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HC says list of directors disqualified for companies failing to file annual returns is not violative of the principles of natural justice

Mukut Pathak & Ors. vs UOI & Anr.

HC finds no infirmity in the list of disqualified directors, says list does not violate principles of natural justice; Orders respondent to reactivate the DIN and DSC of the petitioners.

The petitioners who are directors of various companies filed the present petitions, inter alia, impugning the list of directors stated to have incurred the disqualification under Section 164(2) (a) of the Companies Act, 2013 (hereafter ‘the Act’) for default on the part of concerned companies in filing the annual returns and financial statements for the financial years 2014-2016 which was published on 15.09.2017 (‘impugned list’). Further, the petitioners challenge the list of disqualified directors published subsequently for defaults pertaining to the financial years 2012-2014 and 2013-2015. By way of the impugned list, the petitioners have been disqualified from being appointed / reappointed as directors for a period of five years under Section 164(2)(a) of the Act. The names of some of the companies, in which the petitioners were holding the office of directors, have been struck off from the Register of Companies.

The petitioners have challenged the impugned list on four grounds – first, that the action of the respondents in disqualifying the petitioners is arbitrary inasmuch as the petitioners were not afforded an opportunity to be heard, which, the petitioners contend that the said action is in violation of principles of natural justice. Second, that Section 164 of the Act, which mandates the disqualification of directors, being penal in nature, could not be applied retrospectively. Third, that on the plain interpretation of Section 164(2)(a) of the Act, the petitioners cannot be disqualified to act as directors of the companies, which have not defaulted in filing their annual returns and financial statements for a period of three consecutive years. And fourth, that the defaults under Section 164(2) of the Act result in the directors being disqualified from being appointed/re-appointed as directors but does not result in them demitting office as directors.

HC examines the facts and submissions and proceeds to address the issues.

  1. Whether the provisions of Section 164(2)(a) are retrospective? – HC observes that the essential question to be addressed is whether the consideration of the default committed in filing financial statements and annual returns for the financial years 2013-14 would amount to applying the provisions of Section 164(2) of the Act retrospectively. HC finds that if a company had failed to file its annual returns within a period of thirty days from the holding of the AGM or from the last date for holding such meeting for the financial year 2013-14, it would be in default under the provisions of the Act and there is no reason for excluding such default for the purposes of considering defaults in respect of three financial years as contemplated under Section 164(2) of the Act. Section 164 of the Act came into force on 01.04.2014 and thus, the failure of a company/its directors to file annual returns (for three financial years) thereafter would result in the directors incurring the disqualification as specified under Section 164(2) of the Act. HC relies on the Supreme Court in Sajjan Singh v. The State of Punjab: (1964) 4 SCR 630. HC disagrees with the view of the Karnataka High Court, Madras High Court and Gujarat HC in Yashodhara Shroff v. Union of India: W.P. No. 52911/2017 and connected matters, decided on 12.06.2019; Bhagavan Das Dhananjaya Das v. Union of India and Ors.: W.P. Nos. 25455/2018 and other connected matters, decided on 03.08.2018 and Gaurang Balvantlal Shah v. Union of India: Manu/GJ/1278/2018 inasmuch as the said Courts have held that the defaults for the financial year ending 31.03.2014 cannot be considered for determining whether a director had incurred the disqualification under Section 164(2) of the Act. HC opines that the taking into account such default does not amount to a retrospective application of Section 164 of the Act and the contentions advanced by the petitioners in this regard, are unmerited.

 

  1. Whether a prior notice and an opportunity of being heard was required to be afforded to the petitioners before including their names in the impugned list and whether the impugned list is void as being violative of principles of natural justice? HC opines that the principles of audi alteram partem are not applicable given the nature of the provisions of Section 164(2) of the Act. However, even if it is assumed that disqualifying a director entails an administrative decision, there is a qualitative decision required to be taken by the authorities, the rule of affording a prior hearing cannot be readily inferred as a part of Section 164(2) of the Act. HC disagrees with the decision in Bhagavan Das Dhananjaya Das v. Union of India and Ors and concurs with the view of the Gujarat High Court in Gaurang Balvantlal Shah v Union of India wherein HC held that, “ … As such, there is no procedure required to be followed by the respondent authorities for declaring any person or Director ineligible or disqualified under the said provision. A person would be ineligible to be appointed as a Director in a company, and the company makes defaults as contemplated in Clause (a) of (b) of sub- section (2) thereof, he would be ineligible to be reappointed in the said defaulting company and appointed in other company. The ineligibility is incurred by the person/director by operation of law and  not by any order passed by the respondent authorities, and therefore, adherence of principles of natural justice by the respondents is not warranted in the said provision, as sought to be submitted by learned Advocated for the petitioners.” HC thus, rejects the contention that the impugned list is void as having been published without following the principles of natural justice.

 

  1. Whether the directors incurring a disqualification under section 164(2) of the Act, would demit their office as a director in all companies in terms of section 167(1)(a) of the Act – HC observes that as far as the conditions that disqualify a person disqualified from acting as a director under Section 164(1) are concerned, there is no difficulty in reading such conditions to also result in the particular director demitting office in terms of section 167(1)(a) of the Act. This is so because the conditions as stipulated in section 164(1) of the Act are attributable to the individual and not to all directors of a company. HC observes that any person who is or has been a director of a company, which commits the defaults as set out in clauses (a) and (b) of Sub-Section (2) of Section 164 of the Act, incurs the disqualification for being appointed/reappointed as a director. HC further observes that the rule of literal interpretation cannot be applied for interpreting the provisions of Section 167(1)(a) of the Act. HC concurs with the view in Kaynet Finance Limited v. Verona Capital Limited wherein Bombay High Court had read down the Section 167 (1) (a) to apply to cases of disqualification falling u/s 164 (1) of the Act and not 164(2) pf the Act. In other words, Section 167 (1) (a) has been read as, “he incurs any disqualification specified in Section 164 (1) instead of “he incurs any of the disqualification specified in Section 164”.. HC finds that the petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company.

 

  1. Whether the act of the respondents in deactivating the DIN of the directors is sustainable? HC observes that Section 164(2) only provides for temporary disqualification for a period of five years for a person to be appointed/re-appointed as a director and thus, it is not necessary that the DIN of such person to be deactivated.  HC opines that the Central Government having framed the rules specifying the conditions in which a DIN may be cancelled, cannot cancel the same on any other ground and without reference to such rules. HC says that the act of the respondents is unsustainable as there is also no provision supporting the respondents’ action of cancelling the DSC of various directors.

HC finds no infirmity with the impugned list to the extent it includes the names of the petitioners as directors disqualified under Section 164(2) of the Act and further rejects the contention that the impugned list is void as having been drawn up in violation of the principles of natural justice. 

HC states that the provisions of Section 167(1) of the Act are wholly inapplicable to directors who had incurred disqualification under Section 164(2) of the Act. However, as it is held that Section 167(1) was inapplicable in respect of disqualifications that were incurred under Section 164(2) of the Act, the petitioners continue to be directors of other companies which had not committed any defaults in terms of clauses (a) and (b) of Section 164(2) of the Act. 

HC further states that , “the Scheme of Scheme 164(2) and Section 167 (1) (a) of the Act was materially amended by the Companies Amendment Act, 2018 by introduction of the provisos to Section 164 (2) and Section 167(1) (a) of the Act cannot be read to operate retrospectively. The proviso to Section 167 (1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to matters of procedure – cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167 (1) (a)of the Act on such director incurring the disqualification specified under Section 164 (1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.052018. However, the office of the director shall not become vacant in the company which is in default under sub- section 164(2) of the Act”. Therefore, HC holds that the petitioner would continue to be liable to pay penalties as prescribed under the Act. 

Thus, all the pending applications are disposed off. 

                                             

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