exception or qualification. Sometimes, a proviso is used as a guide to construction of the main section. Thirdly, when....
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....lar class of cases included in it should be held to be otiose and to have achieved nothing. InKedarnath Jute Manufacturing Co. Ltd.v.The Commercial Tax Officer, [AIR 1966 SC 12], it was observed that "the effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment or to qualify something enacted therein, which, but for the proviso, would be within it". [See "Craies" on Statute Law - 6thEdition - P.217]. In this case, the Court was considering Section 5(2)(a)(ii) of Bengal Finance Sales Tax Act, 1941 and Rule 27-A of Bengal Sales Tax Rules. InDattatraya Govind Mahajanv.The State of Maharashtra, [(1977) 2 SCC 548:AIR 1977 SC 915], a Constitution Bench of the Apex Court, while considering the amendment made to Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961, in the context of Article 31B of the Constitution and the second proviso thereto, reiterated what was stated inIshverlals case, supra. InS. Sundaram Pillaiv.V.R. Pattabiraman, [(1985) 1 SCC 591:AIR 1985 SC 582], while dealing with the scope of a proviso and explanation to sub-section (2) of Section 10 of Tamil Nadu Building....