Provision in Companies Act exists for transparency, says HC

The validity of a section of the Companies Act mandating directors of defaulting companies to vacate directorship in other companies while retaining the same in the defaulting company has been upheld by the Madras High Court.

The section 167 (1) (a), which was added to the Act, exists in the interest of transparency and probity in governance, the first bench of chief justices AP Sahi and Subramonium Prasad said.

The proviso was not arbitrary or violative of any fundamental right conferred under the Constitution, the bench said.

The matter pertains to a petition filed by a company secretary G Vasudevan who contended that proviso leads to unequal treatment being meted out to directors of a defaulting company based on whether they are directors in other companies or not.

The provision has a detrimental effect on other, non- defaulting companies and punishes individual directors for the defaults of a company even when fault cannot be directly attributed to them, it was contended.

There is no justification provided for mandating the vacation of directorship in other companies thus leading to this provision being arbitrary and violative of Article 14 of the Constitution, the petitioner said.

Refusing to agree, the bench said this proviso can be justified on two grounds.

Firstly, this has been done in order to 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 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.

Owing to these justifications, the court holds that the section is neither manifestly arbitrary nor does it offend any of the fundamental rights guaranteed under the Constitution, the bench said.