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N. R. Moorthy

The new director disqualification rules seem to go beyond the ambit of delegated powers, says N. R. Moorthy

THE Central Government has prescribed the "Companies Disqualification of Director's under Section 274 (1) (g) of the Companies Act 1956) Rules, 2003" laying down the rules for the purpose of compliance of Section 274 (1)(g) of the Companies Act.

The said provisions enumerate details under which a director of a public company is disqualified from being appointed as such in another public company. The rules have been notified using the powers conferred on the Central Government under Section 642(1)(b) of the Act. To facilitate quick understanding, the said provision is reproduced:

"Section 642: (1) In addition to the powers conferred by Section 641, the Central Government may, by notification in the Official Gazette, make rules: for all or any of the matters which by this Act are to be, or may be, prescribed by the Central Government; and generally to carry out the purposes of this Act."

Before analysing the implications of the said rules, one needs to examine whether the Government can exercise such wide powers under the omnibus and blanket authority and invoke sub-section 1(b) which talks of rule-making power "generally to carry out the purpose of the act."

Looking at the past judicial pronouncement on the powers that can be exercised under the provisions of the rule-making power, it is ridiculous to assume blanket power taking shelter under the above umbrella. If such a view were taken, then it would render various provisions redundant, as the government could come out with such rules sidelining the legislature.

This makes mockery of the very intention of delegation of power. It is an accepted fact that the rules are normally invoked to prescribe a unified procedure to be followed so that transparency and adequate disclosure can be ensured. The role of the rule should be that of a facilitator. It is a settled law that the rules cannot cross the Lakshman rekha.

On a plain reading of the rule it would be apparent that it is beyond the ambit of Section 274 and certain new elements, which are not supported by a statute, have crept in :

Rule 274 (1)(g)(A)(B), for instance, provides the grounds under which a person who is already a director of a public company incurs disqualification and the proviso thereto mandates that such person shall not be eligible for appointment as a director in any other public company for a period of five years from the date on which the default occurs.

In addition, though it is clear by implication that all those who were directors when the default occurred will be hit by the said provision, which has been inserted in the rule to clarify the point. Similarly, the second proviso extends the application to reappointment of directors, which again is of a clarificatory nature.

Rule 4 requires the statutory auditor of the defaulting company (one in which a default has occurred) and the appointing company (one in which a person is supposed to be appointed) to state in their report to the members of the company whether any director is disqualified from being appointed as a director under clause (g) of sub-section (1) of Section 274.

This is totally unwarranted, as Section 227(3)(f) casts the obligation to mention the above statement in their report to the company audited by them. Contrary to the provisions of Sections 274 (1)(g) and 227 (3)(f) such statutory auditors are called upon to furnish a certificate each year "as to whether, on the basis of his examination of the books and records of the company, any director in the company has been disqualified during the year from being appointed as a director". This is going beyond the scope and intent of statute and is untenable in law.

Under Rule 5 a company which has committed such a default is required to file a return in duplicate in Form DDB to the Registrar of Companies furnishing the names and addresses of all the directors of the company during the financial year. This is another example of the executive trammelling over the functions of the legislature.

Likewise, an obligation is caste on the director of a public company under rule 9 to file Form No DDA making certain disclosures. This requirement is redundant, as Section 264 read with From 29 meets the purpose adequately. It is apparent that these two forms are totally redundant and have been introduced in the rules as a device to collect revenue.

Also, Rule 11 mandates that if a company or any other person contravenes any provisions of the rules for which no punishment is provided in the Companies Act, the company and every officer who is in default or such other person shall be punishable with a fine which my extend to Rs 5,000 and for continuing default, Rs 500 every day.

This is incomprehensible, as there is no specific delegation of power to impose these conditions under the rules nor is there any specific penal provision under the said Section 274 of the Act. It is totally misleading to mention that there is no penalty prescribed under the Act. The rule-making authority seems to have conveniently overlooked Section 629 A of the Act, which provides penalty in respect of contraventions for which there is no specific penalty under the relevant provisions of the Act.

This rule is a blatant exercise of power in excess of delegation and is liable to be struck down on a reference to the judiciary. In fact, it is a settled law that through subordinate legislation you cannot levy penalty without it being provided in the parent legislation. The DCA will be well advised to withdraw the prescribed rules before they are proscribed.

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