Supreme Court Prima Facie View: No Retrospective Application Of Companies Act Section 164(2) Before FY 2014-15

Supreme Court Prima Facie View: No Retrospective Application Of Companies Act Section 164(2) Before FY 2014-15

The Supreme Court has expressed prima facie agreement with the Allahabad High Court's judgment that Section 164(2) of the Companies Act 2013, which disqualifies directors for five years due to the non-filing of balance sheets and annual returns for any continuous period of three financial years, has no retrospective application to periods before Financial Year 2014-15.

A bench comprising Justices Sanjiv Khanna and Sanjiv Kumar has scheduled the matter for further consideration in the week commencing December 12, 2024.

The provision was notified on April 1, 2014, and different High Courts have varied in their interpretations of its applicability, whether retrospective or prospective.

While the High Courts of Allahabad, Gujarat, Kerala, and Karnataka held that Section 164(2) applies prospectively, the Delhi High Court ruled that the section could be applied retrospectively to periods before 2014.

The Allahabad High Court's judgment, which has been challenged before the Supreme Court, asserted that the provision, being adverse and penal in nature, cannot be applied to a financial year when no such condition existed to attract disqualification under Section 164(2).

“A provision which has been enforced w.e.f. 01.04.2014 and talks of three financial years, if read with Section 2 (41) of Act, 2013, clearly shows that such a 'Financial Year' must commence from 1st April of the concerned year, and a financial year that has ended on 31st March will not be covered.,' reasoned the High Court.

The Court also upheld the validity of the provision, stating that it rightly distinguishes between tainted and untainted directors based on an intelligible classification, which does not violate Article 14 of the Constitution.

Conversely, the Delhi High Court held that the section could apply to failures in filing returns for financial years prior to 2014. It opined that the non-filing of financial returns was already prohibited under the Companies Act. Therefore, the same prohibition under Section 164, even if applied retrospectively, had no significant adverse effect on the rights of defaulting companies. The Court concluded that Section 164(2) operates prospectively, but this prospective operation would include failures to file financial statements for the financial year ending March 31, 2014, if not filed by October 30, 2014.