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APPLICABILITY OF SECTION 274(1)(g)

APPLICABILITY OF 274(1)(g) TO A PRIVATE COMPANY WHICH IS SUBSIDIARY OF THE PUBLIC COMPANY

Whether 274(1)(g) is applicable to a Private Company which is subsidiary of the Public Company.

General Norm:

Under Companies Act, 1956, the Sections are drafted such a way that –

(a) they are applicable to all the companies – Public, Private and Private which is a subsidiary of a Public (b) they are not specifically applicable to Private Companies which are not the subsidiary of a Public Company (c) they are specifically applicable to the Public Companies and Private Company which is subsidiary of a Public (d) they are applicable only to Public Companies

How to arrive at the applicability?

1) Where a provision is silent on applicability (or when it mentions the word “company”), it is applicable to all the Companies, i.e., a. Public, b. Private and c. Private which is a subsidiary of a Public.

2) Where a provision clearly specifies non-applicability to Private, it is applicable only to the Public Companies Example: 70, 81,149, 165

3) Where a provision clearly specifies non-applicability to Private other than Private which is a subsidiary to Public, it is applicable to a. Public and b. Private which is a subsidiary of a Public Example: 90, 257,264, 309, 372A

4) Where a provision clearly specifies the applicability to Public and Private which is subsidiary of Public, it is applicable to a. Public and b. Private which is subsidiary of public Examples: 77, 170, 193, 255, 256, 259, 262, 263, 265, 269, 293, 310

Note: When a provision is applicable to a Private Company, it is also applicable to a Private Company which is a subsidiary of Public Company. But, when a provision is applicable only to a Public Company, it is not always applicable to a Private which is a subsidiary of a Public Company unless there is a specific mention of the same.

APPLICABILITY OF SECTION 274(1)(g)

Though 274(1) uses the generic word “Company”, 274(1)(g) [which was inserted by Amendment to the Act in 2000] uses specifically the words “Public Company”. It implies that all the provisions of Section 274 except for 274(1)(g) are applicable to all – (a) Public (b) Private (c) Private which is a subsidiary of public

And 274(1)(g) is applicable to only to Public Companies.

To arrive at the conclusion that 274(1)(g) is not applicable to Private Company which is a Subsidiary of a Public company we need to prove that

(1) It is not applicable to Private Companies. Because if a provision is applicable to a Private Company it is also applicable to Private Company which is a subsidiary of Public Company. (2) It is applicable only to Public Companies and not the Private Company which is a subsidiary of Public Company

(I) 274(1)(g) – Not applicable to Private Companies – How?

(a) 274(1) uses the generic word “company” hence provisions of 274 are applicable to Private Companies also.

(b) Further 274(3) say that a Private Company which is not subsidiary of public company can have additional disqualifications in Articles of Association. Implies, 274 is applicable to Private Company too.

(c) Coming to 274(1)(g):-

(i) Section Extract:

274 (1) A person shall not be capable of being appointed director of a company, if- 274 (1)(g) such person is already a director of a public company which,- (A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April, 1999; or(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or pay dividend and such failure continues for one year or more : Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (b).

(ii) Basing on 274(1), assuming that 274(1)(g) is applicable to Private Companies, we will take an example as follows. (iii) Example: Mr. X is a Director in ABC Private Ltd., LMN Ltd. and PQR Ltd. If PQR Ltd defaults as per 274(1)(g)(A) and 274(1)(g)(B), then Mr. X is not eligible for appointment or re-appointment in ABC Pvt. Ltd., LMN Ltd. And PQR Ltd. (iv) What’s the period of ineligibility? Proviso to 274(1)(g) talk about the period of ineligibility for appointment in Public Companies. It is clear for Public Companies. But, there is no provision mentioning the period of ineligibility in case of appointment in Private Companies. It implies that a Director of a default public company is not eligible for appointment in a Private Company forever. (v) When for Public Companies itself (where public interest is involved) restriction is only for five years from default, what’s the logic in restricting the appointment in Private Company forever. It makes no sense. (vi) Hence applying 274(1)(g) to Private Companies has no meaning. (vii) Further Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003 are specifically applicable to Public Companies. If the intention of Law makers was to apply 274(1)(g) to Private Companies then the Rules would have been made applicable even to Private Companies. But the intention of Law makers is to apply 274(1)(g) only to Public Companies. (d) A question may arise that if we go by 274(3) then all the clauses of 274 are applicable to Private Companies also. But here, we should note one point that 274(1)(g) was inserted in 2000 and a specific mention of public was done to avoid the confusion (e) Hence, if we go by the true intention of the Law makers and logic behind not applying it to Private Companies, 274(1)(g) is applicable only to Public Companies.

(II) 274(1)(g) – Applicable to only Public Companies and not the Private Company which is a subsidiary of a Public Company

As mentioned earlier, the general norm in the Companies Act, 1956 is to make a specific mention of applicability of any provision to a Private Company which is a subsidiary of a Public Company, in that provision itself. If there is no specific mention, then that provision is not applicable to Private Company which is a subsidiary of a Public Company.

For example, if we take the sections 70, 81,149, 165. These are the sections which are applicable exclusively to the Public Limited Companies and here there is no specific mention of the applicability to “Private Company which is a subsidiary of a Public Company”. They are not applicable to Private Company which is a subsidiary of a Public Company.

Even in case of Section 274(1)(g) there is mention of applicability to Public companies and no specific mention of “and Private company which is a subsidiary of a public company” (unlike sections 77, 170, 193, 255, 256, 259, 262, 263, 265, 269, 293, 310).

Hence, 274(1)(g) is not applicable to a Private Company which is a subsidiary of a Public Company.

CONCLUSION:

Section 274(1)(g) is applicable only to Public Companies. It is not applicable to a purely Private Company and a Private Company which is a subsidiary of Public Company.

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