TMI Blog2006 (7) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... or being appointed as Directors in another companies after 29-9-2004 and therefore the Company has preferred the present Special Civil Application challenging the vires of section 274(1)( g ) of the Companies Act. Section 274 of the Companies Act reads as under : "274. Disqualification of Directors. - (1) A person shall not be capable of being appointed director of a company, if ( a )He has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; ( b )He is an undischarged insolvent; ( c )He has applied to be adjudicated as an insolvent and his application is pending; ( d )He has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence; ( e )He has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; ( f )An order disqualifying him for appointment as a director has been passed by a Court in pursuance of section 203 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t three years, the directors of such companies will be debarred from becoming the director of other public companies for five years. Similarly, in case of any public company which fails to repay its depositors on maturity of deposit amount/debentures, dividend and interest on deposits/debentures on due dates. The whole-time directors of defaulting companies as on such date will be debarred from becoming a director of any other public company for a period of five years." It is the contention on behalf of the petitioners that the object of the provision is to protect investors from Directors of companies which have either not filed any annual accounts and annual returns continuously for last 3 years, of companies which have failed to repay the deposits on maturity or redeem debentures or pay interest thereon. It is submitted that what intended was that the full-time Directors of such defaulting companies should be debarred from becoming Directors of other public companies for a period of 5 years. It is submitted that though the object refers to full-time directors, the provision enacted refers to all Directors whether they are full-time directors or otherwise. It is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y by taking appropriate action. It is further submitted that considering the danger of disqualification those directors may resign from the company and the resultant effect would be to hand over the companies in the hands of persons who would know nothing about the business, operation and management of the company and would not be even interested in reviving the company. It is further submitted that the said provision which has no nexus to the objects sought to be achieved namely good corporate governance and protection of investors would also result in the investors being deprived of having good professional directors on the Board of the Company. It is further submitted that a professional director if he is likely to be disqualified from being appointed as a director in other companies, would not be interested in remaining a director of the company which has suffered losses and has not been able to repay its depositors and/or redeem debentures and he will walk out just before the disqualifying date. It is therefore submitted that since classification has no reasonable nexus to the objects, sought to be achieved, the classification is per se bad. 4. It is further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore submitted that unequals are treated equally and therefore the said provision is ultra vires to Article 14 of the Constitution of India. It is further submitted that the said provision suffers from the vice of not providing for reasonable classification and/or a criteria to arrive at a reasonable classification in distinguishing errant and non-errant Directors and distinguishing between persons who are guilty or non-guilty of management. 7. It is further submitted that the provision of section 274(1)( g ) is ultra vires the Article 14 of the Constitution of India inasmuch as it disqualifies the whole Board, the moment the Company is unable to pay its deposit- holders and redeem its debentures irrespective of whether the Directors have been responsible for such inability to pay or not and thus to disqualify them without determining their responsibility for company s reversal is against the basic tenet of the Article 14 of the Constitution of India. 8. Shri Thakore, learned Senior Advocate, appearing on behalf of the petitioners, has relied upon the following decisions of the Hon ble Supreme Court : 1. Kathi Raning Rawat v. State of Saurashtra AIR 1952 SC 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equated with the default on the part of the Company to repay the deposits and/or to redeem the debentures on due date. It is submitted that so far as the investors are concerned, they are not concerned with the debts/dues of the other financial companies against their own interest. It is submitted that the Legislature wanted to protect the interests of the investors/ depositors specifically and for that purpose there is an amendment to section 274. Therefore, it is submitted that the said section is not ultra vires the provision of Article 14 on that ground. 11. It is further submitted that even the said section is also not ultra vires the Article 14 of the Constitution of India on the ground that section 274(1)( a ) to ( f ) provides for disqualification of a Director who himself has committed some wrong and section 274(1)( g ) provides for disqualification of a Director merely on the ground that the Company has not been able to repay the deposits and/or redeem the debentures on due dates. It is submitted that the intention of the Legislature is to create a separate class and to disqualify a Director from becoming a Director and/or continuing as a Director for the event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r failed to file annual accounts and annual returns under sub-clause ( a ) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B)." The Statement of Objects and Reasons for enactment of section 274(1)( g ) reads as under : "The Government introduced a comprehensive Companies Bill, 1997 in Rajya Sabha on 14-8-1997 and the same was referred to Standing Committee of Parliament for examination and report thereon. The process of examination, however is not yet over and is still to take some more time. The passing of this Bill is thus likely to be delayed further. It is however considered desirable by the Government that some more important changes in the Companies Act, 1956 are brought out in order to provide immediately certain measures for good corporate governance and for protection of investors. These measures are as follows :... ....( xiv ) to provide that in case of a public company which does not file annual accounts and annual returns continuously for last three years, the directors of such companies will be debarred from becoming the director of other public companies for five years. Similarly, in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpliance and filing of annual accounts and annual returns which are the means of disclosure to all stakeholders; ( iv )increasing compliance rate of filing statutory documents; and ( v )infusing good corporate governance in the regulations of corporate affairs and to protect the interest of the investors. 14. The vires of very section 274(1)( g ) of the Companies Act, came to be considered by the Division Bench of Bombay High Court in the case of Snowcem India Ltd. ( supra ) and the Division Bench of the High Court has upheld the vires of section 274(1)( g ) of the Companies Act by holding that: (1) The Statement of Objects and Reasons for enactment of section 274(1)( g ) for better corporate governance and protection of investment of the depositors. Such amendment would ensure transparency in the functioning of the company and would lead to the protection of investment and investors for better corporate goverance. According to the wisdom of the Legislature, this can be achieved by enhancing penalty/punishment for contribution so as to ensure better compliance with the provision of the Act; (2) Article 21 of the Constitution is not at all attracted; (3) Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disqualified. It is required to be noted that the primary object of the enactment of section 274(1)( g ) is to protect the interests of the investors and good governance and with a view to achieve the said object, section 274(1)( g ) provides disqualification of a director of a company which is unable to pay its unsecured deposit-holders or redeem its debentures. Therefore, the provision of section 274(1)( g ) is in consonance with the object sought to be achieved for such an amendment. Merely because the said section does not provide for disqualification of a Director of a Company which is unable to pay its term-lenders or working capital lenders due to the financial institutions, section 274(1)( g ) would not become ultra vires Article 14 of the Constitution of India. The Directors of the Company who are unable to repay its deposits or redeem the debentures are treated as separate class . 16. It is also the contention on behalf of the petitioners that section 274(1)( g ) of the Act is also ultra vires the Article 14 of the Constitution of India inasmuch as section 274(1)( a ) to ( f ) provides for disqulification of a Director who himself has committed some wrong and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns under which the deposits have been accepted by the companies, or interest thereon, or redeem its debentures, or pay any dividend declared on the respective due dates, and if such failure continues for one year, as described in sub-clause ( b ) of clause ( g ) of sub-section (1) of section 274, then the directors of that company shall stand disqualified immediately on expiry of that one year from the respective due dates : Provided that all the directors who have been directors in the relevant year, from the due date to the expiry of one year after the due date, will be disqualified : Provided further that disqualification on account of the reasons cited under this rule shall also apply to the reappointment as a director. Explanation. For the purpose of this rule, it is clarified that non-payment of dividend referred to in sub-clause ( b ) of clause ( g ) of sub-section (1) of section 274 due to the reason of dividend not being claimed or kept in separate bank account as required under section 205A of Companies Act, 1956 or paid into Investors Education and Protection Fund as required under section 205C of that Act shall not be deemed to be a failure to make payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght it fit to give one year to the Company and the directors to improve their financial position and to see to it that within one year of respective due dates the deposit are repaid and/or the debentures are redeemed. Even after lapse of one year of due date of repayment of deposit or redeeming the debentures still the Company is not in a position to repay the deposits or redeem the debentures, then and then only the disqualification is provided. Thus, it cannot be said that the said provision is arbitrary and/or irrational. As stated above, the Legislature has thought it fit to give sufficient time, i.e., one year for improving the financial position and making the repayment under the circumstances, it cannot be said that section 274(1)( g ) is arbitrary and/or irrational and/or does not take care of the Directors of such Company. It is not unknown in the corporate world especially the matters of companies that the public before investing or depositing looks to the names of the directors and finding them reliable starts investing. When the depositors and debenture-holders repose confidence in directors that these directors will take care of their interest then the management sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute has sought to remedy. The Statement of Objects and Reasons cannot, therefore, be the exclusive footing upon which a statute is made a nullity through the decision of a Court of law. It is also observed by the Hon ble Supreme Court in the said decision that the intention of the Legislature in enacting a particular statute is immaterial in terms of the question relating to its validity. The intention of the Legislature in passing of a particular statute is beyond the pale of judicial review. In the present matter, as stated above, with a view to protect the interest of the investors and unsecured depositors and for that purpose to create a class of those Directors of a Company which is unable to repay the deposits or redeem the debentures and to disqualify them after a period of one year of due date, section 274(1)( g ) is enacted. Therefore, considering the intention and the plain language of section 274(1)( g ), the submission on behalf of the petitioners that provision of section 274(1)( g ) of the Act be declared as ultra vires to Statement of Objects and Reasons and/or ultra vires the Constitution of India, has no substance. 21. So far as the submission on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved... The Court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry ; that exact wisdom and nice adaptation of remedy are not always posible and that judgment is largely a prophecy based on meagre and uninterpreted experience . Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The Courts, cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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