Companies Act: Lawyers to challenge retrospective use

The government may have applied the Companies Act 2013 retrospectively when it disqualified the directors of over 200,000 companies that did not file their financial statements or annual returns for three straight years, said lawyers.

On September 12, Mint reported that the government had identified 106,578 such directors and planned to bar them from the boards of other firms in its continuing fight to eradicate black economy.

Section 164 (2) (a) of the Companies Act, 2013, provides the ground for disqualifying directors if the company has not filed financial statements or annual returns for any continuous period of three financial years.

However, according to a March 26, 2014 notification from the ministry of corporate affairs, section 164 of the Act (along with many other provisions) came into force from 1 April 2014, i.e. the start of 2014-15. Note that Companies Act itself came into effect from 12 September 2013 with some, not all, provisions.

Thus, any disqualification which would be based on returns or statements not filed before 2014-15 would mean that the act is being applied retrospectively, said lawyers.

A look at the Registrar of Companies (RoC) notifications on September 13 (a day after the ministry statement) shows exactly that. RoC Mumbai, for instance, clearly quotes section 164 92) (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 November 1, 2015 to October 31, 2020.

The November 1 date is relevant because norms say companies have to conduct their annual general meetings by September and file returns within another month.

“We are going to challenge the disqualification because it’s a clear case of a law being used retrospectively,” said a senior partner of a top law firm on the condition of anonymity. This person pointed to the period of disqualification and asked whether “board resolutions where these directors have voted on for the last two years are now null and void.”

Yet others have been banned for November 1, 2016 to October 31, 2021, but even there it means the law has been applied retrospectively for fiscal 2014.

To be sure, the Companies Act, 1956 also had a similar provision for disqualifying directors, however, its use was restricted to only public companies.

“In case of the Companies Act 1956, (this provision) existed only with respect to public companies. This has now been expanded to all companies under the 2013 Act. Hence, it would be appropriate to say that, to the extent the disqualification relates to non-compliance by private companies, the law was introduced only with effect from financial year 2014-15 and not earlier,” said Nabeel Ahmed, a partner at Grant Thornton India LLP.

Others too supported this point of view.

“So, if the delay in filing of financial statements and annual report by a company was an offence under the pre-existing Companies Act of 1956 and is also is an offence under the new Companies Act of 2013, the government would have the power to ban the directors from holding office for five years,” said Aaron Solomon, managing partner of law firm Solomon & Co.

The ministry did not respond till the time of going to press.

THE GOVERNMENT PLANS TO BAR AROUND 106,578 DIRECTORS FROM THE BOARDS OF OTHER FIRMS IN ITS FIGHT TO ERADICATE THE BLACK ECONOMY