In G. Vasudevan v. Union of India* (judgment text accessible here), the Hon'ble Madras High Court ("Court") decided on the constitutionality of the proviso to Section 167(1)(a) of the Companies Act, 2013 ("Companies Act") being the provision dealing with vacation of office of a director of a company. The proviso to Section 167(1)(a) of the Companies Act provides that where a director incurs disqualification under Section 164(2) of the Companies Act (i.e. disqualification of director of a company which inter alia has not filed its financial statements or annual returns for a period of three consecutive financial years) , the office of such director shall become vacant in all the companies, other than the company which is in default.

The aforesaid proviso which was inserted vide the Companies (Amendment) Act, 2017 was challenged by the petitioner as ultra vires Articles 14 and 19(1)(g) of the Constitution of India ("Constitution") claiming that the concerned proviso causes unfair treatment to the directors in multiple companies by mandating vacation of directorship in companies other than the defaulting company, thus being arbitrary and also restricting his/her freedom to carry on business. The Court, while upholding the constitutionality of the concerned proviso, observed that the exclusion contemplated under the proviso to Section 167(1)(a) of the Companies Act (i.e. the director of the defaulting company continuing to be a director in such company) was introduced to prevent the anomalous situation of the post of a director remaining vacant in perpetuity owing to the automatic application of Section 167(1)(a) of the Companies Act to newly appointed directors to the concerned defaulting company. The Court also noted that the object of inserting the aforesaid proviso was to ensure that a person who is a director in a company that does not inter alia file its annual returns/financials for three consecutive financial years does not continue in other companies.

DSK Legal's Observations: Based on the aforesaid judgment, it can be stated that a director who incurs disqualification on account of a company: (a) failing to file its financial statements or annual returns for three consecutive years or (b) failing to repay deposits (or interest thereon) or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, would vacate office as director in all companies except the defaulting company. Further, an individual newly appointed as a director of a defaulting company as aforesaid would incur disqualification only after the elapse of six months from his/her appointment (i.e. if the concerned company has not rectified the aforesaid default).

* W.P. No. 32763 of 2019 (decided on December 2, 2019).

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