Analysis on the provision of section 164(2)(a) of Companies Act, 2013 within the spirit of law by CS Peer Mehboob


The Ministry of Corporate Affairs (MCA) has recently published a list of disqualified directors under Section 164(2)(a) of the Companies Act, 2013, which has caused mayhem in the Corporate world without understanding who will be impacted because of this and who will not. As per my understanding I am trying to focus on the issue and on the concerned stakeholders on which it impacts. Please review my understanding, I will appreciate your valuable suggestions.

This issue has arisen due to the applicability of the provisions of Section 164(2)(a) to the private companies also by making it applicable for all companies with effect from the commencement of the Companies Act, 2013 i.e. 01st April, 2014, which was not the situation for private companies in earlier law of Companies Act,1956. There is no change in applicability of this provision for public companies. The position for public companies is same in the new law as it was in earlier law except the consequence of defaults (i.e. Penalties and Vacation provisions). The origin of dispute is with reference to the private companies. Hence, this write up deals with the impact on private companies only. All the discussion below is contemplated keeping in the view of private companies.

Background

Section 164 provides various grounds of disqualification of directors in a company out of which one of the most highlighted and debating ground these days due to MCA’s recent move is disqualification of directors under Section 164(2)(a) because of non-filing of annual returns and financial statements by a company for any continuous period of three financial years. Situation became more complicated after MCA's further announcement consequent upon its publishing the list of disqualified directors, that such listed disqualified directors cannot make filing of any document with MCA as the same shall be summarily rejected.

This move of MCA has given rise to a debate that:

  •     Whether MCA has made effective the provisions of Section 164(2)(a) retrospectively?
  •     Whether Section 164(2)(a) is applicable to private companies retrospectively?
  •     What, if all directors have been listed as disqualified and ineligible for filing any document with MCA?

This write up deals with this issue in detail. Before delving in the saddle of such questions, let us look into the provisions, circulars and Case law relevant to the above issue as follows:

Section 164(2)(a) of the Companies Act, 2013:

Section 164. "(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).....,

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."

There has to be a default of non-filing for continuous period of three financial years. To understand this better, we may split this provision into two elements,

1.     one is default in filing of financial statements and annual returns; and

2.     the other is Continuous period of three financial years.

Both above elements are required together to fall into the provision of disqualification under Section 164(2)(a). For first time attracting this provision immediately, there has to be default of filing for the financial year 2014-15 after enactment of this provision. That means, now default has occurred after enactment for Only year. This default may be the first year of continuing default of three years that means for the three continuous financial years 2014-15, 2015-16 and 2016-17; or this default of year 2014-15 might be the third year of continuing default of three years that means continuing default of past two years 2012-13, 2013-14 with year 2014-15 or this default of year 2014-15, might be the second year of default in filing that means past 2013-14 and 2015-16 with year 2014-15 because the continuity of default for three years after enactment of this provision has to be checked.

Once, the default is occurred after commencement of this Act for the financial year 2014-15, then the trigger of provision Sec.164(2)(a) will be on. Hence, now the next element of this provision has to be checked i.e. the continuity of such default which may cover the past continuing years for said purpose or future continuing years.

The reason behind it is there is no specific date mentioned in the provision of Section 164(2)(a) unlike Section 274(1)(g) of the Companies, Act, 1956, hence, the CONTINUITY OF DEFAULT in filing of annual accounts may cover continuity of default in past years also for the said purpose. Therefore, in order to prove that this law is not retrospective, MCA has no power to go beyond the financial year 2012-13 backwards because the continuity of default in three financial years after enactment cannot go beyond year 2012-13 backwards.In simple words, after 01.04.2014, the continous period of three years can be reckoned at most from years 2012-13, 2013-14 and 2014-15 onwards only. MCA cannot consider and reckon the period of default made in the financial years before year 2012-13 after enactment of this provision in this specific case.

It is pertinent to note here that all Companies already knew the provision of Section 164(2)(a) and its impact when this law came in force. In other words, every company including private company knew that this provision has become effective from 01.04.2014 and MCA will check continous three years default, so any genuine or bonafide company had enough time to escape from this provision by filing Annual Accounts for the F.Y. 2014-15 or onwards. Therefore, to break the continuity of default of three financial years or coming out from this provision, Companies were required to do filing of Financial year 2014-15 and onwards.

The above analysis can also be proved from the notification of Registrar of Companies (RoC), Mumbai dated 13/09/2017 as below:

“Registrar of Companies (RoC), Mumbai’s notifications on 13 September clearly quotes section 164 (2) (a) of the Act and says that directors have been banned because no returns or statements were filed for fiscal years 2013, 2014 and 2015. These directors have been banned from 1 November 2015 to 31 October 2020. The 1 November date is relevant because norms say that companies have to conduct their annual general meeting of shareholders by September and file their returns within another month.”

Vikram Ahuja vs. Greenstone Investments Pvt. Limited and ors., before NCLT, Mumbai Bench, decided on 22.11.2016,

This case is giving clarity in interpretation of the provision of Section 164(2). One of the point for discussion and decision in this case before the Hon'ble bench was "whether the disqualification set forth in Section 164(2)(a) r/w 167(1) (a) of the Act 2013 has 'RETROSPECTIVE EFFECT OR NOT';

 NCLT held that:

"this provision has to be read as applicable to the situations where non-filing has started, at the most in the past and continuing while this enactment has come to into existence and also to future non-filing........"

Therefore, the provisions of Section 164 (2)(a) shall be applicable where the non-filing has started in the past and continuing while this enactment has come to existence and also to the future non-filing. Mere applicability of such provision on continuous default till date shall not give rise to the question of retrospective or prospective effect.

If we read this holding of NCLT thoroughly, it is cleared in this order that there is no question of retrospective or prospective effect. The lawmaker has used the word continuous period of three years, therefore, continuity of default should be checked after commencement of this Act from where non-filing has started at the most in the past and continuing and also to the future non-filings.

Effective date of provision of Section 274(1)(g) vis-a vis Section 164(2):

The similar provision of Section 164(2) of Companies Act, 2013 was Section 274(1)(g) of the Companies Act, 1956. The provision of Section 274(1)(g) was enforced by Companies (Amendment) Act, 2000, which was read as under:

Section 274(1) A person shall not be capable of being appointed as director of a company, if:

(a)-(f).........

(g) such person has already a director of a public company which-

(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on or after the first day of April, 1999; or

(B).....”

However, in the present section 164(2) of the Companies Act, 2013, there is no such date mentioned. Meaning thereby, same is continuous in nature i.e. the defaults prior to introduction of the said Section 164(2) will be considered for the purpose of determining the continuity of default for the period of three financial years.

Confusion created by MCA’s Clarification dated 15.10.2014 and CLSS Scheme, 2014:

The General Circular 41/2014 dated 15.10.2014 issued by Ministry of Corporate Affairs on the clarification been sought by the Stakeholders that whether the directors of the Companies who have filed their (past) balance sheets or annual returns after 01.04.2014 but before the Company Law Settlement Scheme 2014 (CLSS-2014) [15.08.2014] will get immunity from disqualification under Section 164(2)(a).

As per the said circular, the MCA has clarified that the disqualification will be applicable for the prospective defaults of such companies directors who have filed their Balance Sheets and Annual returns on or after 01.04.2014 but before CLSS-2014 i.e. before 15.08.2014.

Further, MCA vide its circular dated 12.08.2014 provides the intention of introducing the scheme of the Company Law Settlement Scheme, 2014. The relevant extracts are as follows:

“In case of defaulting companies which avail of this scheme and file all belated documents, the provision of 164 (2)(a) of the Companies Act, 2013 shall apply only for the prospective defaults, if any, by such companies."

In view of the both above circulars, MCA had given time to all companies to get all past filings from 01.04.2014 till the time CLSS Scheme extended till December, 2014, and those companies which had filed within this time or under CLSS, 2014, MCA had clarified that for those companies the provisions of Section 164(2)(a) of the Companies Act, 2013 shall apply prospectively. The language used in this circular is indirect in relation to the applicability of Section 164(2)(a). Those who comply with these circulars, the provisions of Section 164(2)(a) shall become effective prospectively, means those who do not comply with these circulars, Provisions of Section 164(2)(a) shall become applicable retrospectively. However, this was not the intention of that provision Section 164(2)(a) to make this provision retrospectively for companies. Hence, due to these circulars, lots of confusion regarding effect of this provision is created.

Conclusion of the above initially raised issues:

Now, we can conclude the issues raised in the begining of this write up as follows:

Whether MCA has made effective the provisions of Section 164(2)(a) retrospectively?

Ans.: MCA has not made effective Section 164(2)(a) retrospectively. But, it appeared from the MCA’s circulars came earlier realting to CLSS, 2014, that the recent move of MCA by disqualifying directors of the company under Section 164(2)(a) is having retrospective effect. But it is derived from the recent notification of RoC and NCLT Judgement that MCA has taken the provision on the merit as per the spirit of the law.

Whether Section 164(2)(a) is applicable to private companies retrospectively?

Ans: No. But in the two exclusive special cases, i.e.for defaults continuing for 2012-13, 2013-14 and 2014-15; and 2013-14, 2014-15 and 2015-16. Authority may consider the past years also within the ambit of the provision as explained above.

What, if all directors have been listed as disqualified and ineligible for filing any document with MCA?

An application for removal of disqualification of directors shall be made in Form-10, after making good the default of non-filing. If all directors are listed disqualified and ineligible for filing any documents with MCA, a Company Secretary of the company may file financial statements and annual accounts and make good the default of company. However, if there is no Company Secretary in the company, shareholders may appoint a director or in such situatuation Central Government will appoint a dirctor. Hence, a circular in this regard is expected from MCA. Further, in order to avoid such situation, the upcoming Companies Bill, 2017 is giving time of six months for resolving such issues without immediate vacating office of director under Section 167(1)(a).

P.S. This is just an academic discussion which should be unbiased keeping in mind the soul of law as it is meant and intended. There are other factors also for discussion like vacation of directors under Section 167 connecting with Section 164(2)(a). Some may think that this provision is contradicting but as per my opinion it is just the evolution from the earlier law. This law has become a little stringent but in upcoming Companies Bill, 2017, there is some relaxation from immediate vacation from directorship under Section 167.

Thank you so much for reading.

Author:

CS Peer Mehboob

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