Mukut Pathak & Ors. Vs. Union of India and Anr (Delhi High Court)
It is important to note that whereas a DIN is necessary for a person to act as a director; it is not necessary that a person who has a DIN be appointed as a director. 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. Thus, it is not necessary that the DIN of such person to be deactivated.
Conclusion: On analysing section 164(2) it was concluded that the same operates prospectively and a director would not demit office in terms of Section 167(1) of the Companies Act, 2013 on account of a disqualification incurred under Section 164(2) for conduct prior to the amendments to the Act introduced from May 7, 2018. Moreover, Central government had no power to cancel or deactivate the Director Identification Number (DIN) on account of a director suffering a disqualification under Section 164(2).
Held: Assessee-director was disqualified under Section 164(2) for default on the part of concerned companies in filing the annual returns and financial statements for the financial years 2014-2016. Assessee had sought a direction from the Central government to allow them to use their Digital Signature Certificates (DSC) and Director Identification Numbers (DIN) on the ground that the action of the Centre in disqualifying them was arbitrary inasmuch as they were not afforded an opportunity to be heard and secondly, section 164 was penal in nature, it could not be applied retrospectively. Also, assessee argued that a plain interpretation of Section 164(2)(a) suggested that they could not 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. He also contended that the defaults under Section 164(2) resulted in the directors being disqualified from being appointed/re-appointed as directors, but did not result in their demitting office as directors. Court analysed these number of issues on the provisions relating to the disqualification of directors and held that firstly section 164(2) operates prospectively. However, such prospective operation would entail taking into account failure to file the financial statements pertaining to the financial year ending 31.03.2014 on or before 30.10.2014. Court was of the view that the taking into account such default did not amount to a retrospective application of Section 164. Secondly, a director would not demit office in terms of Section 167(1) of the Companies Act, 2013 on account of a disqualification incurred under Section 164(2) for conduct prior to the amendments to the Act introduced from May 7, 2018. However, if a director suffered any of the disqualifications under Section 164(2) on or after May 7, 2018, he would demit the office of director in all companies other than the defaulting company by virtue of the provisos to Section 164(2) and 167(1)(a). Court had also held that under the Companies Act or its Rules, Central government had no power to cancel or deactivate the Director Identification Number (DIN) on account of a director suffering a disqualification under Section 164(2).
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
1. The petitioners have filed the present petitions, inter alia, impugning the list of directors stated to have incurred the disqualification under clause (a) of section 164(2) 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. The said list was published on 15.09.2017 and is hereafter referred to as the ‘impugned list’. The petitioners also challenge the list of disqualified directors published subsequently for defaults pertaining to the financial years 2012-2014 and 2013-2015. The petitioners impugn the same to the extent that it includes their name. The petitioners further pray that the respondents be directed to allow the petitioners to use their Digital Signature Certificates (DSC) and Director Identification Number (DIN).
2. The petitioners in the present batch of petitions were directors in various companies. 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. Further, 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. In WP. (C) 3658 of 2019, the petitioners have been disqualified as directors on account of failure on the part of a company (Logic Eastern India Private Limited) to file its annual returns. It is stated that Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 has been initiated in relation to said company.
3. The impugned action was taken against the petitioners on account of default on the part of the companies in not filing the annual returns for the preceding financial years.
4. The petitioners have challenged the impugned list, essentially, 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. 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.
5. The respondents dispute the aforesaid contentions and contend that sufficient opportunity had been provided to the petitioners to correct the default of not filing the statutory documents.
6. These petitions were heard together, as the controversy involved in the present petitions is common.
7. In view of the above, this Court will refer to only to the facts of W.P.(C) 9088/2018 for addressing the controversy raised in these petitions.
8. The petitioners in W.P.(C) 9088/2018 were appointed as directors in various companies in the period of 2005-2010.
(i) Petitioner no.1 and 2 were appointed as directors in the company M/s Aryan Cargo Express Pvt. Ltd., registered under the Companies Act, 1956: petitioner no.1 was appointed as a director in the said company on 23.12.2005; and petitioner no.2 was appointed as director in the said company on 19.04.2007. The said appointments were made after obtaining the required security clearance by the Ministry of Home Affairs, through Ministry of Civil Aviation as per Civil Aviation Requirements (CAR).
(ii) Thereafter, on 15.05.2008, petitioner no.1 and 2 were appointed as directors in the company Aryan Express Holding Pvt. Ltd.
(iii) On 01.09.2009, the petitioners were named as directors in the company M/s. Aryan Cargo & Express Logistics Pvt. Ltd.
(iv) On 19.03.2010, the petitioners were also appointed as directors in the company Cargo Logistics Pvt. Ltd.
9. It is stated that the company, M/s. Aryan Cargo Express Pvt. Ltd. commenced its business in March, 2010. It is further stated that financial statements and annual returns of the aforesaid company were completed and uploaded on the website of Registrar of Companies (ROC) upto the financial year 2012-13, but the petitioners failed to submit the aforesaid statements for the subsequent years.
10. In the year 2014, respondent no.1 issued a circular (General Circular No. 34/2014), whereby it floated a scheme called Company Law Settlement Scheme, 2014. The said Scheme was floated to provide an opportunity to the defaulting companies to file their (belated) financial statements and annual returns for the consecutive period of three financial years. The said Scheme also offered an opportunity to the inactive companies “to get their companies declared as ‘dormant company’ under Section 455 of the Act by filing a simple application at reduced fees”.
11. Thereafter, in the year 2015, the petitioners applied for the voluntary closure of companies, namely M/s. Aryan Express Holding Pvt. Ltd. and M/s. Aryan Cargo Logistics Pvt. Ltd., on account of failure to commence the business. It is stated that the said applications were rejected by the ROC.
12. On 12.04.2017, a notice dated 19.03.2017 under Section 248 of the Act was sent to petitioner no.1 and 2, inter alia, stating that the company Aryan Cargo Express Pvt. Ltd. had been non-operational for two preceding financial years and therefore the ROC intended to remove the name of company from the Register of Companies. The relevant extract of the said notice is set out below:
“(1) Pursuant to sub-sections (1) and (2) of Section 248 of the Companies Act, 2013, notice is hereby given that as per available record:-
The Company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455.
(2) Therefore, on the basis of aforesaid ground, I intend to remove the name of company from the register of companies and request you to send your representation along with copies of the relevant documents, if any, within thirty days from the date of receipt of this notice.
(3) Unless a cause to the contrary is shown within the time period above mentioned, the name of the above mentioned company shall be liable to be removed from the register of companies. However, the directors of the company shall be liable for appropriate action under the Act.
This notice is also treated as having been served on the directors of the company in terms of the provisions of section 20 of the Companies Act, 2013.”
13. In the meanwhile, respondent no.1 introduced another scheme known as “Condonation of Delay Scheme – 2018”.
14. Petitioner no.1 replied to the aforesaid notice stating that the operations of the said company were stopped due to financial difficulties and further requested the ROC to allow the petitioner a
chance to re-start operations within the then current financial year.
15. Thereafter, ROC issued another notice dated 15.05.2018 to petitioner no.1 reiterating its intention to remove the name of the aforesaid company from the Register of Companies. On 18.06.2018, petitioner no.1 sent a reply to the aforesaid notice stating that efforts had been made to re-launch the operations of the said company.
16. On 15.09.2017, respondent no.1 published the impugned list of disqualified directors, disqualifying 74,920 directors under Section 164 read with Section 167 of the Companies Act, 2013 on-account of non-filing of Annual Returns for block of three consecutive years 2014-16, comprising of financial years 2013-14, 2014-15 and 2015- 16. Consequently, the DINs of the aforesaid disqualified directors were blocked and details of these directors regarding their disqualification for the period from 01-11-2016 to 31-10-2021, were updated.
17. It is submitted by the respondents that the aforesaid list published on 15.09.2017 did not take into account the defaults committed in filing the annual returns for the preceding block of three financial years – financial years 2011-12, 2012-13 and 2013-14 (FYs 2012-14) and financial years 2012-13, 2013-14 and 2014-15 (FYs 2013-2015), respectively.
18. It is further submitted that the said defaulting directors were also disqualified because part of the defaults was post 01.04.2014. For the block of financial years 2012-14 and financial years 2013-15, two separate lists of disqualified directors, both dated 03.10.2017, were published by respondent no.2 under which 37,237 directors were identified as disqualified for the block years 2012-14, for the period 01.11.2014 to 31.10.2019 and 01.11.2015 to 31.10.2020, respectively.
19. A tabular statement of the list of disqualified directors for the aforesaid block years, that is 2012-14, 2013-15 and 2014-16 is set out below:
