The Supreme Court of India has signaled its preliminary agreement with the Allahabad High Court’s ruling that Section 164(2) of the Companies Act, 2013, cannot be applied retrospectively to disqualify directors for periods before the Financial Year 2014-15. This section mandates a five-year disqualification for directors failing to file balance sheets and annual returns over three consecutive financial years.
The provision, which became effective on April 1, 2014, has sparked diverse interpretations across different High Courts. The Allahabad, Gujarat, Kerala, and Karnataka High Courts have ruled that the section applies only prospectively. In contrast, the Delhi High Court has held that the rule could potentially cover non-compliance from financial years prior to 2014.
The Allahabad High Court emphasized that the penal nature of Section 164(2) precludes its retroactive application, particularly since there was no corresponding legal requirement for disqualification before April 1, 2014. The court pointed out that the legislation, as it stands, clearly indicates that the relevant financial year begins on April 1 of each year, meaning that fiscal years ending before this date are not included.
The Supreme Court bench, consisting of Justices Sanjiv Khanna and Sanjiv Kumar, has scheduled further deliberations on the matter for mid-December 2024. The Court’s final decision will provide much-needed clarity on the extent of Section 164(2)’s applicability, impacting the legal status of numerous company directors across India.
