Yashodhara Shroff vs Union Of India

Ratio decidendi

The rule this decision rests on

Section 164(2)(a) of the Companies Act, 2013 is not ultra vires Article 14 or Article 19(1)(g) of the Constitution; it is neither manifestly arbitrary nor disproportionate, as the provision operates by automatic operation of law based on objective circumstances (non-filing of financial statements or annual returns for three continuous financial years) and aims to achieve transparency, probity, and accountability in corporate governance. Principles of natural justice requiring pre- or post-decisional hearing do not apply to disqualifications occurring by operation of law under Section 164(2) of the Act, as the ineligibility is not a discretionary administrative order but a statutory consequence of objective facts; therefore, the absence of hearing does not violate Article 14 of the Constitution. Disqualification of directors under Section 164(2)(a) of the Act cannot be based on any continuous period of three financial years that commences prior to 01.04.2014 (the date of enforcement) and extends after that date; rather, the three-year period must either (a) commence from 01.04.2014 onwards, or (b) have occurred entirely prior to 01.04.2014 under the earlier Companies Act, 1956. Mixing the periods—counting non-filing both before and after commencement of the 2013 Act to constitute the three-year default triggering disqualification—constitutes an illegal exercise of power and gives impermissible retrospective effect to the provision. Disqualification of directors of private companies under Section 164(2)(a) of the Act is prohibited where the basis includes any period prior to 01.04.2014, as such disqualification is being applied for the first time to private companies under the 2013 Act and was never envisaged under Section 274(1)(g) of the 1956 Act (which applied only to public companies); such retrospective application to private companies is unreasonable and ultra vires Article 14. Section 167(1)(a) of the Act, which provides that the office of a director shall become vacant upon incurring any disqualification specified in Section 164, encompasses disqualifications under Section 164(2) of the Act; however, the proviso inserted by the Amendment Act of 2017—by which a director disqualified under Section 164(2) does not vacate office in the company in default but vacates office in all other companies—has only prospective operation from 07.05.2018 and cannot be applied retrospectively to directors disqualified prior to that date. Directors whose disqualification occurred prior to 07.05.2018 are not required to vacate their office in either the defaulting company or other companies due to the prospective-only nature of the amended proviso; the proviso applies only to disqualifications occurring on or after 07.05.2018. A director cannot be deactivated or have their Director Identification Number (DIN) cancelled by virtue of disqualification under Section 164(2) of the Act, as Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 does not provide for such cancellation on that ground. Striking off of a company under Section 248 of the Act does not per se result in automatic disqualification of its directors; disqualification arises only where the struck-off company has also failed to comply with Section 164(2)(a) of the Act.

Written by Miss Lucy from the judgment below, not taken from a headnote.