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2020 (1) TMI 169 - HC - Companies LawVires of the proviso to Section 167(1)(a) of the Companies Act - Disqualification for appointment of Director - case of petitioner is that petitioner's rights have not been in any manner affected by the insertion of the proviso in as much as the petitioner is not a Director in any company and has not had to vacate his office by virtue of the proviso inserted in Section 167(1)(a) of the Companies Act by the Companies (Amendment) Act 2017 - HELD THAT:- As per Section 167(1)(a) of the 2013 Act, the office of the Director is to become vacant if a Director incurs any disqualification as provided for under Section 164. However, such all-encompassing provision existed in the 1956 Act with each of the grounds for vacation being listed individually. It is important to note that liability under Section 274(1)(g) was not a ground for a Director to vacate his post in any company. Before the impugned proviso was inserted in the Companies Act 2013, Directors of a company who had defaulted under Section 164(2) would have to vacate their post as Director of the defaulting company only. This was leading to a situation where any person who became a Director of a company which had defaulted under Section 164(2) automatically attracted Section 167(1). Thus, no person could be appointed as a Director in those companies which had defaulted under Section 164(2). Section 274(1)(g) of the Companies Act 1956 was made to protect investors rights and to ensure that Directors of companies act vigilantly in preventing any misfeasance or discrepancy which may affect investors and the public. It is thus held that the underlying object of Section 274(1)(g) is facilitating good corporate governance and it cannot be declared unconstitutional without considering the purpose that the provision serves - the legislative intent behind the inclusion of the proviso to Section 167(1)(a) is also to ensure good governance and inculcate a sense of security in investors through transparent disclosures and control over erring Directors. The filing of returns and disclosures regarding the finances of the company are vital to ensure greater transparency and accountability to the public which is the need of the hour in today's corporate set up. These measures are extremely necessary in the interest of fair trade and ensuring justice. Additionally, a great deal of responsibility is borne by the Directors of a company to ensure that the company acts in accordance with laws and upholds the principles of transparency and probity - A Director must not derelict his duties as a Director and must exercise all due diligence necessarily to ensure that the company abides by laws and regulations. A Director, irrespective of the nature of Directorship, by virtue of the fact that he holds the position of Directorship cannot claim immunity for the defaults of the company in the filing of returns or the business of the company, and therefore cannot be made to vacate his post in other companies. This Court can take judicial notice of the fact that people invest their hard earned money in companies in which there are persons of repute holding the position of a Director. The Director therefore cannot absolve himself of the misdeeds of the company after holding a position in the company - There is thus a rational nexus between the amendment and the object for which the amendment was brought about in the Companies Act 2013. The contention of the petitioner that the proviso to Section 167(1)(a) is irrational, manifestly arbitrary and unreasonable, and thus must be declared as ultra vires Article 14 of the Constitution of India cannot be accepted. The exclusion of Directors from vacating their posts in the defaulting company while doing so in all other companies where they hold Directorship has been done in order to prevent the anomalous situation wherein the post of Director in a company remains vacant in perpetuity owing to automatic application of Section 167(1)(a) to all newly appointed Directors. Secondly, the underlying object behind the proviso to Section 167(1)(a) is seen to be the same as that of Section 164(2) both of which exist in the interest of transparency and probity in governance. Owing to these justifications, the Court thus holds that the proviso to Section 167(1)(a) is neither manifestly arbitrary nor does it offend any of the fundamental rights guaranteed under Part III of the Constitution of India. Petition dismissed.
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