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Amendments made in the year 2014 and 2018 to the Companies Act, 2013 are prospective: Calcutta High Court

Amendments made in the year 2014 to Section 164(2) and 2018 amendment to proviso to Section 167(1)(a) of the Companies Act, 2013 are prospective in nature and a retrospective application would be anomalous, absurd, unreasonable and could potentially ruin the economy. The Sections deals with the disqualification of director of a company for not filing financial statements for a continuous period of three years and/or balance sheet within thirty days of the date of the Annual General Meeting. This ratio was laid down by the Calcutta High Court presided over by J. S. Bhattacharya in the case of Naresh Kumar Poddar Vs. Union of India, [W.P.O. No. 439 of 2019].

The director of a private company was disqualified by a 2017 notification for the period between November 2016 and October 2021. Hence, he filed a Petition in the High Court stating that the notice was not applicable to him as the amendment is prospective and nit retrospective. He further alleged that The impugned notice disqualifying the petitioner for five years from November 1, 2016 to October 31, 2021 is premature and untenable at law.

The High Court after analyzing the Section and Amendments was of the opinion that the disqualification of a director through a retrospective application of an amendment was patently penal in nature and this has violated the fundament right under Article 19(g) of the Constitution which is a right to practice any profession or occupation, trade or business.

The Court with consequences of the retrospective application was of the opinion that, “If retroactive effect is given thereto, and would entail the directors suffering a grievous violation of their fundamental right under Article 19(1)(g) of the Constitution without any possibility of the directors, or anyone for that matter, having been able to predict such consequence on the relevant date, that is, the date of such default. In such a factual scenario, it cannot be argued by reasonable prudence that a retroactive effect ought to be given to the amendment-in-question. This is an irreconcilable anomaly that would befall the directors if retrospective/retroactive effect is given to the amendments-in-question, not justiciable even by applying Article 19(6) of the Constitution.”

The Court further assessing the overall impact upon the economy and trade of the nation if such retrospective application is permitted stated that, “…there might be ‘Black Swan’ situations, for example, economic recession and debilitating pandemics, which would throw off business and commerce out of gear for considerable periods of time, having little or no effect on robust or anti- fragile (Courtesy: Nassim Nicholas Taleb for the terms ‘Black Swan’ and ‘anti-fragile’) large operators but ruining the credibility and goodwill of small companies, completely veering them off course … This, coupled with the automatic disqualification envisaged in the 2014 and 2018 amendments to the 2013 Act, is sufficient to ruin the economy as a whole which, somewhat counter-intuitively, is detrimental to the growth of the economy. Thus, attributing retrospective/retroactive effect to the said amendments would run contradictory to the purpose of public good. The simplistic approach of merely identifying non-performers in an attempt to provide a fillip to commerce, by a pseudo-streamlining of the economy, loses teeth in the broader perspective discussed above.”

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