DATE: 25/07/2025
COURT: High Court of Karnataka
BENCH: Justice Suraj Govindaraj
FACTS:
The petitioners are directors of M/s Vihaan
Direct Selling (India) Private Limited, appointed in 2016. When the company
attempted to file its annual returns and statutory filings for the financial
years 2017–18 and 2018–19, the Ministry of Corporate Affairs (MCA) portal
displayed a message indicating that the directors were disqualified. In
response, the petitioners made representations to the Registrar of Companies
(Respondent No. 3) requesting reactivation of their Director Identification
Numbers (DINs) to facilitate statutory compliance. On 07.08.2018, the MCA
notified the company that an inspection would be conducted under Section 206(5)
of the Companies Act, 2013, and the petitioners were asked to furnish documents
and information. Subsequently, based on the inspection, the Regional Director issued
a communication dated 12.12.2018 citing certain irregularities and seeking an
explanation.
On 21.05.2019, the Registrar of Companies
issued a show-cause notice to the company, which was responded to on
04.06.2019. Soon after, on 07.06.2019, the Registrar filed a petition for
winding up the company before the National Company Law Tribunal. It was during
this process that the petitioners became aware of their disqualification from
all companies as directors. Despite repeated correspondence with the
authorities, the petitioners’ DINs remained blocked, preventing them from
filing any documents. As the five-year disqualification period, starting from
2018 expired in 2023, the petitioners have approached the High Court seeking
relief, arguing that continued disqualification violates their fundamental
rights under Article 19(1)(g) of the Constitution.
ISSUES:
The primary issues before the Court were:
(1) Whether a director disqualified under Section 164(2) of the Companies Act,
2013 can be barred from holding directorship in companies other than the
defaulting company; (2) Whether such disqualification violates the fundamental
right to practice any profession or carry on any occupation under Article
19(1)(g) of the Constitution of India; and (3) Whether the period of
disqualification under Section 164(2) can extend beyond the statutory limit of
five years.
JUDGEMENT WITH REASONING:
The High Court dismissed the writ petition,
holding that while the disqualification of the petitioners under Section 164(2)
was valid, it could not be extended beyond the statutory five-year period.
Since the disqualification arose in 2018, it lapsed in 2023, and therefore, the
petitioners could no longer be treated as disqualified. However, the Court
found no merit in the petitioners’ claim that the disqualification violated
their fundamental rights under Article 19(1)(g).
The Court clarified that the
disqualification under Section 164(2) is not company-specific but
director-specific. If a company fails to file financial statements or annual
returns for three consecutive years or fails to repay deposits or redeem
debentures, the directors of that company become disqualified for a period of
five years. This disqualification extends to all companies where such persons
serve as directors, not just the defaulting company. However, the vacation of
office under Section 167(1)(a) is limited only to the defaulting company, as
per the proviso to the section. The Court emphasized that the purpose of the
disqualification regime is to promote compliance and integrity in corporate
governance, and the inability to act as a director in other companies is a
statutory consequence of the failure to act in accordance with the
responsibilities of a director.
Regarding the constitutional challenge, the
Court held that the restrictions imposed by Sections 164 and 167 are reasonable
restrictions under Article 19(6) of the Constitution and do not amount to a
violation of Article 19(1)(g). The right to trade or carry on a profession is
not absolute and can be subjected to statutory regulation in the public
interest. The disqualification arises due to the inaction or negligence of the
director, unless they can prove that such inaction was beyond their control (e.g.,
refusal of co-directors to sign necessary documents). In such exceptional
cases, mechanisms may be developed to prevent undue hardship. However, since no
such case was made out here, the disqualification stood valid. Crucially, the
Court noted that Section 164(2) only provides for disqualification for a fixed
term of five years, with no statutory provision allowing extension beyond that.
Accordingly, as the five-year period had elapsed, the petitioners'
disqualification ceased by operation of law.
ANALYSIS:
This case underscores the legal
implications of non-compliance by a company on its directors under the
Companies Act, 2013. The Court reinforced the principle that disqualification
under Section 164(2) is a personal disqualification attributable to a director’s
failure to ensure statutory compliance, such as the timely filing of financial
statements and returns. Importantly, this disqualification is not confined to
the defaulting company alone but affects the director's eligibility across all
companies. The Court further clarified that although the disqualification under
Section 164(2) may lead to vacation of office under Section 167(1)(a), such
vacation is restricted only to the defaulting company, preventing an excessive
or disproportionate impact on a director’s other lawful engagements.
The judgment also presents a significant
constitutional analysis, where the Court found that the disqualification
provisions do not violate the right to practice a profession under Article
19(1)(g) of the Constitution. The Court reasoned that these provisions serve a
legitimate public interest by maintaining accountability and corporate
discipline, and therefore qualify as "reasonable restrictions" under
Article 19(6). Moreover, it firmly held that the statutory disqualification is
strictly limited to a five-year term, with no provision for extension by
authorities, thereby providing a clear outer limit on regulatory sanction. This
ruling offers clarity on the temporal scope of director disqualifications while
balancing the need for compliance with the protection of individual rights
under corporate law.
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