Disposed

Sri. Ramesh Kumar v. the Union of India

Karnataka HC14 Oct 2022WP/13363/2019

Case brief

AI extract

What is this about?

The High Court of Karnataka disposed of a writ petition challenging director disqualification under the Companies Act, 2013, holding that the matter is subjudice in a Division Bench appeal. The court relied on a co-ordinate bench order and vacated the interim order on the vire of Section 167(1)(a), leaving the substantive challenge pending before the Division Bench.

What did the court decide?

The writ petition is disposed of as the challenge is subjudice pending consideration by the Division Bench.

Sri. Ramesh Kumar Vs the Union of India — Company and Corporate | Karnataka HC (2022)

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WP No. 13363 of 2019

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 14^TH DAY OF OCTOBER, 2022

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BEFORE

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THE HON'BLE MR JUSTICE M.NAGAPRASANNA WRIT PETITION NO. 13363 OF 2019 (GM-RES)

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BETWEEN:

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SRI. RAMESH KUMAR, S/O. UKCHANDJI HARAN, AGED ABOUT 58 YEARS, NO.46, SB ROAD, VV PURAM, BASAVANAGUDI, BENGALURU – 560 004.

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…PETITIONER

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(BY SRI. ABHINAV RAMANAND A., ADVOCATE)

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AND:

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Digitally signed by PADMAVATHI B K Location: HIGH COURT OF KARNATAKA

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THE UNION OF INDIA, A WING, SHASTRI BHAWN, RAJENDRA PRASAD ROAD, NEW DELHI – 110 001. REPRESENTED BY ITS SECRETARY.

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THE MINISTRY OF CORPORATE AFFAIRS, A WING, SHASTRI BHAWN, RAJENDRA PRASAD ROAD, NEW DELHI – 110 001. REPRESENTED BY ITS SECRETARY.

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THE REGISTRAR OF COMPANIES, KARNATAKA, E WING, 2^ND FLOOR, KENDRIYA SADANA,

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KORAMANAGALA, BENGALURU – 560 034.

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…RESPONDENTS

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(BY SRI.H.MALLAN GOUD, CGC FOR R1 AND R2)

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THIS W.P. IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO DECLARE/QUASH SECTION 164(2)(a) OF THE COMPANIES ACT, 2013, CENTRAL ACT NO.18/2013, AS ARBITRARY, UNCONSTITUTINAL, ULTRA VIRES AND IN CONTRAVENTION OF THE PROVISIONS OF PART III OF THE CONSTITUTION OF INDIA AND ETC.,

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THIS PETITION, COMING ON FOR PRELIMINARY HEARING, THIS DAY, THE COURT MADE THE FOLLOWING:

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ORDER

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The petitioner is before this Court calling in question the action of the respondents in disqualifying the petitioner from being a director of any company for a period of five years from 01.11.2017 to 31.10.2022.

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Heard Sri Abhinav Ramanand A., learned counsel appearing for the petitioner and Sri H. Mallan Goud,

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learned Central Government Counsel appearing for the respondents.

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Learned Central Government Counsel appearing

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for the respondents would place reliance upon the order rendered by the co-ordinate Bench of this Court, in

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W.P.No.56393/2017 AND CONNECTED MATTERS

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disposed on 12.06.2016 , which considered an identical issue of disqualification of the director and the impugned order therein, is passed by the very same authority, to contend that the matter is still pending consideration before the Division Bench of this Court in

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W.A.No.2688/2019 .

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The co-ordinate Bench of this Court in W.P.No.56393/2017 AND CONNECTED MATTERS

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disposed on 12.06.2016 , after rendering its order draws a summary of conclusions, which reads as follows:

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“Part-13

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Summary of Conclusions:

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208. In view of the aforesaid discussion, I have arrived at the following conclusions:

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(a) It is held that Section 164(2)(a) of the Act is not ultra vires Article 14 of the of the Constitution. The said provision is not manifestly arbitrary and also does not fall within the scope of the doctrine of proportionality. Neither does the said provision violate Article 19(1)(g) of the Constitution as it is made in the interest of general public and a reasonable restriction on the exercise of the said right. The object and purpose of the said provision is to stipulate the consequence of a disqualification on account of the circumstances stated therein and the same is in order to achieve probity, accountability, and transparency in corporate governance.

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(b) That Section 164(2)(a) of the Act applies by operation of law on the basis of the circumstances stated therein, the said provision does not envisage neither predisqualification any hearing, nor postdisqualification and this is not in violation of the principles of natural justice and hence, is not ultra vires Article 14 of the Constitution.

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(c) That Section 164(2)(a) of the Act does not have a retrospective operation and is therefore, neither unreasonable nor arbitrary, in view of the interpretation placed on the same.

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(d) That there has been an arbitrary exercise of power by the respondent authority in disqualifying the petitioners as directors of public companies by taking into consideration the period prior to 01.04.2014 as well as subsequent thereto for the purpose of reckoning the continuous period of three financial years. It is observed that even in respect of public companies, having regard to the nature of the consequences envisaged under Section 164(2) of the Act as compared to Section 274(1)(g) of the 1956 Act, the period prior to 01.04.2014 and subsequent thereto could not have been considered for reckoning three continuous financial years for disqualifying the directors of public companies. Such disqualification is hence quashed.

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(e) Insofar as the private companies are concerned, disqualification on account of the circumstances stated under Section 164(2)(a) of the Act has been brought into force for the first time under the Act and the consequences of disqualification could not have been imposed on directors of private companies by taking into consideration any period prior to 01.04.2014 for the purpose of reckoning continuous period of three financial years under the said provision. The said conclusion is based on the principle drawn by way of analogy from Article 20(1) of the Constitution as, at no point of time prior to the enforcement of the Act, a disqualification based on the circumstances under Section 164(2) of the Act was ever envisaged under the 1956 Act vis-àvis directors of private companies. Such a disqualification could visit a director of only a public company under Section 274(1)(g) of 1956 Act and never a director of a private company.

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Such petitioners who disqualification are directors of the private companies is hence quashed.

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(f) But, if any disqualification of directors of public companies has occurred under the 1956 Act, i.e., prior to 01.04.2014, the same would result in an ineligibility under Section 164(2) of the Act on account of the retro-active operation of the Section.

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(g) Consequently, where the disqualification under Section 164(2)(a) of the Act is based on a continuous period of three financial years commencing from 01.04.2014, wherein financial statements or annual returns have not been filed by a public or private company, the directors of such a company stand disqualified and the consequences of the said disqualification would apply to them under the Act.

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(h) That Section 167(1)(a) of the Act is not ultra vires Article 14 and/or Article 19(1)(g) of the Constitution. The said provision is saved under Article 19(6) thereof.

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(i) The proviso to Section 167(1)(a) of the Act is not ultra vires Articles 14 or 19(1)(g) of the Constitution as being manifestly arbitrary having regard to the interpretation made above.

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(j) Further, the amendment to Section 167(1)(a) of the Act, by insertion of the proviso is by virtue of the Amendment Act, 2017 is subsequent to the date on which the petitioners were disqualified, which in most cases is 01.11.2016 or at any rate prior to 7 th May 2018. That the said proviso has only a prospective effect and cannot have a retrospective and operation. Thus, in respect of the petitioners who were disqualified prior to the

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date of enforcement of the amended provision, that portion of the proviso namely “office of the director shall become vacant not applicable in to all the companies” is those petitioners. Hence, the petitioners herein, (who may have also been granted interim orders by this Court) continue to hold office as directors in the defaulting company as well as all other companies. This is in consonance with the interpretation placed on the proviso and petitioners would not vacate the office in all other companies in which they are directors as the proviso does not apply to the petitioners who were all disqualified prior to 07 th May 2018, as the amendment, by way of an insertion of proviso, has only a prospective operation.

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(k) It is clarified that the operation of the proviso under Section 167(1)(a) of the Act being prospective in nature, any disqualification of any director of a public company or a private company prior to 07 th May 2018, would not result in such director vacating the office of the director in all other companies in which the disqualified director is a director. However, the director of the company in default would continue to hold office as a director even in respect of the defaulting company. The proviso to the above extent only is by way of a clarification so as to avoid an absurdity as otherwise, all the directors of the defaulting company would have to vacate office which would result in the company being bereft of directors and have a cascading effect and there would be no compliance of Section 164(2)(a) by such a company. Hence, the expression “other than the company which is in default” in the proviso to Section 167(1)(a) would

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imply that the director of a defaulting company who has suffered disqualification need not vacate his office of the director in the defaulting company.

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(l) Consequently, proviso to Section 167(1)(a) of the Act having a prospective operation would affect only those directors who are disqualified on or after 07 th May 2018 insofar as vacating office of director other than the defaulting company is concerned.

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(m) It is held that the directors of the struck off companies under Section 248 of the Act do not per se get disqualified. But, if the said company has also not complied with Section 164(2)(a) of the Act, then the said company being a defaulting company, the directors of such a company get disqualified in terms of the discussion made above.

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Re. Point No.7:

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209. In the result, I pass the following order:

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O R D E R

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(i) Where the petitioners disqualification is based by of the taking into consideration any financial year “prior to 01.04.2014 as well as subsequent thereto” while reckoning continuous period of three financial years under Section 164(2)(a) of the Act, irrespective of whether the petitioners are directors of public companies or private companies, such a disqualification being bad in law, the Writ Petitions are allowed and the

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impugned List is quashed to that extent only;

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(ii) If the disqualification of the directors is based by taking into consideration any financial year prior to 01.04.2014 only i.e., the disqualification has occurred under the provisions of the 1956 Act in respect of the public companies, the writ petitions are dismissed;

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(iii) If the disqualification of the directors is based by taking into consideration three continuous financial years subsequent to 01.04.2014, irrespective of whether the petitioners are directors of public companies or private companies, they stand disqualified under the Act;

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(iv) Where the petitioners disqualification is based by taking into consideration any financial year prior to 01.04.2014 in respect of private companies, such disqualification being bad in law, the writ petitions are allowed to the aforesaid extent only;

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(v) The Writ Petitions, wherein the challenge is also made to the vires of Section 164(2)(a), and/or 167(1)(a) and/or proviso to Section 167(1)(a) of the Act, are dismissed to the aforesaid extent;

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(vi) The respondents are directed to restore the DIN of those directors whose disqualification has been quashed by this Court;

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(vii) Those petitioners who have challenged only the striking off of the companies in

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which they are directors have an alternative remedy of filing a proceeding before National Company Law Tribunal (NCLT) under Section 252 of the Companies Act, 2013, which provides for an appeal to be filed within a period of three years from the date of passing of the order dissolving the company under Section 248 of the Act. Hence, those Writ Petitions are dismissed reserving liberty to those petitioners who are aggrieved by the dissolution of the companies under Section 248 of the Act (Struck of companies) to approach NCLT, if so advised;

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(viii) Parties to bear their own costs.

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Interim orders passed in these writ petitions stand vacated. All pending applications stand disposed.

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The appreciation for the assistance rendered by the learned senior counsel and the learned counsel for the petitioners, learned ASG and other counsel for Union of India and other respondents is placed on record.”

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(Emphasis supplied)

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Certain observations in the afore-extracted order

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were against the Union of India. The Union of India has

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challenged the order in writ appeal No.2688/2019 , before the Division Bench. The petitioners whose cases were dismissed did not choose to challenge the order. The

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Division Bench of this Court on 04.12.2019, passed the

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following order:

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“Heard Sri Prabhuling K. Navadgi, learned Senior Counsel appearing for learned Counsel for the appellants.

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Admit.

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The operation and execution of the order dated 12.6.2019 passed by the learned Single Judge in W.P.No.56393 of 2017 is stayed in so far as it pertains to operative portion of the order at No.(i), (iv) and (vi) is concerned and also insofar as it relates to holding that proviso to Section 167(1)9a) of the Companies Act, 2013 is prospective in nature, until further orders.”

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(Emphasis supplied)

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The matter is pending consideration at the hands of the Division Bench, nothing further survives for consideration with regard to challenge of disqualification against the petitioner.

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