Kaynet Finance Limited vs. Verona Capital Limited:

For the purpose of disqualification, Section 164 of the Act of 2013 can be divided in two parts. They are Sub-section (1) and Sub-section (2). Sub-section (1) relates to disqualification of a person for appointment as a director. The disqualifications listed are, to put in general terms: unsound mind; insolvency; conviction for offences involving moral turpitude with imprisonment not less than six months; order of disqualification passed by a court; conviction for an offence of related party transaction. If a person has suffered these consequences, then he cannot be appointed as a director. The second category of disqualification is in Sub-section (2). This Sub-section disqualifies a person who is or has been director of a company which has not filed financial statements or annual returns or has failed to repay the deposits. Thus first part deals with disqualifications for appointment and second part deals with a director of a company in default. This analysis is to point out that there are two different categories envisaged under Section 164.

The consequence of being a director of a company which has not filed financial statements or annual returns as envisaged under Section 164(2)(a) is provided in Section 164(2) itself. The consequence is that such a director will not be eligible for reappointment as a director of a company in default or any other company for a period of five years from the date defaulting company has failed to fulfill the requirement. If it is interpreted that the directors of a company which has not filed its financial statements for the stipulated period are not only disqualified for reappointment but their offices will stand vacant, it will create a vacuum. The offices of directors of such a company would forthwith fall vacant and the cause of such company cannot be proceeded with by the directors. Directors would not be able to take steps even if company is restored to Register of Companies and defend it in the court of law or in arbitration. It could not have been the intention of the law to create an absurdity. Therefore, Section 167(1)(a) will have to be read down to mean that the reference to Section 164 in Section 167(1)(a) is not to the contingencies provided in the second part i.e. Sub-section (2) of Section 164. A question may arise that how Section 167 can then be reconciled with Section 164(1) because this section deals with disqualification for appointment. It may be contended that if a person cannot be appointed as a director, then there cannot be a vacation of his office. However, Section 164 (1) does not deal only with disqualification for initial appointment, it also contemplates a sitting director. Because it cannot be the position that a disqualification applicable for appointment as a director, such as unsound mind and conviction, cannot disqualify a director who has incurred such a disqualification after he has become a director. Therefore, harmoniously read, the interplay between Section 164 and 167 is that the office of a director of a company will not automatically fall vacant if a director of a company incurs any of the disqualifications enumerated in Section 164(2) of the Act of 2013.

Next debate on this aspect was on the implication of the proviso is inserted in Section 167 of the Act 2013 by Act 1 of 2018 with effect from 7 May 2018. It states that that where a person 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 in default. The argument of the Appellant is that this position was brought out on 7 May 2018 and it would not assist the directors of the Respondent before the date. This argument is incorrect. The legislative intent prior to the incorporation of the proviso, was not to declare that the office of the director covered in contingencies under Section 164(2)(a) to become vacant forthwith and the only embargo was on the eligibility for re-appointment. The proviso introduces a mandate from 7 May 2018, that a director of a company which has failed to file its financial statements or annual returns for a continuous period of three financial years, cannot continue as a director of the other companies. The contention of the Appellant that the proviso relaxed the position in favour those directors who were disqualified under Section 164(2)(a) and now vacation of office is restricted only to companies other than in default, is incorrect. The position is other way round. Prior to proviso there was no automatic vacation of office of director falling under Section 164(2)(a). By the proviso, a sanction is now imposed that such directors will not only be ineligible for reappointment, but if they are holding office as director in other companies, that office will fall vacant. Again the legislative intent reiterated, that as far the company in default, the office of its directors will not automatically fall vacant.

We, therefore, reject the contention of the Appellant that the Arbitration Application filed on behalf of the Respondent by its Directors who were disqualified was not maintainable. The office of these Directors had not fallen vacant on their disqualification, and they could represent the Respondent.