The Companies Act, 2013 ("Act") is the primary legislation on the law of companies in India and deals with the incorporation, registration, regulation, and administration of companies registered in India. While the primary nature of the legislation is regulatory, it also contains several 'enforcing provisions' that serve to impose penalties on instances of non-compliance. The penal nature of these enforcing provisions can lead to interesting questions that do not usually arise in the corpus of company law. Such is the confusion surrounding the question of applicability of section 164(2) of the Act. Section 164(2) of the Act provides for the disqualification of directors of a company. The section states that no person who is or has been a director of a company that:
(a) has failed to file financial statements or annual returns for a period of three consecutive financial years or;
(b) has failed to repay deposits, pay interest on those deposits, redeem debentures, pay interest on those debentures, or pay any declared dividends for one year or more,
shall be eligible to be reappointed as a director in any company for a period of five years from the date of the default.
Section 164(2) is a necessary enforcing provision in Chapter XI of the Act, which deals with the appointment and qualifications of directors. Given the importance of the director's office and its duties to act in good faith for the benefit of the members of the company, a penalty for non-compliance with regulations that ensure financial transparency is warranted. The operation of the section was notified on 1st April 2014 and since then several High Courts across the states have espoused multiple and often conflicting views on the retrospective application of the section. The lack of clarity on the effective date of the section has led to hundreds of petitions contesting disqualifications reaching the courts. Recently, in Union of India v Jaishankar Agrahari (SLP(C) Nos. 16213-16373/2021), where about two hundred such petitions were clubbed together, the Supreme Court has finally produced a prima face view on the matter, observing that the application of the section ought to be prospective.
Notably, High Courts of Allahabad1, Gujarat2, and Kerala3 have supported the view that the section can only be applied with prospective effect. On the other hand, the High Court of Delhi has previously concluded that the section would apply with retrospective effect and therefore the defaults described in the section occurring before the date of the notification would also attract the penalty.
The multiplicity of conflicting views is well known and has been acknowledged by the High Courts themselves. The Allahabad HC in Jaishankar Agrahari v Union of India (Writ-C. No. 12498 of 2019 (batch)) held that disqualification of a director under section 164(2) of the Act "is a failure of submission of Financial Statements or Annual Returns for any continuous period of three Financial Years and this provision, which is adverse and penal in nature, cannot be made applicable to a Financial Year which had already lapsed and when there was no such condition attracting any disqualification." In essence, the view espoused by the Allahabad HC expressed that the retrospective application of a provision that is penal in nature would be a violation of the principles of natural justice.
On the other hand, in Mukut Pathak v Union of India (2019 SCC OnLine Del 10868), the Delhi HC, while acknowledging the views expressed by the other High Courts, stated that "merely because an enactment draws on events that are antecedent to its coming in force does not render the said enactment retrospective." Put simply, section 94(2) of the Act obligates companies to file their annual returns within sixty days from the date of their annual general meeting. Consequently, the Delhi HC opined that because the non-filing of financial statements and annual returns was already prohibited under the Act, the enforcement of the penal consequences under section 164(2) was not adverse.
Given the aforesaid conflicting views of the High Courts, the Supreme Court's interpretation of the section had been long awaited. Recently, in Union of India v Jaishankar Agrahari, the Supreme Court has passed an order that endorses the view expressed by the Allahabad HC, that is, section 164(2) ought to be applied with prospective effect from the date of its notification. In its order, the Supreme Court acknowledged the alternative views expressed by the Delhi, and Telangana High Courts, but stated that "prima facie, we are in agreement with the views expressed by the [Allahabad] High Court." While the matter is far from concluded until the Supreme Court arrives at its judgement, however, the order has been a relief for the more than two hundred respondents who have been affected by the penal consequences of section 164(2) of the Act.
Footnotes
1 Refer to Jaishankar Agrahari v Union of India (Writ-C. No. 12498 of 2019 (batch))
2 Refer to Gaurang Balvantlal Shah S/O Balvantlal v Union Of India (Spl. Civil Application No.22435/2017)
3 Refer to Zacharia Maramkandathil Mohan and Ors v. Union Of India (2021 SCC OnLine Ker 2550)
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.