Case Law - CHAPTER 16 - DIRECTORS

CHAPTER 16 - DIRECTORS

02.12.2019

G. Vasudevan (Petitioner) Vs Union of India (Rep. by Secretary, Ministry of Corporate

Affairs and Ministry of Law and Justice) (Respondents)

Madras High Court

Section 167(1)(a) Companies Act not violative of Articles 14, and 19(1)(g) of the Consti-

tution of India

Facts of the case

Petition filed under Article 226 of the Constitution of India praying for the issuance of a

writ of Declaration, to declare the “Proviso” in Section 167(1)(a) of the Companies Act 2013,

as inserted vide the Companies (Amendment) Act 2017 as ultra vires the Articles 14,

19(1)(g) of the Constitution of India and declare illegal and null and void.

The challenge in the instant writ petition is to the vires of the proviso to Section 167(1)(a)

of the Companies Act, as inserted by the Companies (Amendment) Act 2017. The same is

extracted hereunder: -

“(i) in clause (a), the following proviso shall be inserted, namely: — “Provided that where

he incurs disqualification under sub-section (2) of section 164, the office of the director

shall become vacant in all the companies, other than the company which is in default under

that sub-section.”;

Section 167 of the Companies Act gives instances where the office of a Director shall be-

come vacant. Section 167(1)(a) states that if a Director incurs any disqualification specified

in Section 164, then he vacates his seat as a Director. The proviso which is under challenge

in the instant writ petition states that, when a company commits a default as stipulated in

sub-section 2 of Section 164, then a Director of such defaulting company does not vacate

the post in the company in which the default is committed but a Director of such a compa-

ny has to vacate his seat as a Director in all other companies in which he is Director.

The petitioner contends that proviso to Section 167(1)(a) of the Companies Act, leads to un-

equal treatment being met out to Directors of a defaulting company based on whether they

are Directors in other companies or not. The petitioner claims that since this proviso states

that such Directors of a defaulting company would only have to vacate Directorship in other

companies while retaining the same in the defaulting company, this leads to unfair treatment

to those Directors who hold such posts in multiple companies.

The petitioner further claims that this differential classification is not based on an intelligi-

ble differentia and that there is no justification provided for mandating the vacation of Di-

rectorship in other companies, thus leading to this provision being arbitrary and violative of

Article 14 of the Constitution of India. It is also contended that the impugned provision irra-

tionally has a detrimental effect on other, non-defaulting companies and punishes individual

Directors for the defaults of a company even when fault cannot be directly attributed to

them. The petitioner also claims that the impugned proviso also violates the principles of

natural justice.

Issue

The primary issue in this case relates to whether or not the proviso to Section 167(1)(a) was

without justification irrationally mandating the vacating of Directorship in other companies

while not providing for the same in the defaulting company ?

Jugement

The Madras High Court held that the proviso to Section 167(1)(a) must be interpreted in

ordinary terms and would apply to the entirety of Section 164 including sub-section 2. The

Court has further held that this proviso can be justified on two grounds. Firstly, it has been

reiterated that 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 Direc-

tors.

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 pro-

bity 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 un-

der Part III of the Constitution of India. Thus, the writ petition is dismissed.