Section 167(1)(a) of Companies Act 2013 has prospective or retrospective effect?

Proviso to Section 167(1)(a) of the Act having a prospective operation would affect only those directors who are disqualified on or after 7th May 2018 insofar as vacating office of director other than the defaulting company is concerned.

The Honourable High Court of Karnataka in the matter of Yashodhara Shroff vs. Union of India, WP No. 52911 of 2017 stated that the amendment to Section 167(1)(a) of the Act, by insertion of the proviso is by virtue of the Amendment Act, 2017 is subsequent to the date on which the petitioners were disqualified, which in most cases is 01.11.2016 or at any rate prior to May 2018. That the said proviso has only a prospective effect and cannot have a retrospective operation. Thus, in respect of the petitioners who were disqualified prior to the date of enforcement of the amended provision, that portion of the proviso namely “office of the director shall become vacant in all the companies” is not applicable to those petitioners. Hence, the petitioners herein, continue to hold office as directors in the defaulting company as well as all other companies. This is in consonance with the interpretation placed on the proviso and petitioners would not vacate the office in all other companies in which they are directors as the proviso does not apply to the petitioners who were all disqualified prior to 7th May 2018, as the amendment, by way of an insertion of proviso, has only a prospective operation. It is also clarified that the operation of the proviso under Section 167(1)(a) of the Act being prospective in nature, any disqualification of any director of a public company or a private company prior to 7th May 2018, would not result in such director vacating the office of the director in all other companies in which the disqualified director is a director. However, the director of the company in default would continue to hold office as a director even in respect of the defaulting company. The proviso to the above extent only is by way of a clarification so as to avoid an absurdity as otherwise, all the directors of the defaulting company would have to vacate office which would result in the company being bereft of directors and have a cascading effect and there would be no compliance of Section 164(2)(a) by such a company. Hence, the expression ”other than the company which is in default” in the proviso to Section 167(1)(a) would imply that the director of a defaulting company who has suffered disqualification need not vacate his office of the director in the defaulting company.

Consequently, proviso to Section 167(1)(a) of the Act having a prospective operation would affect only those directors who are disqualified on or after 7th May 2018 insofar as vacating office of director other than the defaulting company is concerned.

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