- 1 - IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25TH DAY OF JANUARY, 2025 BEFORE THE HON'BLE MR. JUSTICE K. V. ARAVIND WRIT PETITION No.50795/2019(GM-RES) BETWEEN: 1 . M. KRISHNA REDDY, S/O. M. VENKATA REDDY, AGED 57 YEARS, R/O No.59D, 4TH A CROSS, 30TH MAIN, BTM II STAGE, BENGALURU-560076. ...PETITIONER (BY SRI K. V. SATISH, ADVOCATE) AND: 1 . THE REGISTRAR OF COMPANIES, O/O THE REGISTRAR OF COMPANIES, II FLOOR, 'E' WING, KENDRIYA SADANA, KORAMANGALA, BENGALURU-560034. MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA. 2 . ACE FORGE PVT. LTD., A COMPANY REGISTERED UNDER THE COMPANIES ACT, 1956 AND HAVING ITS REGISTERED OFFICE AT No.131, 2ND CROSS, 19TH MAIN, 6TH BLOCK, KORAMANGALA, BENGALURU-560068. REPT. BY ITS MANAGING DIRECTOR. 3 . SRI ARUN BALLAKUR, S/O LATE B. L. N. RAO, AGED ABOUT 58 YEARS, - 2 - AND R/O No.295, 19TH MAIN, 6TH BLOCK, KORAMANGALA, BENGALURU-560095. 4 . SMT. MADHAVI BALLAKUR, W/O. SRI. ARUN BALLAKUR, AGED ABOUT 50 YEARS AND R/O No.295, 19TH MAIN, 6TH BLOCK, KORAMANGALA, BENGALURU-560095. …RESPONDENTS (BY SMT. SHRIDEVI BHOSALE, ADVOCATE FOR SMT. ANUPAMA HEGDE, ADVOCATE FOR R1; SRI VIVEK HOLLA, ADVOCATE FOR R2 TO R4) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO DIRECT THE R-1 TO NOTIFY IN ITS OFFICIAL WEBSITE AND IN THE MASTER DATA OF THE R-2 AND OTHER RECORDS MAINTAINED THAT THE R-3 AND 4 HAVE BEEN DISQUALIFIED FROM DIRECTORSHIP OF THE R-2 UNTIL 31.10.2021 AND THAT THEIR DIRECTOR IDENTIFICATION NUMBER ALSO STANDS SUSPENDED TILL SUCH DATE AND ETC. THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED FOR ORDERS, COMING ON FOR PRONOUNCEMENT THIS DAY, THE COURT PRONOUNCED THE FOLLOWING: CORAM: HON'BLE MR. JUSTICE K. V. ARAVIND C.A.V. ORDER Heard Sri K.V.Satish, learned counsel for the petitioner, Smt. Shridevi Bhosale, learned counsel on behalf of Smt. Anupama Hegde, learned counsel for respondent No.1 and Sri Vivek Holla, learned counsel for respondent Nos.2 to 4. - 3 - 2. This writ petition has been filed with the prayer to issue directions to respondent No.1 to notify, on its official website and master data, that respondent Nos.3 and 4 stood disqualified from holding the office of Director in respondent No.2-Company until 31.10.2021. Further, the petitioner seeks a direction to respondent No.1 to initiate prosecution against respondent Nos.3 and 4 for unlawfully representing themselves as Directors of respondent No.2- Company after 01.04.2014. 2.1 The brief facts relevant for consideration of this petition are that, the petitioner is a shareholder and promoter of respondent No.2-Company. Respondent No.2 is a company registered under the Companies Act, 2013 (hereinafter referred to as 'the Act'). Respondent Nos.3 and 4 are directors and were disqualified from the directorship of respondent No.2 under Section 164(2) of the Act for non-filing of the Annual Report comprising of Balance Sheet, Directors and Auditor's Report and also the Annual Return for a consecutive period of three years namely, 2014-15, 2015-16 and 2016-17. It is the case of - 4 - the petitioner that the moment default is committed for three consecutive financial years, the disqualification is by operation of law under Section 164 of the Act. 3. Sri K.V.Satish, learned counsel appearing for the petitioner submits that respondent Nos.3 and 4 were responsible for the non-filing of financial statements or Annual returns of the company. Respondents Nos.3 and 4 have committed default for a continuous period of three financial years, namely, 2014-15, 2015-16 and 2016-17. It is submitted that under section 164(2)(a), respondent Nos.3 and 4 would suffer disqualification and cannot continue or act as directors of the company. It is further submitted that in view of default, disqualification is statutory and automatic by operation of Section 164(2). Such statutory disqualification is not challenged by respondents Nos.3 and 4 and the same remains. 3.1 Learned counsel further submits that as the disqualification is prior to the insertion of proviso to Section 164(2), disqualification as director would apply to the default company and all other companies. Learned - 5 - counsel further drives his contention by relying on the proviso to Section 167(1)(a) of the Act. Learned counsel in support of the above submissions, relies on the judgment of this Court in Writ Petition No.52911/2017 dated 12.06.2019 in the case of Yeshodhara Shroff vs. Union of India and another. 4. Sri Vivek Holla, learned counsel appearing for respondent Nos.2 to 4, would submit that the default is for three consecutive years from 2014 to 2017. The disqualification would occur in September 2017. 4.1 Learned counsel further submits that the disqualification under Section 164(2) is only for reappointment as a director of that company or in any other company for a period of five years. As per proviso to Section 164(2), the disqualification will not apply to the default company. 4.2 Learned counsel further relying on Section 167(a) of the Act, as per proviso to Section 167(1)(a) of the Act, the disqualification applies to other companies only if - 6 - disqualification occurs after 07.05.2018. It is the submission of learned counsel that the disqualification having occurred in September 2017 that is prior to 07.05.2018, the proviso to Section 167(1)(a) is not applicable. 4.3 Learned counsel in support of his submissions seeks support from the judgment relied on by learned counsel for the petitioner. 5. Smt. Shridevi Bhosale, learned counsel appears on behalf of Smt. Anupama Hegde, learned counsel for respondent No.1. 6. Having considered the submissions of learned counsel for the parties and perusal of the writ papers, it is evident that respondent Nos.3 and 4 were directors of respondent No.2-Company. 6.1 The company has committed default as referred to in Section 164(2)(a) for three consecutive financial years namely, 2014-15, 2015-16 and 2016-17. Section 164(2) reads as under; - 7 - "(2) No person who is or has been a director of a company which— (a) has not filed financial statements or annual returns for any continuous period of three financial years; or (b) has failed to repay the deposits accepted by it or pay 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, shall be eligible to be reappointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so: [PROVIDED that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.] (3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2): [PROVIDED that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.]" 6.2 Section 167(1)(a) reads as under; "167. Vacation of office of director.— (1) The office of a director shall become vacant in case— (a) he incurs any of the disqualifications specified in Section 164: - 8 - [PROVIDED that where he incurs 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;]" 6.3 A bare reading of Section 164(2) of the Act mandates that a director shall incur disqualification from being reappointed as a director in the same company or being appointed as a director in any other company for a period of five years. One of the grounds for such disqualification is the failure to file financial statements or annual returns for three consecutive financial years. As per the pleadings of both parties, the disqualification arising from the non- filing of financial statements or annual returns for the financial years 2014-15, 2015-16, and 2016-17 remains undisputed. 7. The petitioner contends that disqualification occurs automatically by operation of law the moment a default is committed. It is asserted that respondent No.1 has failed to enforce this disqualification. On the other hand, respondent Nos.3 and 4 argue vehemently that the disqualification pertains solely to reappointment. They - 9 - further contend that the proviso to Section 167(1)(a), which extends the disqualification to all other companies apart from the one in default, applies only if the default occurred after 07.05.2018, as stipulated by the said proviso. The proviso to Section 167(1)(a) prescribes disqualification from holding the office of director in all companies except the defaulting company. This Court, while adjudicating on the applicability of the proviso in the case of Yeshodhara Shroff (supra), upon extensive consideration of the 2018 amendment, has held that; "195. I find considerable force in the argument of petitioners’ counsel as, on 01.11.2016, when the petitioners were disqualified, while they had to vacate the office of the director, it necessarily referred to the defaulting company under Section 164(2) of the Act. But, realizing the fact that if all the directors in the defaulting company had to vacate office, then such Board of Directors would be bereft of directors and would lead to an absurd situation, the proviso was inserted to the effect that a director of a defaulting company shall not vacate office of the director in the defaulting company. Therefore, the said portion of the proviso could be construed to be clarificatory in nature and therefore, would have a retrospective effect." "196. ….. The proviso would therefore apply only to those directors who sustain disqualification subsequent to 07.05.2018 when the proviso was introduced. Consequently, under Section 167(1)(a) of the Act, a director of - 10 - a defaulting company who has been disqualified prior to 07.05.2018 would not have to vacate his office of such a company or in any other company. Further, the petitioners who were also protected by the interim order passed by this Court would continue to be the directors of the defaulting company till their term of office ends." "197. ….. The words “provided that where he incurs disqualification under sub- section (2) of Section 164, the office of the director shall become vacant ……., other than the company which is in default under that sub-section” being clarificatory in nature has retrospective operation, while the words “in all the companies” being introduced for the first time by way of proviso, pursuant to Amendment Act, 2017, has prospective operation and the proviso would apply only to those directors who sustain a disqualification pursuant to 07.05.2018. While saying so, the doctrine of severability as applicable to interpretation of statutes is applied." "208. In view of the aforesaid discussion, I have arrived at the following conclusions: xxxxxx (e) Insofar as the private companies are concerned, disqualification on account of the circumstances stated under Section 164(2)(a) of the Act has been brought into force for the first time under the Act and the consequences of disqualification could not have been imposed on directors of private companies by taking into consideration any period prior to 01.04.2014 for the purpose of reckoning continuous period of three financial years under the said provision. The said conclusion is based on the principle drawn by way of analogy from Article 20(1) of the Constitution as, at no point of time prior to the enforcement of the Act, a disqualification based on the circumstances under Section - 11 - 164(2) of the Act was ever envisaged under the 1956 Act vis-à-vis directors of private companies. Such a disqualification could visit a director of only a public company under Section 274(1)(g) of 1956 Act and never a director of a private company. Such disqualification of the petitioners who are directors of private companies is hence quashed. ......... (g) Consequently, where the disqualification under Section 164(2)(a) of the Act is based on a continuous period of three financial years commencing from 01.04.2014, wherein financial statements or annual returns have not been filed by a public or private company, the directors of such a company stand disqualified and the consequences of the said disqualification would apply to them under the Act. ........ (j) Further, the amendment to Section 167(1)(a) of the Act, by insertion of the proviso is by virtue of the Amendment Act, 2017 is subsequent to the date on which the petitioners were disqualified, which in most cases is 01.11.2016 or at any rate prior to *7th May 2018. That the said proviso has only a prospective effect and cannot have a retrospective operation. Thus, in respect of the petitioners who were disqualified prior to the date of enforcement of the amended provision, that portion of the proviso namely “office of the director shall become vacant in all the companies” is not applicable to those petitioners. Hence, the petitioners herein, (who may have also been granted interim orders by this Court) continue to hold office as directors in the defaulting company as well as all other companies. This is in consonance with the interpretation placed on the proviso and petitioners would not vacate the office in all - 12 - other companies in which they are directors as the proviso does not apply to the petitioners who were all disqualified prior to 07th May 2018, as the amendment, by way of an insertion of proviso, has only a prospective operation. (k) It is clarified that the operation of the proviso under Section 167(1)(a) of the Act being prospective in nature, any disqualification of any director of a public company or a private company prior to 07th May 2018, would not result in such director vacating the office of the director in all other companies in which the disqualified director is a director. However, the director of the company in default would continue to hold office as a director even in respect of the defaulting company. The proviso to the above extent only is by way of a clarification so as to avoid an absurdity as otherwise, all the directors of the defaulting company would have to vacate office which would result in the company being bereft of directors and have a cascading effect and there would be no compliance of Section 164(2)(a) by such a company. Hence, the expression “other than the company which is in default” in the proviso to Section 167(1)(a) would imply that the director of a defaulting company who has suffered disqualification need not vacate his office of the director in the defaulting company." 7.1 In the judgment referred to (supra), it has been held that the proviso to Section 167(1)(a) of the Act is prospective in nature and does not apply to any disqualification of directors occurring prior to 07.05.2018. In the present case, the disqualification pertains to September 2017. Furthermore, it has been clarified that a - 13 - director of the defaulting company shall continue to hold the office of director in the defaulting company until the completion of the tenure. 8. Learned counsel for the petitioner submits that the judgment of this Court in Yeshodhara Shroff (supra) has been stayed in Writ Appeal No.2688/2019. However, learned counsel for respondent Nos.3 and 4 contends that the interim stay is confined to the operative portion of the order at paragraph 209(i, iv, and vi). It is further argued that the stay order pertains solely to one of the writ petitions forming part of the common judgment. The judgment in Yeshodhara Shroff (supra), insofar as it relates to the writ petition concerning respondent Nos.3 and 4, remains unchallenged. This position is not disputed by learned counsel for the petitioner. Additionally, respondent Nos.3 and 4 are not parties to the writ appeal, and therefore, the stay order is neither applicable to nor binding in the present case. 9. Be that as it may, the issue raised in the present writ petition is no longer res integra and is fully covered by the - 14 - judgment of this Court in Yeshodhara Shroff (supra). In the said judgment, this Court has clearly held that the proviso to Section 167(1)(a) of the Act is prospective in nature and does not apply to any disqualification occurring prior to 07.05.2018. Additionally, it has been clarified that the director of the defaulting company shall continue to hold office and shall not vacate his position in the defaulting company. Upon thorough examination of the factual and legal aspects, it is clear that the controversy raised in this writ petition is fully addressed by the decision in Yeshodhara Shroff (supra). No case is made out to take a different view. 10. Although disqualification arises under Section 164(2)(a), the proviso to Section 167(1)(a) ensures that the office of the director does not become vacant in the company in default. Furthermore, considering that the proviso to Section 167(1)(a) is prospective and applies only to disqualifications occurring after 07.05.2018, and the disqualification in the present case pertains to the year 2017, which predates 07.05.2018, the proviso does not - 15 - apply. Consequently, the disqualification does not extend to directors of companies other than the company in default. 11. While learned counsel for respondent Nos.3 and 4 has raised various arguments in the statement of objections, explaining the reasons for the default in filing financial statements for the three consecutive financial years 2014-15, 2015-16, and 2016-17, these arguments are not relevant to the specific issue at hand for consideration by this Court. Therefore, they are not addressed in this petition as unnecessary. 12. Accordingly, the writ petition is dismissed. Sd/- (K. V. ARAVIND) JUDGE DDU