Defaulting Director Can Be Disqualified From All Companies, S.164 Is Reasonable Restriction To Article 19(1)(g): Karnataka High Court

The Karnataka High Court has held that under Section 164 of the Companies Act 2013, an individual can be disqualified from being a Director in a company against which allegations are made, as well as regarding any other company in which the individual is a director against whom no allegations are made.

The petitioner directors had argued that they had been disqualified from the company–M/s Vihaan, as regards which allegations have been made, but also as regards any other company, and that they cannot be disqualified as an interim measure from all companies. 

Justice Suraj Govindaraj said,

"The submission of Sri.D.R.Ravishankar., learned Senior counsel that a director can only be disqualified in the company in default and not in a company in which he is not in default, cannot be sustained. The disqualification is not with reference to a company but with regard to an action not taken by the director coming under Sub-section (2) of Section 164 i.e., if the company has not filed financial statements or annual returns for a continuous period of 3 years or has failed to repay the deposits accepted by it or failed to pay interest thereon or failed to redeem any debentures on the date due, etc., which is a positive act required to be done by the company, which has not been so done...The intent of Section 164 is to disqualify a director who is in default...Section 164 and 167 of the Act are reasonable restrictions to the fundamental right guaranteed under Article 19(1)(g) of the Constitution of India.”

It thus held, "under Section 164 of the Companies Act 2013, a director can be disqualified from being a director in the company as regards which the allegations are made, as well as regarding any other company in which he or she is a director, for which no allegations are made". 

Petitioner Dilipraj Pukkella and another both directors of M/s Vihaan Direct Selling (India) Private Limited had approached the court after the company attempted to file its annual returns and statutory filings for the year 2017-18 and 2018-19, a pop-up dialogue box on the official web portal of Ministry of Corporate Affairs displayed the message “the Directors disqualified under the provisions”.

On 07.06.2019, a petition was filed by the Registrar of Companies for the winding up of the company before the National Company Law Tribunal. It is from those documents that the petitioners came to know about their disqualification from all companies as directors.

The petitioners contended that they cannot be disqualified as an interim measure from all companies, the said disqualification causes immense harm and injury to the interests of the petitioners. It is on account of such disqualification that the petitioners have been unable to file the returns and documents relating to the company, thereby resulting in further delay and violation.

Further, even if there is a power for disqualification and exercising such power if any order is passed, the said order can only be enforced for a period of five years. In the present case, the order having been passed in the year 2018, the period of five years has expired in the year 2023, and as of today, there cannot be any embargo on the petitioners exercising their directorship in any company, including M/s Vihaan.

The respondents opposed the plea that there have been serious allegations which have been made against M/s Vihaan and its directors, and necessary action has been taken. There are violations which have been alleged against the directors, in view of the dubious conduct of the company as also on account of various complaints which have been received alleging Ponzi scheme to have been conducted by the company, which has resulted in losses to several thousand depositors. Action was taken against the directors who have violated the various applicable provisions of the Companies Act.

Findings:

The bench noted that in the present case, the disqualification which is alleged against the petitioners is under Sub section (2) of Section 164, on account of directors having failed to repay the deposit accepted by the company or to pay interest thereon etc.

In terms of proviso to Clause (a) of Sub-section (1) of Section 167, it is categorically stated that where a director incurs a 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, it said.

The court rejected the submission of petitioners that director can only be disqualified in the company in default and not in a company in which he is not in default.

Observing that “Sub-section (2) of Section 164 does not provide for extension of the period of 5 years, the restriction can only be for a period of 5 years", the court held that there is no power with the concerned authorities to extend a period of disqualification beyond a period of five years.

Accordingly it dismissed the petition.

Appearance: Advocate Shreehari Kutsa for Petitioners.

ASG Aravind Kamath for CGC M N Kumar FOR R1 TO R3

Citation No: 2025 LiveLaw (Kar) 256

Case Title: Dilipraj Pukkella & ANR AND Union of India & OThers

Case No: WRIT PETITION NO. 3465 OF 2021

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