HC upholds law for disqualification of directors under new Companies Act

BANGALORE, 11/12/2007: A view of Karnataka High Court in Bangalore

BANGALORE, 11/12/2007: A view of Karnataka High Court in Bangalore  

However, the court finds fault in computation of period for the disqualification

The High Court of Karnataka has upheld the legal and constitutional validity of Section 164(2)(1) of the new Companies Act of 2013 that disqualifies a director on account of default by the company for not filing financial statements or annual returns for continuous period of three financial years.

However, the court found fault in disqualifying a large number of directors of both public and private companies by the Registrar of Companies, Bengaluru, by applying the Section 164)(2)(a) while spreading the three years of default period both when the old Companies Act of 1956 was in force till March 31, 2014, as well as the period under the new Act, which came into force on April 1, 2014.

Justice B.V. Nagarathna delivered the verdict while disposing off around 400 petitions filed by Yashodhara Shroff, resident of Bengaluru, and several others who were disqualified under the new law on account of default by the companies in which they were directors.

The court also said that the disqualification of directors of private companies under Section 164(2)(a) by taking into consideration continuous three years period prior to April 1, 2014, is illegal as norms for disqualification stated under the new Act brought into force for directors in private companies for the first time as such norms did not exist under the 1956 Act.

However, if directors of a public company were disqualified considering all the three-year period of default prior to April 1, 2014, then disqualification from being appointed as director of any company for a period of five years would apply to such directors under the new Act.

If the disqualification of the directors is based on taking into consideration three continuous financial years subsequent April 1, 2014, irrespective of whether petitioners are directors of public or private companies, they stand disqualified under the new Act, the court clarified.

The court directed the Registrar of Companies to restore the Director Identification of Number (DIN) of those directors whose disqualification has been quashed.

Terming that the new Companies Act 2013 and amendments made to it are only small steps taken towards transparent and ethical corporate governance, the court said “it is only when a strict implementation of the same by all stakeholders in the corporate world as well as authorities concerned is made, that the aims and the objectives of the legislation can be achieved”.

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Printable version | Feb 21, 2020 1:44:45 PM |

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