Written by : Mehnaz Fathima V W, BB.A LL.B (Hons.), CHRIST (Deemed to be University) Pune Lavasa Campus, India
We all know what a company is!
It is a legal entity formed by a group of people or other organizations with a common object of conducting business or undertaking any professional, industrial, or any such activity with a view to derive profits out of it. It is also well known that a company can act only through natural persons, though it is considered legally as a separate entity. These natural persons who act for the company are called directors. Section 2(34) of the Companies Act 2013 states that “a director appointed to the board of the company” is called as the director. Collectively, the directors are called as the Board of Directors or the Board, as mentioned in Section 2(10). That being said, we can understand that having to run a company, the directors have roles that are multi-fold, and based on these roles and other factors, directors are of many subheads. This includes (1) first directors – who signed the Memorandum of Association and who hold office until directors are appointed, (2) Casual Vacancies – who are appointed for a brief period of time, (3) Additional Directors – if the Board deems fit and necessary, etc.
The role of a director being multifaceted, it is important for us to know that defining such a role or the power they hold is not as easy as falling off a log. In Imperial Hydropathic Hotel Co. Blackpool v. Hampson (1883) LR 23 Ch D 1, the Court of Appeals opined that the role of a director could be as versatile as being a trustee, an agent, or a managing partner. Similar to this was observed in the case of Albert Judah v. Rampada Gupta & Anr AIR 1959 CAL 715. Now that we see their crucial role, it would be surprising to know that such a role does not mandate any educational or qualification requirement for the appointment. Directors must have a DIN (Director Identification Number) and not be disqualified under section 164 of the Act.
Section 164 and what was discussed in this case…?
Having said the above, the fun part of understanding the qualifications of a director is by finding out what disqualifies them. The Companies Act 2013 prescribes the grounds on which a person can be disqualified. This is mentioned under section 164, some of them including unsoundness of mind, undischarged insolvency, adjudicated insolvency, Order by a court or a Tribunal, exceeded six months from the last day fixed for the payment of calls, etc. On 4th November 2019, the Honorable High Court of Delhi clarified the issue of disqualification of directors in the case of Mukut Pathak & Ors. v. Union of India & Anr 265 (2019) DLT 506. On a very precise note, the case was about Section 164(2)(a) of the Act, which lays down that when a company has not filed finance statements or annual returns for three consecutive years, the result can be disqualification of the directors. However, was this one of the first and most important cases to dispute the said provision? Surprisingly, the answer is no!
This case is usually understood with various conflicting judgments of the past, including that of Bhagavan Das Dhananjaya Das v. Union of India AIR 1970 SC 150 by the Madras High Court and Gaurang Balvantlal Shah v. Union of India 2017 by the Gujarat High Court. In the facts of the Mukut Pathak case, directors of various companies collectively approached the Honorable High Court of Delhi, challenging their disqualification under section 164(2)(a) from being appointed or reappointed as a director by the Ministry of Corporate Affairs. The issue that was presented in the Court was whether the disqualification under the provision must be applied retrospectively or otherwise.
The Companies Act came into force with effect from the 1st of April 2014, and the fun fact of the case is that the Financial Year concerning the financial statements or annual returns was 2013-14. Sensibly and generally, it is understood that no statute shall be applied retrospectively except when the enactment so specifies or implies. As we can easily guess, the arguments of the directors were that the statements concerned the financial year before the enactment, and hence, their disqualification could not be made valid. Initially, the court did not entertain the contentions of the directors as there existed a similar provision in The Companies Act 1956. This implies that there is no role of a retrospective concept, as otherwise also the result would have been the same without any adverse effects.
The Court stated that while the provision stands prospective in nature, such an operation would take into account failure to file the annual returns of the financial year ending on the 31st of March 2014, with the filing to be on or before the 31st of October. Parallelly, the Supreme Court directed the Respondents to reactivate the DIN numbers of the petitioners and stated that the same could not be cancelled on any other grounds other than what was specified in the rules framed by the Central Government.
In Conclusion…
As we see above the nature of the provision, the principle of natural justice was what I saw to be of immense importance. While it is necessary to understand the concept with particular focus on this provision, it is also equally crucial to note that even before the enactment such a provision had no big of a change. And as much as that sounds reasonable, it is judicial and utmost fair of the Honorable Court to have passed a judgment of such nature.
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