The Madras High Court has upheld the constitutionality of section 167 (1) (a) of the Companies Act that mandates defaulting companies’ directors to vacate their office in other companies where they hold directorships except the company which had defaulted.
The first bench of chief justices AP Sahi and Subramonium Prasad upheld that the proviso to section 167(1)(a) was neither arbitrary nor does it violate any of the fundamental rights provided under the Constitution of India.
The high court order came in response to a petition filed by a company secretary challenging the proviso. According to the petitioner, the proviso to section 167 (1) (a) violated Article 14 that guarantees the fundamental right of equality.
It was also contended that the proviso is detrimental to non-defaulting companies and punishes individual directors for the fault that cannot be directly attributed to them.
The court dismissed the petition saying that the proviso can be justified on two grounds.
Firstly, the inclusion of the proviso will prevent the anomalous situation wherein the post of director in a company remains vacant in perpetuity owing to automatic application of section 167(1)(a) to all newly appointed directors.
Secondly, the underlying object behind the proviso to section 167(1)(a) is seen to be the same as that of section 164(2) both of which exist in the interest of transparency and probity in governance.
“This proviso will also act as a deterrent from incorporating shell companies to park illegally obtained money,” the bench added.