Sec. 164(2) of Companies Act valid; but financial year before 2014-15 inappropriate for its application: Allahabad HC

Sec. 164(2) of Companies Act valid; but financial year before 2014-15 inappropriate for its application: Allahabad HC

Case Name: Jai Shamker Agrahari vs. Union of India and Another

Case Number: Writ C No 12498/2019

Quorum: Justice Sudhir Agarwal and Justice Rajveer Misra 

The Allahabad HC has upheld the constitutionality validity of Section 164(2) of the Companies Act 2013 which states about the director whose company has not filed financial statement or annual returns for a total period of three financial years shall be disqualified from holding the position for a total period for five years. The financial year for this purpose will have effect only from the year 2014 -2015.

Key Features:

  • The Hon’ble HC rightly differentiated the directors based on the intelligible classification and was not a violation of Article 14 of the Constitution.
  • There is validated director classification between the tainted and untainted classification and also there has been a reasonable nexus with the object sought to be achieved. 
  • There has been a classification between the director who had complied with the requirement of the statutory obligation and a person who has not followed the statutory compliance. 
  • Article 14 of the constitution does not apply in this context.

HC Verdict:

The Hon’ble Court has found that Article 19 of the Constitution aligns with the provision. Therefore this provision was created to include the good governance policy and the regime in the regulation of the corporate affairs and was in the view that the limited prohibition is applied that too in respect of a tainted director who has failed to comply with the statutory provision of the Act. 

The court also found that under Section 164(2) (a) of the Act the financial year would commence from 2014-2015 and not prior thereto. 

The perusal of Section 2(41) of the Act shows that for a provision which came into force on 01.04.2014, the financial year ended on 31.03.2014 and will not be relevant in as much as disqualification under Section 164(2) (a) of the Act 2013. It is the failure of the submission of the financial statement or annual return for a total period of three financial years and this provision cannot be made applicable to the financial year which has lapsed. 

The Court took the ruling of the Gujarat High Court in the case of Gaurang Balvantal Shah vs. Union of India. This observation of the Allahabad HC is in the same views of the decisions of the Gujarat, Madras and Karnataka and Madhya Pradesh High Courts under section 164(2) of the Companies Act. 

Edited by Vartika Gajendra Singh

Approved & Published – Sakshi Raje

Shubhang Gomasta
I am Shubhang Gomasta currently pursuing my master's in Law from MATS University, Raipur. I am a law graduate from Tamil Nadu National Law University. Not a book worm exactly but an enthusiastic writer and a blogger. I have a deep interest in areas such as Arbitration, Competition Law and Securities Law. In my free time, my activities include analyzing current affairs especially governmental policies and decisions.