What the Madras HC held on disqualification of Directors under s.164 (2) of the Companies Act

The Madras High Court has held that Section 164 of the Companies Act, 2013 (2013 Act), concerning the disqualification of company directors for default in filing financial statements/annual returns, can only be applied prospectively..Justice T Raja clarified the same while quashing the decision of the Registrar of Companies (RoC) to disqualify over a thousand private company directors for defaults commencing from the Financial Year (FY) 2013-2014..The provision deals with disqualification of company directors for failure to file financial statements or annual returns for any continuous period of three financial years. Persons disqualified under this provision would be barred from being appointed as director in any company for a period of five years. The provision came into effect from April 1, 2014..According to the petitioners, this meant that it could only be applied for default from the next Financial Year onwards, i.e. the year starting April 1, 2014 and ending on March 31, 2015..However, the respondents – the Ministry of Corporate Affairs (MCA) and the RoC – contended that on a reading of Section 164(2), it is evident that the provision could be applied for previous financial years as well..Placing reliance on the Calcutta High Court decision in Nabendu Dutta v Arindam Mukherjee, it was submitted that it would be absurd that even after a law has come into force, the same cannot be given effect to immediately..Given this rationale, the RoC justified its 2017 notifications intimating the disqualification of several private company directors under Section 164 of the 2013 Act, for defaults commencing from the FY 2013-2014..The respondents argued that the disqualification had already taken place by the operation of law and that by the said notifications, they had only communicated the fact of such disqualification..Several directors eventually challenged their disqualification in over 600 writ petitions before the High Court..The lead petitioner was represented by Senior Advocate PH Arvindh Pandian and Advocates CV Shailendran and Salai Varun. ASG G Rajagopalan appeared for the respondents..By a judgment pronounced last Friday, Justice Raja ruled in favour of the aggrieved directors/petitioners, agreeing that Section 164(2) would only be applicable from the FY 2014-2015 onwards. Inter alia, the following arguments served to support this conclusion..Section 164 (2) came into effect from April 1, 2014.Section 164 (2) of the 2013 Act replaced the erstwhile Section 274 (1) (g) of the Companies Act, 1956..Under the 1956 Act, non-filing of the financial statement of a private company for three consecutive years or more was neither an offence nor a cause for disqualification of the director. The petitioners argued that this was the prevailing position up until the FY 2013-2014..Section 274 (1) (g), which came into effect in December 2000, clearly stated that the provision would be applicable from the FY starting 1999. In contrast, Section 164 (2), which extended the liability to private companies as well, uses the phrase “any continuous period of three financial years”..As Section 164 (2) came into effect in 2014, this would mean that it is applicable from the year ending on March 31, 2015 i.e. the FY from April 1, 2014 to March 31, 2015 onwards..Disqualification could only arise from after October 31, 2017.As per Section 92 (4) of the 2013 Act, the time limit to file the annual returns is sixty days from the date of the Annual General Meeting (AGM) or the last date on which the AGM ought to have been held. The time limit to file the balance sheet under Section 137(1) of the 2013 Act is thirty days from the AGM..Section 164 is only applicable from the FY 2014-2015. Thus, for any company, the third financial year would be the year ending on March 31, 2017..In that year, the last date for private companies to convene the AGM is September 30, 2017 (i.e. within six months of the closing of the FY). The last date for filing the annual returns is November 29, 2017. The balance sheet is to be filed only on October 30, 2017..Therefore, the disqualification could take place only on or after October 30, 2017..MCA Circular clarifies that Section 164 is prospective .A General Circular issued on April 4 also clarified that transactions which commenced earlier than 1st April, 2014 shall be governed by the relevant provisions/schedules/rules of the Companies Act, 1956. The circular states,.“… in respect of financial years commencing on or after 1st April, 2014, the provisions of the new Act shall apply.”.Section 403 of 2013 Companies Act provided a further time of 270 days to file documents.As per the erstwhile Section 403 of the 2013 Companies Act, an additional period of 270 days was available for the filing of financial statements or returns on the payment of an additional fee..Whereas the provision has now been omitted by a 2017 amendment, the Court noted that as on the date of the impugned disqualification of the petitioners, Section 403 was still in existence..On these grounds, the Court set aside the erroneous disqualification of the company directors, finding that Section 164(2) had wrongly been given retrospective effect by the RoC and the MCA..Read common order below: