CHENNAI HIGH COURT SETS ASIDE ROC’S ORDER DISQUALIFYING PRIVATE COMPANY DIRECTORS

Action would be retrospective of Sec. 164 of Companies Act’

CHENNAI HIGH COURT’s ORDER

The Madras High Court has set aside the disqualification of directors of private companies by the Registrar of Companies for non-filing of financial statements for a period of three continuous financial years.

COURT SET ASIDE THE ORDER PASSED BY ROC

Justice T. Raja, who reserved the order after hearing final arguments in the case last week, delivered the judgment on Friday. Allowing the writ petitions, the court set aside the order passed by the RoC in disqualifying the directors.

DISQUALIFICATION UNDER SECTION 164(2)(A) OF THE COMPANIES ACT, 2013

The directors were disqualified under Section 164(2)(a) of the Companies Act, 2013. Initially, a list of disqualified directors numbering 45,657 of various firms with effect from November 1, 2016 was released. An updated list, however, saw this list pruned to 34,565.

QUESTIONING OF CALCULATION OF THREE CONTINUOUS FINANCIAL YEARS

The Madras High Court, it may be recalled, was the first to grant a stay in this case in September. Subsequently, more parties had filed writ petitions challenging the disqualification. The focus of the challenge by petitioners was on the very calculation of three continuous financial years.

DISQUALIFICATION CANNOT BE RETROSPECTIVE

The court said that since Section 164 came into effect from April 1, 2014, the respondents (i.e. RoC) cannot disqualify the petitioners for the financial years 2013-14, 2014-15, 2015-16, as it would tantamount to giving retrospective effect.

SECTION 2(41) OF THE COMPANIES ACT 2013

The Section says that if the financial statements are not filed for three continuous financial years, then the director can be disqualified. However, if Section 2(41), which defines ‘financial year’ is taken into account, then the first financial year would end on 31.3.2015, the second financial year on 31.3.2016 and the third on 31.3.2017.

AGAINST NATURAL JUSTICE

Petitioners had contended that even though the Section did not contemplate a show-cause notice before taking any action, since the disqualification had civil consequences, the principle of natural justice had to be adhered to.

 

LESSONS LEARNED FROM THIS VERDICT

Due to disqualification ,  the directors are debarred to act as directors in other companies.

Some companies are not able to file their accounts and other returns due to deactivation of DIN of such directors.

Such companies and directors can approach the concerned High Courts to get relief for them as per the decision of Chennai High Court.

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