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Shell companies: Govt may have applied Companies Act retrospectively to bar directors

LiveMint logoLiveMint 19-09-2017 Shakti Patra

Mumbai: 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, lawyers said.

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

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

However, according to a 26 March 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 fiscal year 2014-15. The 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)’s notifications on 13 September (a day after the ministry statement) shows exactly that. RoC Mumbai, for instance, clearly quotes section 164 (2) (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 1 November 2015 to 31 October 2020. The 1 November date is relevant because norms say that companies have to conduct their annual general meeting of shareholders by September and file their returns within another month.

“We are going to challenge the disqualification because it’s a clear case of a law being used retrospectively,” a senior partner of a top law firm said on 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 1 November 2016 to 31 October 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 unquestionably have the power to ban the directors of these companies from holding office for five years,” said Aaron Solomon, managing partner of law firm Solomon and Co. “However, if the delay in filing of financial statements was not an offence under the earlier Companies Act of 1956, then in that event, the courts may not be inclined to uphold the retrospective nature of the recent government order.”

The RoC ban notifications on these directors show that many of these are associated with private limited companies.

The ministry of corporate affairs and RoC Mumbai did not respond to calls and emails seeking comment.

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