QUESTION
Ajay Oza was a director in several companies and was barred from being appointed or reappointed as a director for a term of five years under Section 164(2)(a) due to a failure by one of the firms to file annual returns and financial statements for the financial year 2015-17. In 2018, the list of directors that were disqualified was made public. Before the Gujarat High Court, Ajay challenged the list of disqualified directors for defaults in the financial years 2013-15 and 2014-17.
Was there a requirement to provide prior notice and an opportunity to be heard before publishing the list of disqualified directors?
SECTION 164. DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR
(1) A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court.
(b) he is an undischarged insolvent.
(c) he has applied to be adjudicated as insolvent and his application is pending.
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force.
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
(h) he has not complied with sub-section (3) of section 152.
(i) he has not complied with the provisions of sub-section (1) of section 165
(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) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debenture on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, 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.
Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.
(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification. Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section(1) shall not take effect—(i) for thirty days from the date of conviction or order of disqualification;(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; (iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or
ANSWER
The present case is similar to the case of Mukut Pathak & Ors. vs.Union of India & Anr. W.P. (C) 9088/2018 & CM Appln. No.35006/2018, judgement dated 04.11.2019. In this case, Delhi High Court observed that principles of natural justice areonly meant to supplement the law and are a kind of code of fair administrative procedure in the decision-making process.
However, in the present case, the administrative authorities are not required to take any qualitative decision, in as to when a director would be disqualified.
Section 164(2) merely sets out the conditions, which if not complied with, would disqualify a person from being reappointed or appointed as a director. Thus,
it was unable to accept that exclusion of the "audi alteram partem" rule resulted in any procedural unfairness.
Mukut Pathak & Ors. vs. Union of India & Anr. W.P. (C) 9088/2018 & CM Appln. No.35006/2018 the Hon’ble Delhi High Court.
In relation to the question on whether Section 164(2)(a) of the Companies Act operates retrospectively, the Court held that though the aforesaid section takes into consideration violations of the periods preceding the date of notification of Section 164(2)(a) of the Companies Act, the provision does not operate retrospectively.
Further, as regards the requirement of giving the concerned directors a prior hearing before disqualification, the Court held that an opportunity of prior hearing before the disqualification is not required to be given because the disqualification of a director under Section 164(2)(a) of the Companies Act does not involve a governmental authority taking a qualitative decision.
Further, on the question of whether a director incurring disqualification under Section 164(2)(a) of the Companies Act would automatically vacate office in all companies in which he was appointed as a director on account of Section 167 of the Companies Act, the Court held that a director's office would not be vacated automatically on account disqualification under Section 164(2)(a) of the Companies Act.
However, this benefit would be available only until the enactment of the amendments to Sections 164(2) and 167(1) of the Companies Act vide Companies (Amendment) Act, 2017 which came into effect from May 7, 2018.
In terms of the aforesaid amendment, a director incurring disqualification under Section 164(2) of the Companies would vacate office as a director in all companies other than the company which is in default of the requirement to file its annual returns and/or financial statements for 3 consecutive years.
Further, in terms of the aforesaid amendment, a director would incur disqualification under Section 164(2) of the Companies Act only on the elapse of six months from the date of his appointment.
With effect from May 7, 2018 (i.e., the date on which the aforesaid amendment came into force), a director would automatically vacate his office in all companies other than the company which is in default of the requirement to file its annual returns and/or financial statements for three consecutive years. As regards a company which is in default of the aforesaid requirement, the concerned director would vacate office on the elapse of six months from the date of his appointment if aforesaid default is not rectified within such period.
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