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Are
the Sections 164 (2) and 167 of the Act 2013 co-linked(Automatic Vacation) :-
Short
Summary:
In this article, the author begins by referring the
provisions of section 164 and Section 167 of Companies Act, 2013 relating to
Disqualification of director and Vacation of director(automatic vacation). The
main thrust of the article, however, is upon the “Are the Sections 164 (2) and
167 of the Act 2013 co-linked”
In last few months we have seen that number of director(s)
have been disqualified under the said section by Registrar of Companies (ROC)
and Disqualification of directors hits 500 listed companies. On 5th
September, 2017 MCA strikes 2,09,000
companies from ROC database for not filling of return for 3years, on 12th September,
2017 MCA says it has identified 106,000 directors for disqualification, on 20th
September, 2017 MCA starts publication names of directors who have been
disqualified, in last week of September NSE sends out of 210 notices to listed
Companies whose directors have been disqualified by MCA and BSE identifies 500
Companies who ‘appear’ to have directors disqualified by MCA on their board, on
6th of October NSE send ot and additional 97 notices to listed
Companies. There is so much confusion in regard to “Are the Sections 164 (2)
and 167 of the Act 2013 co-linked” and “Is Section 164 (2) of the Act 2013 lead
to automatic Disqualification”.
In this article author discuss the decisions of Hon’ble
National Company Law Tribunal (NCLT), and also on report of the companies law
committee in regard to Automatic vacation and Section 164(2) effect.
BACKGROUND
Section 164 of the
Companies Act, 2013 (herewith referred to as the 'Act') states various
disqualifications for appointment of Director in a company. Further, Section
167 of the Act states the instances for the occurrence of the vacation of the
office of director. In the present Article the efforts has been done to make
the reader understand the effect of clause (a) of subsection (2) of Section 164
read with clause (a) of the sub-section (1) of section 167 of the Act to the
extent that it is not limited to the provisions of the Section itself i.e.
disqualification under Section 164 (2) of the Act does not only makes a
director ineligible to be reappointed as a director of that company or
appointment in other companies, but also shall mean to effect the directorship
in the existing companies when read with Section 167 (1)(a) of the Act.
Further, in this
article it has been emphasized that the intention of the law makers to bring
such strict provisions under the Act was to tighten the noose of the defaulters
for non-filing of the financial reports annually is an act of keeping the
stakeholders in grave obscurity.
The relevant extract
of the provision under the aforesaid sections are as follows:
Section 164. "(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).....,
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."
Section 167. "(1)
The office of a director shall become vacant in case—
(a) he incurs any of
the disqualifications specified in section 164;"
RETROSPECTIVE
OR PROSPECTIVE EFFECT OF SECTION 164(2) OF THE ACT
Substantive law refers
to body of rules that creates, defines and regulates rights and liabilities.
Procedural law establishes a mechanism for determining those
rights and liabilities and machinery for enforcing them.
On study of various
judgments, one could settle that it is a cardinal rule in law that every
statute is prospective unless it is expressly or by necessary implication made
to have retrospective operation. Procedural law is retrospective meaning
thereby that it will apply even to acts or transactions under the repealed Act.
In this article, we
shall elaborately discuss in the following points whether the applicability of
Section 164 (2) shall be retrospective or prospective or whether even the
question of the same arises keeping in mind the intention of the law.
GENERAL
CIRCULAR 41/2014 DATED 15.10.2014.
Before interpreting
the provisions of Section 164(2) and its applicability as prospective or
retrospective, it would be important to refer to the General Circular 41/2014
dated 15.10.2014 issued by Ministry of Corporate Affairs.
The said circular
dated 15.10.2014 was issued by the MCA on the clarification been sought by the
Stakeholders that whether the directors of the Companies who have filed their
(past) balance sheets or annual returns after 01.04.2014 but before the Company
Law Settlement Scheme 2014 (CLSS-2014) [15.08.2014] will get immunity from
disqualification under Section 164(2)(a). As per the said circular, the MCA has
clarified that the disqualification will be applicable for the prospective
defaults of such companies directors who have filed their Balance Sheets and
Annual returns on or after 01.04.2014 but before CLSS-2014 i.e. before
15.08.2014.
In other words, it can
be said that the provisions of Section 164 (2) are not prospective in nature
that is the three financial years will not be counted from 01.04.2014 (the day
the section became effective) but even in case where the balance sheets or
annual returns of previous years i.e. prior to 01.04.2014 have not been filed
for consecutive period of three years and such default continues after
01.04.2014, the directors of such companies will be considered as disqualified.
The prospective effect of disqualification will be applicable on such companies
who have prior to 15.08.2014 have complied with filing of its past balance
sheets or annual return as the case may be.
Discussion
about previous Act
SECTION 274(1)(G) OF COMPANIES ACT, 1956.
It is to be noted that
Section 164(2) correspond to Section 274(1)(g) of Companies Act, 1956, wherein
a person was not capable of being appointed director of a Company if such
person is already a director of a public company which has not filed the Annual
Accounts or Annual Return for any continuous three financial years commencing
on or after the first day of April 1999.
Here, as one can see
the difference between Section 164(2) and Section 274(1)(g) is that in case of
Section 274(1)(g) the default of non filing is w.r.t public company however in
case of Section 164(2) there is no such distinguishment between Private Company
or Public Company. Furthermore, under Section 274(1) (g), the applicability of
the Section was defined i.e. the three financial years were taken into account
from on or after 1st April 1999 however, in the present Section 164(2) there is
no such date mentioned. Meaning thereby same is continuous in nature i.e. the
defaults prior to introduction of the said Section 164(2) will be considered
for the purpose of determining the disqualification.
CIRCULAR
DATED 12.08.2014 OF MINISTRY OF CORPORATE AFFAIRS INTRODUCING COMPANY LAW
SETTLEMENT SCHEME, 2014 (CLSS).
Furthermore, it would
also be important to peruse the circular dated 12.08.2014 relating to CLSS.
This circular by MCA provides the intention of introducing the scheme of
the Company Law Settlement Scheme, 2014. The relevant extracts
are as follows:
- "1. ...
2. The companies Act,
2013 lays down a stricter regime for the defaulting companies with higher
additional fees....Additionally, the provisions of section 164(2) of the Act,
inter alia, providing for disqualification of directors in case a company has not filed financial statements or
annual returns for any continuous period of three financial years has been extended
to all companies.
3. The Ministry has
received representations from various stakeholders requesting grant of
transitional period/one-time opportunity to enable them to file their pending
annual documents to avoid attraction of higher fees/fine and other penal
action, especially disqualification of
their Directors prescribed under the new provisions of the Act.
6....... (xii):-In
case of defaulting companies which
avail of this scheme and file all belated
documents, the provision of 164 (2)(a) of the Companies Act, 2013
shall apply only for the prospective defaults, if
any, by such companies."
Further, the
defaulting companies were defined under the Scheme as a company which has made
a default in filing of annual statutory documents and such defaulting companies
were permitted to file belated documents which were due for filing till 30th
June, 2014.
Accordingly, on the
basis of above the circular also it is clear that the intention of law was to
curb the continuing default of the companies for non-filing of their statutory
documents by bringing strict provisions under section 164 (2) of the Companies
Act, 2013. Had the same not been the intention the purpose of the relief
provided under the aforesaid scheme would fail.
VIKRAM
AHUJA VS. GREENSTONE INVESTMENTS PVT LIMITED AND ORS., BEFORE NCLT, MUMBAI
BENCH, DECIDED ON 22.11.2016:
In the said case law,
one of the point for discussion and decision before the Hon'ble bench was
"whether the disqualification set forth in Section 164(2)(a) r/w 167(1) (a)
of the Act 2013 has retrospective effect or not";
- The Hon'ble Tribunal, after
considering various case laws considered that: "this provision has
to be read as applicable to the situations where nonfiling
has started, at the most in the past and continuing while this enactment
has come to into existence and also to future non-filing........"
- Also, in a decided case law it
has been provided that, the statute providing posterior
disqualification on past conduct does not become a retrospective one
because a part of a requisition for its action is drawn from a time
antecedent to its passing;
- Therefore, the provisions of
Section 164 (2)(a) shall be applicable where the non-filing has started in
the past and continuing while this enactment has come to existence and
also to the future non-filing. Mere applicability of such provision on
continuous default till date shall not give rise to the question of
retrospective or prospective effect.
ACCOMPANIMENT
OF SECTION 167(1)(A) AND SECTION 164(2) OF THE ACT
It is to be noted that
Section 167(1)(a), mentions that "he incurs any disqualification specified
in Section 164". The section collectively talks about the disqualification
under Section 164 without further bifurcating as disqualification specified
under Section 164(1) or Section 164(2). Had, it been the intention of
legislature to refer to only Section 164(1) the same should have been clearly
mentioned.
Further, Section 164
provides the type of disqualification due to which a person to be appointed or
re-appointed as Director is restrained from being appointed or reappointed. On
the other hand Section 167 provides for the circumstances wherein vacation of
the existing director from the board of directors of any Company (without any
discrimination as Private or public) will automatically happen. One such
circumstance is any of the disqualifications contemplated under Section 164.
REPORT
OF THE COMPANIES LAW COMMITTEE
Also, we have brought
about the intention of the law makers w.r.t. Section 164 (2) read with Section
167 (1) (a) of the Act. The relevant extracts from the Report of the Companies
Law Committee, issued in February 2016 (also available on the website of
Ministry of Corporate Affairs), has been discussed below with respect to the
stringent provision of disqualification and vacation of Director.
This Committee was
formed on 4th June, 2015 by the Ministry of Corporate Affairs, to make
recommendations to the Government on issues arising from the implementation of
the Companies Act, 2013 as well as on the recommendations received from the
Bankruptcy Law Reforms Committee, the High Level Committee on CSR, the Law Commission
and other Agencies.
The relevant extract
of the same is as follows [Page No. 57 para 11 (Part 1)]:
Disqualifications from
appointment as, and vacation of office of director
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 etc., and Section 164(2) lists out
disqualifications related to the company such as non-compliance of annual
filing requirements, etc.
The Committee
acknowledged that this Section created a paradoxical situation, as the office
of all the directors in a Board would become vacant where they are disqualified
under Section 164(2), and a new person could not be appointed as a director as
they would also attract such a disqualification. In this regard, the Committee recommended that the
vacancy of an office should be triggered only where a disqualification is
incurred in a personal capacity and therefore, the scope of Section 167(1)(a)
should be limited to only disqualifications under Section 164(1).
11.14 The Committee also recommended that a
disqualification under Section 164(2) be only applicable to a person who was a
director at the time of the non-compliance, and in case of a continuing
non-compliance, there should be a period of six months' time allowed for a new
Director to make the company compliant.
The Committee above
has also referred that in case of disqualification incurred by any Director
under Section 164 (2) of the Act will automatically vacate the office of the
director under Section 167(1)(a) of the Act in all the companies in which at
that point of time such person is a director.
APPLICABILITY
OF SECTION 164(2) TO PRIVATE COMPANIES OR PUBLIC COMPANIES
Disqualifications as
provided under section 164(2) of the Act are applicable to all companies
irrespective of their category and status. The private companies may add such
other disqualification in its Articles in addition to the statutory
disqualifications provided under the Act. Further, as far as the applicability
of Section 164(2) to the private companies are concerned here it would be
relevant to refer the circular dated 5th June 2015 wherein the Ministry of
Corporate Affairs have clarified the sections which are exempted in case of
Private Companies.
DISCUSSION
ABOUT SECTION 167 AMENDMENT IN COMPANIES (AMENDMENT) BILL, 2017
In section 167 of the
principal Act, in subsection
(1), – i. in clause
(a), the following proviso shall be inserted, namely: –
"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."
Accordingly, on the
basis of above amendment also it is clear that the intention of law was to curb
the continuing default of the companies for non-filing of their statutory
documents by bringing strict proviso under section 164 (2) of the Companies
Act, 2013 by amendment bill, 2017 Here the intention is to clarify that Section
164(2) is also a disqualification and Vacation under Section 167(1) is for
Whole section 164 by adding proviso that director shall become vacant in all
the companies, other than the company which is in default.
SOME
QUESTIONS NEED TO BE DISCUSSED
Ø Is
there any compliance requirement to be done by the company and the director in
case of non – compliance of Section 164 (2)?
Yes. Such company will
have to inform the Registrar in Form DIR-9 within a period of thirty days of
the failure that would attract the disqualification under sub-section (2) of
Section 164, furnishing therein the names and addresses of all the directors of
the company during the relevant financial years, otherwise the officers of the
company as specified in Section 2 (60) of the Act shall be the officers in
default.
In case of other companies
where the person is a director, he will inform the company concerned about the
disqualification incurred in Form DIR-8 before he is appointed/ reappointed.
Further, as per Section 167 (2) — if a person, functions as a director even
when he knows that the office of director held by him has become vacant on
account of any of the disqualifications specified in sub-section (1), he shall
be punishable with 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.
Ø How can the director remove his/her name from the list
of disqualified directors post serving the punishment of 5 years bar on
appointment/ re-appointment?
As per Rule 14
(5) of the Companies (Appointment and Qualification of Directors) Rules, 2014,
the director shall make an application in form DIR – 10 to the ROC for removal
of disqualification and the said application can be made only at the end of the
tenure of five years post his disqualification. DIR-10 form is physical form of
application marked to ROC.
Ø Is there any remedy available to such disqualified
directors if the director contends that his name has wrongly been removed?
At present, since
there seems to be no remedy available as per the Companies Act, 2013, a Writ
Petition can be made by the aggrieved director under Article 226 of the
Constitution of India in the absence of any alternate remedy available.
On September 21, 2017,
the Madras High Court has passed an interim order[9] staying the RoC Chennai’s order of
disqualification of Bhagavan Das Dhananjaya Das as the director of Birdies and
Eagles Sports Technology, a private company. It is expected that in sometime
from now, there will be several court rulings on the issue whether the removal
of the name of a person was/was not right.
CONCLUSION
The above discussions
relating to vacation of office of director due to disqualification incurred by
a director under section 164(2)(a) of the Act may be concluded with the
observation that such disqualification is one of the basis upon which the
office of a director shall become vacant
in all the companies in which he is holding position of director. However,
it is pertinent to note that such vacation of office will be effective
instantly when such disqualification has incurred by the director.
Although the said section
164(2) notified w.e.f. 01.04.2014, the disqualification shall be considered if
there is default in filing of financial statements and annual return by a
company in which a person is holding a position of directorship and thus such
person as director shall be disqualified to be appointed as director in any
other company and his position shall be vacated in all the companies in which
he is a director in terms of Section 167 (1) (a) of the Act. The same may be
understood by the following illustration:
Mr. X is a director in
the following companies:
- ABC Pvt. Ltd., which has last
filed its financial statements and annual return up to financial year
2011- 12;
- DEF Pvt.. which has last filed
its financial statements and annual return up to financial year 2013-14;
- MBD Pvt. Ltd. which has last
filed its financial statements and annual return up to financial year
2015- 16;
The disqualification
of Mr. X shall not be considered up to financial year 2014-15. Thereafter he
will be disqualified pursuant to Section 164(2)(a) as ABC Pvt. Ltd. has not
filed its financial statements and annual return for the continuous period of
three financial years till date. By virtue of this continuous offence, he is
liable to vacate his directorship in all other companies viz. DEF Pvt.. and MBD
Pvt. Ltd. in terms of Section 167 (1)(a) of the Act.
The
content of this article is intended to provide a general guide to the subject
matter. Specialist advice should be sought about your specific circumstances
Author
Qualified Company Secretary
Vikram Grover
Vgrover44@gmail.com
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