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‘Disqualification Of Directors Under Section 164(2) Of Company ACT 2013 And Consequent Vacation Under Proviso To 167(1)(A) Of The Companies ACT, 2013 Are Prospective’ Says Calcutta High Court.

  • February 23, 2024

The Calcutta High Court recently ruled in ‘Naresh Kumar Poddar v. Union of India, through Secretary, Ministry of Corporate Affairs and another ‘ that the 2014 amendment to Section 164(2) and the 2018 amendment to proviso to Section 167(1)(a) of the Companies Act, 2013 are prospective in nature opining that their retrospective application would be anomalous, absurd, unreasonable and could potentially ruin the economy.

Section 164 of the Companies Act 2013  enumerates grounds of  Disqualifications for Appointment of Director.  And, subsection (2) thereof  says about disqualification on account of  non filing of financial statements or annual returns for any continuous period of three financial years.

Section 167 (1) of the Companies Act 2013  says: ‘The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164; 
1Provided 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.’

The proviso herein was Inserted by The Companies (Amendment)Act,2017 which t Effective from 7th May 2018.

The legal questions posed in the present case are:

1. Whether Section 164(2)(a), as introduced by the 2014 Amendment and the proviso to Section 167(1)(a), as 10 introduced by the 2018 Amendment, are prospective,           retrospective or retroactive in nature; and
2. Whether there is any scope for giving opportunity to the defaulting company or its directors to represent against the disqualification under Section 164, read with Section     167 of the 2013 Act.

The Hon’ble court after hearing both sides answered  first question that Section 164(2)(a), as introduced by the 2014 Amendment, and the proviso to Section 167(1)(a), as introduced by the 2018 Amendment, to the 2013 Act are prospective in operation.

The Hon’ble court  opniond on the second question as : “  clear reading of Section 164(2) and Section 167(1)(a), both with the corresponding provisos (as amended) leaves no scope of any discretion on the part of the authorities in case of a company incurring the defaults as contemplated therein. It is well-settled that the rules of natural justice can only be applied if an opportunity of hearing/representation is of relevance and affects the outcome of the procedure. In the absence of any discretion of the authorities, since the disqualification under the said sections is automatic on the perpetration of the defaults contemplated therein, an opportunity of representation/hearing to the defaulter would merely be an exercise in futility. Thus, question (ii) as formulated above, is answered in the negative.’

Please Click here to download the copy of the judgment