Bombay HC refuses to stay 2017 MCA Circular on Disqualification of Directors

The Bombay High Court recently refused to stay a 2017 circular issued by the Ministry of Corporate Affairs (MCA) related to the disqualification of directors of companies. .While doing so, the Bench of Justices SC Dharmadhikari and RI Chagla prima facie found that there was no inconsistency between the MCA Circular and Section 164(2) of the Companies Act, 2013. The Bench held,."Prima facie, we do not think that the Circular which has been issued by Ministry of Corporate Affairs and the notice dated 7th September, 2017 is in any way inconsistent or contravening the position emerging from the plain reading of this section."Bombay High Court.Section 164(2) places a five-year bar on re-appointment of a person as director of a company which fails to file financial statements or annual returns for a period of three continuous years..By way of background, in September 2017, the MCA had disqualified a large number of directors of both public and private companies, invoking Section 164 (2) (a) of the Companies Act, 2013. It concluded that the said companies were “shell companies.”.Aggrieved by their disqualification, the directors had moved the Bombay High Court last year. The plea seeks the re-activation of Director Identification Number (DIN) of these directors..Bombay HC to hear challenge to Disqualification of Directors after 2017 MCA notification.As per the directors’ plea, the Registrar of Companies (RoC) made a mistake while calculating the three financial years of default. It is alleged that it combined both periods – when the old Companies Act of 1956 was effective, as well the period under the new Act, which came into force from April 1, 2014.Thus, the petitioners have also sought for grant of compensation from the RoC for failure to perform its duties on the ground that the disqualification was done without issuing notice, in violation of natural justice principles.The petitions also mention that due to disqualification, the directors are debarred from acting as directors in their companies. As a result, some companies are unable to file their accounts and other returns..Notably, the petitions refer to the recent judgments of the Madras, Gujarat and Karnataka High Courts, which decided in favour of the disqualified directors and quashed the MCA notification.As noted in the petitions, these High Courts ruled that the effect of the new Companies Act of 2013 would not be retrospective. It is contended that since these orders are not stayed by the Supreme Court, the law laid down in them is applicable throughout India..Disqualification of Directors under Section 164(2) Companies Act: What the Delhi HC held.In an order passed on October 15 last year, the Bench had asked Additional Solicitor General Anil Singh to take instructions on whether the Central Government would accept that:(a) The vacating of office would be limited to directorships of companies other than the defaulting company; and(b) Whether the embargo in Section 164(2)(a) would apply only to the re-appointment as a director of that defaulting company and not to his continuance..When the matter was taken up on February 7 this year, Singh told the Court that a challenge to the Constitutional validity of Section 164(2) has not been upheld. He further pointed out that the High Courts of Madras, Karnataka, Delhi and Gujarat have held that the provision cannot be applied retrospectively..Referring to the case before the Karnataka High Court, Singh stated that the government had argued that the proviso to Section 164(2) is only clarificatory in nature and, therefore, it has retrospective operation. Thus, the petitioners would continue as directors of the defaulting company, but they would vacate office in all other companies..Section 164(2) of the Companies Act, 2013 held to be constitutional: A cause of concern for errant directors? .The Court then referred to the Karnataka High Court's observations on Section 167(1)(a) of the Act, which provides the circumstances under which the office of a director becomes vacant..The Bench observed that rationale behind bringing in Section 167(1)(a) was to instil a higher degree of transparency and accountability in corporate governance.."Therefore, the argument of the petitioners’ advocate that Section 167(1)(a) of the Act did not envisage vacation of office of a director under Section 164(2) of the Act, is incorrect.".The Bench also made a prima facie observation that the argument that Section 164 could not have a retrospective operation, was incorrect..Based on this reasoning, the Court refused to grant interim relief to the petitioners."A blanket stay or a relief having far reaching legal consequences as sought cannot be granted. The prayers in that behalf are rejected.".Having said that, the Court made it clear,"We clarify that this order only expresses our tentative and prima facie view and shall not influence the Court while finally deciding the matter and particularly the Constitutional challenge."[Read the order]