#Wake-up MCA – Act Amended Through Removal of Difficulties Power Under Section 470

Companies Act, 2013 empowers the Central Government to issue orders to remove any difficulty arising from effectuating the provisions of the Act (Section 470). The CG can make such provisions which are not inconsistent with the provisions of the Act.

The power to remove difficulties has been the subject of judicial interpretation:

In Jalan Trading Co. Private Limited Vs. Mill Mazdoor Union, 1967 AIR  691, 5 member Bench of Supreme Court dealt with this issue and observed that “Power to remove the doubt or difficulty by altering the provisions of the Act would in substance amount to exercise of legislative authority and that cannot be delegated to an executive authority. Sub-section (2) of s. 37 which purports to make the order of the Central Government in such cases final accentuates the vice in sub-section (1), since by enacting that provision the Government. is made the sole judge whether difficulty or doubt has arisen in giving effect to the provisions of the Act, whether it is necessary or expedient to remove the doubt or difficulty, and whether the provision enacted is not inconsistent with the purposes of the Act.

Similarly in Mahadeva Upendra Sinai Etc. vs Union Of India & Ors, 1975 AIR 797, the Supreme Court observed as under-

(2) The existence or arising of a ‘difficulty’ is the sine qua non for the exercise of the power under clause 7 of the 1963-Regulation. The ‘difficulty’ contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act and no further. It may slightly tinker with the Act to round off angularities and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. Under the guise of removing a difficulty, it cannot change the scheme and essential provisions of the Act.”

The above judicial interpretation leads us to conclude that the Central Government is not empowered to exercise legislative power, that is, it cannot change the basic structure and primary features of the Act.

Recently, the Central Government has issued two orders under Section 470 of the Act on 9th July, 2014 and 24th July, 2014.

The order issued on 9th July, 2014 is known as The Companies (Removal of Difficulties) Fifth Order, 2014 and the one issued on 24th July, 2014 is the next in series, i.e., The Companies (Removal of Difficulties) Sixth Order, 2014.

The Fifth Order amends Section 2(76)(v) by replacing the words “or holds” with the words “and holds”.

The Sixth Order amends Section 2(76)(iv) by adding the words “or his relative” after the word manager.

The old and new clauses (iv) and (v) read as under:

Old Clauses

(iv) a private company in which a director or manager is a member or director;

(v) a public company in which a director or manager is a director or holds along with his relatives, more than two percent of its paid-up capital;

New Clauses

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director or and holds along with his relatives, more than two percent of its paid-up capital;

 

Clause (iv)

In clause (iv) ‘or his relative’ has been added on the pretext that “his relative” appears in all sub-clauses (i), (ii), (iii) and (v) and non-occurrence of this phrase has resulted in disharmonious construction.

The reasoning given is without any substance for following reasons:

1. It was a clear legislative intent to leave out the phrase “or his relative” from clause (iv) as it relates to private companies and it would be too burdensome for companies to identify and maintain fair record about membership or directorship of relative of a director or manager. How would a director or manager gain knowledge of his relatives’ membership and directorships in private companies. What if the relatives and the concerned director or manager are not on talking terms? Even if they have good relations, why would any relative disclose his shareholding or directorship in private companies to his relative? This was precisely the reason, the phrase “or his relative” was deliberately and intentionally left out from clause (iv).

2. If we read clause (v), the phrase “or his relative” has been used only in the context of holding shares beyond 2% of the share capital of the Company. It does not per se brings the relatives’ shareholding or directorship within the related party definition. The context is entirely different. The text and the context does not match with the reasoning stated by the Central Government.

Clause (v)

By replacing “or” with “and”, the flavour of the entire clause stands altered. In the garb of difficulty of removal, the Central Government  has changed the entire meaning and construction. The reasoning stated is that ‘or’ has appeared inadvertently and therefore defeats the intention of this clause. How it defats intention is beyond comprehension? In previous clause (iv), the words ‘or’ appears indicating that directorship and membership conditions are in the alternative. In clause (v), how can the Central Government interpret it in its own discretionary way? By replacing “or” with “and”, the conditions have been made simultaneous, resulting in a diametrically opposite meaning.

The Central Government is expected to issue the Orders within purview of law and boundaries laid down by Hon’ble Supreme Court and not tinker with the provisions twisting and turning their meanings on the head.

The seriousness attached with the power needs serious legal attention and the Central Government cannot disfigure the basic structure of the legal provisions as legislated by the Parliament.

Wake-up MCA!!

Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.