The Madras High Court, in a recent case upheld the constitutionality of the proviso to Section 167(1)(a) of Companies Act, 2013 which provides that the Directors of a defaulting company who also hold directorship in other companies have to vacate their office from all the companies except the one in the defaulting company, to protect the interests of the investors. The petitioner filed a case in the High Court contesting that the provision was violating the principles of natural justice, and it was rejected by the court.
The court while delivering the judgment placed its reliance on the judgment given by the Delhi High Court in the case of Mukut Pathak & Ors Vs. Union of India. In this case the court stated that before the insertion of this provision, the position was that the Directors had to vacate the office of the companies which had defaulted and due to this no person was eligible to be appointed as the director, and thus to rectify the situation, the provision was inserted.
The High Court also examined the intentions of the legislation behind inserting the provision and while examining it, the court placed the reliance on the judgment given by the Gujarat High Court in the case of Saurashtra Cement Ltd. & another Vs. Union of India where the provision given under the section 247(1)(g) of the Companies Act, 1956 was challenged, this provision was similar to the provision under the section 167(1)(a) of the Companies Act, 2013. The Gujarat High Court in the abovementioned cases held that the intention and the purpose of the provision was to disqualify errant directors and protect the investors from mismanagement.
The apex court of India in the case of Snowcem India Ltd & Ors Vs. Union of India held that this provision did not debar the directors from carrying out any business, trade or occupation and this provision was a penal measure in the cases where the Director failed to perform the duties.
The Madras High Court held that provisions of Section 167(1)(a) were not arbitrary and didn’t violate any fundamental rights, and hence dismissed the petition.
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