2006 Supreme(Guj) 399

Gujarat High Court
Judgename :R.S.GARG, M.R.SHAH
SAURASHTRA CEMENT LTD. - Appellant
Versus
UNION OF INDIA - Respondent
SPECIAL CIVIL APPLICATION 12206 Of 2004
Decided On : 07/14/2006

Headnote:Point in Issue :

       Whether disqualification of Director incorporated by amendment to the provision of the Act is unconstitutional and does not subserve the object of amendment.

       Head Note :

       (a) Companies Act, 1956 (Central Act 1 of 1956) - Section 274 (1)(g) - Companies (Amendment) Act, 2000 - Companies [Disqualification of Directors under Section 244 (1)(g) of the Companies Act, 1956] - Rules 2003 - Rule 3 - Constitution of India, 1950 - Article 19(1)(8), and 21 - Amendment - Disqualification of Directors - Incorporation of - Constitutional - Validity - Finding of - The objects and reasons for the incorporation of amended provision is better corporate governance and protection of investment of the depositors - Such amendment is to ensure transparency in the functioning of the company and would lead to the protection of investment and investors for better corporate governance - Article 21 of Constitution is not at all attracted and does not violate the Directors fundamental rights guaranteed under Article 19(1)(g) of the Constitution - The newly amended Act only prescribes that a Director of a company who does not fulfil the conditions prescribed therein shall not be capable of being appointed Director of any other Company - The amendment does not debar the petitioners from carrying on any business, trade or occupation - It only renders a Director incapable of being appointed Director of other Companies - It is only to ensure that Directors of Company discharge their obligation properly - The amendment is neither violative of Article 14 of Constitution nor violates the rules of Natural Justice.

       Held :

       According to newly Amended Act, a person shall not be capable of being appointed Director of a Company, if such person is already a Director of a Public Company which has not filed annual accounts and annual returns for any continuous 3 financial years commencing on and after the first date of April 1998 or has failed to repay its deposits or interest thereon or redeem its debentures on due date or pay dividend and such failure continue for one year or more and such person shall not be eligible to be appointed as a Director of any Public Company for a period of 5 years from the date on which such Public Company, in which he is a Director, failed to file annual accounts and annual returns under Sub-clause (a) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in Clause (b). The purpose of the amendment is to disqualify certain person from Directorship in Public Companies. The intention and the purpose of the above amendment is to disqualify errant Directors, protect the investors from mismanagement, ensure compliance infilling of annual accounts and annual returns. The purpose of the said provision is as such not to punish those who are disqualified but to save the community form the consequences of mismanagement and also to prescribe some standards of corporate managership.

       It appears that the primary purpose of the disqualification is not to punish the individual but to protect the public against future conduct by person whose past record as Directors shows a great danger to creditors and others. Failure is often a sign of incompetence from which the community should be protected. Thus, considering the statement of objects and reason, what emerges is that the above amendment will ensure proper governance of companies, transparency in working of companies and also ensure more effective enforcement. The said provision has been enacted with the intention and purpose of,

       (i) disqualifying errant Directors;

       (ii) protecting the investors from mismanagement;

       (iii) ensuring compliance 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. [Para 13]

       Head Note :

       (b) Companies Act, 1956 - Section 274(1)(g) - Constitution of India, 1950 - Article 14 - Discrimination - Classification of debts - Disqualification of Director - Merely for non-payment of one kind of debt - Finding as to - Sustainability - Petitioners contention the provision does not provide for disqualification of a Director of a Company which is unable to pay its term tender or working capital lender due and payable to financial institution and providing disqualification merely for Director of those Companies who is unable to pay his unsecured deposit holders or redeem its debentures is discriminatory in nature is without force and can not be accepted - It is required to be noted that the primary object of the enactment of the provision is to protect the interest of the investors and good governance - It is with this object that provision provides disqualification of a Director of a Company which is unable to pay its unsecured deposit holders or redeem its debentures - Provision is in consonance with the object sought to be achieved - It not become ultra vires Article 14 of Constitution merely because it does not provide for disqualification of a Director of a Company unable to pay its term lender or working capital tenders - It is also to be noted that Directors of the company unable to repay its deposits or redeem the debentures are treated as separate class.

       Held :

       It is the contention on behalf of the petitioners that amendment to Section 274(1)(g) of the Act is violtive of Article 14 of the Constitution of India inasmuch as it seeks to classify the debts of the company into two separate classes namely debts, in the form of deposits and debentures and other debts. It is contended on behalf of the petitioners that the provision does not provide for disqualification of a Director of a Company which is unable to pay its term-lenders or working capital lenders due and payable to the financial institutions. However, the Director of a Company who is unable to pay his unsecured depsosit-holders or redeem its debentures would be disqualified. It is required to be noted that the primary object of the enactment of Section 274(1)(g) is to protect the interest 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 enactment. 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. [Para 15]

       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 disqualification of a Director who himself has committed some wrong and who can be said to be a tainted Director, however, Section 274 (1)(g) provides for disqualification of a Director for no fault of his and merely because the Company is unable to pay the interest on the deposits and/or repay the depositors and/or redeem the debentures and, therefore, unequals are treated equally. It is required to be noted and it appears that Legislature wanted to create a separate class and to see that a Director of a Company who is unable to pay his unsecured deposit-holders or redeem its debentures and who are not in a position to protect the interest of the investors cannot be continued as Directors, and with a view to see that those Directors may not also manage the affairs of the Companies, Section 274 (1)(g) has been enacted and, therefore, it cannot be said that Section 274(1)(g) is ultra vires the Constitution of India and unequals are treated equally. The Directors of the Company who are disqualified under Section 274(1)(a) to (f) and the Directors of the Company who are disqualified under Section 274(1)(g) are both belonging to different class and they are class by themselves. Therefore, the contention on behalf of the petitioners that unequals are treated equally cannot be accepted. [Para 16]

       Head Note :

       (c) Companies Act, 1956 - Section 274 (1)(g) - Companies Amendment Act, 2000 - Companies (Disqualification of Directors under Section 274 (1)(g) of the Companies Act, 1956 - Rules 2003 - Rule 3 - Company - Disqualification of Director - Inability in repayment of deposits or redeem debentures - Not always relatable to Directors - Objects and purpose of amendment - Failure to subsurve - Finding as to - Sustainability - Contention that Directors of the Company would be aware of the financial position of the Company well in advance and would necessarily resign before accruing of the disqualification date has no substance - Rule 3 of Rules takes care of situation - Proviso to Rule 3 provides that Directors who has been Directors in the relevant year from the due date to expiry of one year after the due date will be disqualified - Disqualification date would be one year after the due date of repayment of deposits or payment to be made on redeeming debentures - Under the circumstances contention that Section 274 (1)(g) will not subserve its objects has no substance - On the same grounds contention that provision may be attracted in the cases where there is no fault of Directors is without force - The legislature has given one year to the Company and the Directors to improve their financial position - Even after lapse of one year of due date of repayment of deposit or redeeming debentures still the Company is not in a position to repay them and then only the disqualification is provided - The provision , therefore, can not termed as arbitrary or irrational and does not properly take care of the Directors of such Company - Considering all the relevant aspects it can not be said that the provision of Section 274(1)(g) is ultra vires the Constitution.

       Held :

       Considering Rule 3 of the Rules of 2003 and Proviso to Rule 3, 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. Therefore, even if a Director resigns before the disqualification date in that case also the said Director who has been a Director in the relevant year from the due date to the expiry of one year after the due date will also be rendered disqualified. Disqualification date would be one year after the due date of repayment of deposits and/or payment to be made on redeeming the debentures. Under the circumstances, the submission on behalf of the petitioners that Section 274 (1)(g) will not sub serve its objects, has no substance. If a Director reigns before the due date, then it may be an act of prudence on his part but such act on his part cannot make the law invalid. If the law provides some respite to a person, then he certainly can have the benefit. [Para 17]

       It is the submission on behalf of the petitioners that Directors will be disqualified for no fault to theirs and there may be so many reasons for the inability of the Company in making repayment of deposits and/or redeeming the debentures and the said fault may not be relatable to the Directors. It is required to be noted that a Company, though a legal entity, cannot act by itself, and it can act only through its Directors. All the powers and the management of the affairs of the Company are vested in the Board of Directors. The Board, thus, becomes the working organ of the Company. The Directors, as a Board, are exclusively empowered to manage and/or exclusive responsible for that management. Thus, it cannot be said that for no fault of the individual Directors they will be disqualified. It is also required to be noted that Section 274(1)(g) of the Act provides for disqualification of a Director of a Company which has failed to repay any deposit or interest thereon, or redeem its debentures on the respective due dates, and if such failure continues for one year then the Directors of that Company shall stand disqualified immediately on expiry of that one year from the respective due dates. Thus, it is not that immediately on expiry of due date of repayment of any deposit or interest thereon or redeeming its debentures there is automatic disqualification. The Legislature has though 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 provision is arbitrary and/or irrational. [Para 18]

       Law Laid Down :

       Merely because the said provision does not provide for disqualification of a Director of a company unable to pay its term lenders or working capital lenders, it would not become ultra vires Article 14 of Constitution.

       Case Law Analysis :

       Snowcem India Ltd. vs. Union of India, 2005 (60) SCL 50 (Bom.) [Para 9].-Relied on

       Conclusion :

       It can not be said that the provision of Section 274(1)(g) of the Act is ultra vires the Constitution of India more particularly when provision has been enacted primarily in larger public interest.

       Cases Referred :

       Kathi Raning vs. State of Saurashtra, AIR 1952 SC 123;; State of West Bengal vs. Anwar Ali Sarkar & Anr., AIR 1957 SC 75;; Shri Ram Krishna Dalmia & Ors. vs. Shri Justice S.R. Tendorkar & Ors., AIR 1958 SC 538;; K. Thimmappa & Ors. vs. Chairman Central Bd. of Dirs., SBI & Anr., AIR 2001 SC 467;; Bakhtawar Trust & Ors., vs. M.D. Narayan & Ors., 2003 (5) SCC 298.

       Decided in Favour of :

       Respondent

       Petition Dismissed