Case Law Details
Zacharta Maramkandathil Mohan Vs Union of India (Kerala High Court)
Conclusion: Director Identification Numbers (DINs) of assesses-director allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014, were not liable to be deactivated or cancelled solely for the reason that assesses-director stood disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2).
Held: In the instant case, assessee submitted against deactivation of DINs was that the Companies (Appointment and Qualification of Directors) Rules, 2014 did not empower the Registrar of Companies to deactivate DINs. Assessee argued that deactivation of DIN for the sole reason that a Director was temporarily disqualified to hold office, under Section 164(2), was impermissible. It was held that from the Rule 11, it was evident that the Rule does not empower any authority to cancel or deactivate DIN upon disqualification under Section 164(2). Cancellation or deactivation is contemplated only where the DIN is found to be duplicated or it was obtained in a wrongful manner or by fraudulent means or on the death of the concerned individual or on the concerned individual being declared as of unsound mind or the concerned individual has been adjudged as insolvent. It had to be kept in mind that DIN was an Identification Number and disqualification under Section 164(2) was of temporary nature. It was also submitted at the Bar that the DIN number was common to persons who were at the same time Directors of Companies and partners of Limited Liability Partnerships. In such circumstances, there was no justification for cancelling or deactivating DINs of Directors consequent on their disqualification resulting from Section 164(2). On an analysis of Rules 9 to 11 of the Rules, 2014 the Hon’ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan had also held that DIN of Directors of a defaulting Company could not be cancelled or deactivated solely on the basis of disqualification of Directors under Section 164(2). Thus, DIN of assessees allotted under Rule 10 were not liable to be deactivated or cancelled solely for the reason that assessees stood disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2).
Writ petitions were disposed of with the following declarations and directions:
1. Section 164(2) and Section 167(1) of the Companies Act, 2013 are not ultra vires Article 14 or Article 19(1)(g) of the Constitution of India.
2. Disqualification of the petitioners under Section 164(2) of the Companies Act, 2013 is by operation of law and the petitioners are not entitled to any opportunity of hearing in the matter.
3. Section 164(2) is not retrospective in operation and only the defaults made by Companies in filing Financial Statements / Annual Returns in the financial year 2014-15 and subsequent financial years can be taken into account for disqualifying a Director under Section 164(2) of the Companies Act, 2013.
4. Where disqualification of petitioners is based on any period of default prior to 01.04.2014, such disqualifications are bad in law and are hence set aside.
5. The provisos inserted below Section 164(2) and Section 167(1)(a) of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from 07.05.2018 are constitutionally valid and the same being clarificatory in nature, would apply retrospectively. However, the words “ in all the companies” appearing in the proviso to Section 167(1)(a) will have only prospective operation.
6. Notice under Section 455(4) of the Companies Act, 2013 is not a sine qua non for applying the provisions of Section 164(2) or 167 to the Directors of any Defaulting Company.
7. The Director Identification Numbers (DINs) of the petitioners allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014, are not liable to be deactivated or cancelled solely for the reason that the petitioners stand disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2).
8. Consequently, there will be a direction to the respondents to re-activate the Director Identification Numbers (DINs) of the petitioners forthwith. However, it is made clear that the respondents will be at liberty to cancel or deactivate the DINs of the petitioners for any reasons laid down in Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 2014.
9. Where the names of any Companies stand struck off , the petitioners in respect of such Companies are at liberty to invoke Section 252 of the Companies Act, 2013 to challenge striking off the names of their Companies from the Register of Companies and to resort to legal remedies available to them, to challenge their disqualification for holding the office of Director.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
In all these writ petitions, the challenge is against Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 and the disqualification thrust upon the petitioners for acting as Directors of Companies, pursuant to Sections 164 and 167. Common questions of law arise for consideration in all these writ petitions and hence the writ petitions are heard together and disposed of by a common judgment.
2. The Companies Act, 1956 was enacted with the objective to consolidate and amend the law relating to the companies and certain other associations. The said Act has been in force for about fifty-five years and was amended several times. In view of changes in the national and international economic environment and expansion and growth of economy, the Central Government decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international economic environment and further accelerate the expansion and growth of economy. And for this purpose, the Companies Bill, 2009 was introduced on 3rd August, 2009 in the Lok Sabha. The said Bill was referred to the Parliamentary Standing Committee on Finance for examination and the Committee gave its Report on the 31st August, 2010.
3. Subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill. The Central Government accepted in general the recommendations of the Standing Committee and also considered the suggestions received from various stakeholders. In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating the recommendations of the Standing Committee and suggestions of the stakeholders. The revised Bill, namely, the Companies Bill, 2011 made provisions for E-Governance, Corporate Social Responsibility and Enhanced Accountability on the part of Companies. The Companies Act, 2013 was given assent by the President of India on 29.08.2013.
4. Section 274 of the repealed Companies Act, 1956 laid down certain disqualifications for being appointed as Directors of Companies. Persons of unsound mind, Undischarged insolvent and persons convicted for offences involving moral turpitude and sentenced for imprisonment for not less than six months, were disqualified. Directors of Public Limited Companies which have not filed Annual returns for any continuous three financial years or which have failed to pay deposits or interest thereon on due dates or redeem debentures on due dates or pay dividends for one year or more, were also disqualified.
5. Section 164 of the Companies Act, 2013 (corresponding to Section 274 of the Act, 1956) made the disqualification on failure to file Annual returns, applicable to Directors of all Companies including Private Limited Companies. It is this sweeping change, which has given rise to these litigations. Before dwelling upon the issues raised in these writ petitions, it would be necessary to advert to the following provisions in the Act, 2013.
6. Section 92 of the Act, 2013 deals with preparation and filing of Annual Returns by Companies:
“92. Annual return – (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) [Omitted]
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors [***]; and
(k) such other matters as may be prescribed,
and signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.
Provided further that the Central Government may prescribe abridged form of annual return for One Person Company, small company and such other class or classes of companies as may be prescribed.
(2) The annual return, filed by a listed company or, by a company having such paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the company has complied with all the provisions of this Act.
(3) Every company shall place a copy of the annual return on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board’s report.
(4) Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed[***].
(5) If a company fails to file its annual return under subsection (4), before the expiry of the period specified [therein], such company and its every officer who is in default shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default.
(6) If a company secretary in practice certifies the annual return otherwise than in conformity with the requirements of this section or the rules made thereunder, he shall be liable to a penalty of two lakh rupees.”
Section 129 provides for laying of Financial statement before the Annual General Meetings:
“129. Financial statement – (1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards:
Provided further that nothing contained in this subsection shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company:
Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—-
(a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
(c) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.
(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year.
[(3) Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.]
(4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).
(5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation.
(6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.
(7) If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Explanation.—For the purposes of this section, except where the context otherwise requires, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act.]
Section 164 laying down disqualifications for appointment of Directors, is as follows:
“164. Disqualifications for appointment of director – (1) A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
(h) he has not complied with sub-section (3) of section 152.
(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.]
* [Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.]
(3) A private company may by its articles provide for any disqualifications for appointment as a director in
addition to those specified in sub-sections (1) and (2):
[Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.]
[ * inserted by the Companies (Amendment) Act, 2017, w.e.f. 07.05.2018 ]”
Section 167 states as to when the office of a Director shall become vacant and the consequences of a person knowingly functioning as Director after the office held by him has become vacant. Section 167 reads as follows:
“167. Vacation of office of director – (1) The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164;
* [Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.]
(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
(c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:
[Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)-
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or
(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.]
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.
(2) If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
(3) Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.
(4) A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).
[*inserted by the Companies (Amendment) Act, 2017, w.e.f. 07.05.2018 ]”
The first proviso to Section 164(2) and the provisos to Section 167(1)(a) were inserted subsequently by the Companies (Amendment) Act, 2017 with effect from 07.05.2018.
7. The petitioners are persons who are disqualified pursuant to Section 164(2) for failure of their respective Companies to file Financial Statements/Annual Returns. The petitioners therefore challenge Sections 164 and 167 of the Act, 2013 and actions of the respondents pursuant thereto on the following counts.
8. The contention of the petitioners is that the incidents leading to disqualifications under Section 164(1) are personal to the Directors – like Unsoundness of mind, Insolvency, Conviction in criminal cases etc. The incidents resulting in disqualification under 164(2) however, are non-filing by Company, of Annual Returns or Financial Statements for a continuous period of three years, failure of a Company to repay deposits accepted or interest payable, failure of the Company to redeem debentures on due dates, failure to pay dividends etc. The incidents resulting in disqualification under Section 164(2) are not directly attributable to Directors. The consequences however are grave. Those Directors are disqualified to act as Directors in all other companies also and that too for a period of long five years. The consequences are extremely disproportionate and unjustified. The legislative provisions in this regard are evidently, exceptionally and excessively arbitrary and would be and should be hit by Article 14 of the Constitution.
9. When the consequences of disqualifying are so grave and civil in nature, then even if the disqualification is by operation of law, principles of natural justice should be complied with. The failure to file Annual Returns / Financial Statements can be due to reasons beyond the control of Directors – like pandemics, lockdowns, non-availability of or ban on internet services etc. Or it may be in spite of the earnest efforts taken by the Directors. Therefore, before effecting disqualification, the affected Directors should be extended an opportunity of hearing. The Act, 2013 does not contemplate even a post-decisional hearing for rendering the Directors disqualified.
10. In the context of absence of notice before disqualifying a Director, it was argued, Section 455(4) mandates that if a Company has not filed Annual Returns or Financial Statements for a period of two financial years consecutively, the Registrar shall issue a notice to that Company and enter the name of such Company in the register maintained for dormant companies. It was contended that the notice under Section 455(4) should be treated as a mandatory requirement and without issuing a notice under Section 455(4), the disqualification prescribed under Section 164(2)(a) cannot come into effect.
11. The petitioners further urged that under Section 248, if a 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, the Registrar has the power to remove the name of the Company from the Register of Companies. As Section 248 can be invoked against any Company, disqualifying the Directors without notice, is arbitrary. As the Directors have no remedy against the disqualification under Section 164(2), except under Article 226 of the Constitution, principles of natural justice / audi alteram partem should necessarily be read into Section 164.
12. The petitioners argued that the Act, 2013 has only prospective operation. Therefore Sections 164(2) cannot be applied retrospectively. In other words, only the financial years post-01.04.2014 can be considered to decide whether there is consecutive three years failure in filing Annual Returns or Financial Statements. When so considered, there cannot be any disqualification of Directors pursuant to Section 164(2), till the year 2017. Any retrospective implementation of Section 164(2) would be ultra vires, it was urged.
13. It was also argued that since Section 164 (2) bars only “appointment” of Directors of a defaulting Company (as against the term “re-appointment”) in other companies, such Directors can be “re-appointed” as Directors in other companies, as the Section 164 has made a clear distinction between “appointment” and “re-appointment”.
14. The petitioners further argued that irrespective of the impact of Sections 164 and 167 on the petitioners, there is no justification for deactivating the Director Identification Number (DIN) and cancelling Digital Signature Certificate (DSC) of the disqualified Directors. The Directors are not legally compellable to give up their DINs for the sole reason that they are temporarily disqualified for being appointed or reappointed as Directors.
15. The respondents resisted the writ petition filing counter affidavits and counter statements. The respondents submitted that the petitioners stood disqualified by operation of law and upon fulfillment of the criteria mentioned in Section 164(2)(a) read with section 167(1)(a). Section 164(2)(a) of the Companies Act, 2013 cannot be read in isolation and will have to be read along with section 167(1)(a) of the Companies Act. In view of section 167 (3) of the Act, 2013, where all the Directors of a company vacate their offices under section 167(1), the promoter shall appoint the required number of Directors who shall hold Office till the Directors are appointed by the company in general meeting.
16. The respondents stated that the provisions of Sections 164 and 167 are explicit. A person who is or has been a Director of a Company, which has not filed financial statements or annual returns for any continuous period of three financial years, shall be ineligible to be reappointed as a Director of that Company or appointed as Director in any other Company, for a period of five years. The disqualification is by operation of law. The Act does not envisage any adjudicatory process or hearing to be provided to the errant Companies or Directors in default. The disqualification of Directors is not by any executive action of the respondents. Therefore there is no question of issuing a prior notice or following the principles of natural justice.
17. The respondents stated that the provisions of section 92(4) as it stood prior to 2017 and subsequent to 2017 Amendment categorically states that annual returns/financial statements shall be filed within 60 days from the date of annual general meeting. So also, section 137(1) categorically stipulates that a financial statement shall be filed with the Registrar of Companies within 30 days of the respective Annual General meeting. What is stipulated as per subsection (1) of Section 403 is also that the same have to be filed within the time specified in the relevant provision.
18. The respondents reiterated that since the provisions contemplate automatic vacating of office of the Director and the provisions of the law do not envisage any adjudicatory proceedings, there is no question of issuing show cause notice to the Directors before their incurring disqualification. The disqualification from the Directorship is well within the knowledge of the Company and its Board of Directors. Ignorance of law cannot be taken as a plea by the petitioners. Since the period of disqualification is five years from the third consecutive default, respective DINs of such Directors have been deactivated in order to prevent such Directors from being appointed or reappointed as Directors in any other company. The writ petitions are therefore devoid of any merit and are liable to be dismissed, contended the respondents.
19. Considering the pleadings in the writ petitions, the following issues arise for consideration:
A. Whether Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 are ultra vires the Constitution of India, being violative of Article 14 or 19 ?
B. Whether the Principles of Natural Justice should be read into Section 164(2) in view of the nature and severity of consequences arising from its operation ?
C. Whether Section 164(2) is retrospective in its operation ?
D. Constitutionality and consequences of the first proviso to Section 164(2) and the proviso to Section 167(1)(a), inserted by Companies (Amendment) Act, 2017 with effect from 07.05.2018.
E. Whether notice under Section 455(4) need be necessarily issued on a defaulting Company, before Section 164(2)(a) to become operational ?
F. Whether the action of the respondents in deactivating the DINs of the petitioners, is justified ?
G. What is the impact of striking off of a defaulted company, on the disqualified Directors ?
20. In support of the contentions of the petitioners that Sections 164 and 167 offend Articles 14 and 19 of the Constitution, Sri. Navod Prasannan Pattali, learned counsel for the petitioners, argued that the ground of disqualification for reappointment in a defaulting Company under Section 164(2) or for appointment in other Companies for a period of five years, is not directly attributable to the Directors, but the consequences are very serious and are excessively disproportionate to the default. Hence Section 164(2) is violative of Article 14 of the Constitution. By making Directors of a defaulting Company ineligible for appointment in other companies which are not in default, the fundamental right of the Directors under Article 19 is offended.
21. Relying on the judgment of the Hon’ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan and others v. Union of India and others [(2020) 7 MLJ 641], the learned counsel argued that the determination of disqualification under Section 164(2) would not be necessarily devoid of challenge and hence compliance of natural justice cannot be dispensed with and it should be read into the provisions. The learned counsel pointed out that in the judgment in State Bank of Patiala and others v. S.K.Sharma [(1996) 3 SCC 364], the Hon’ble Apex Court has held that while applying the principles of audi alteram partem, the court must always bear in mind the ultimate and overriding objective viz., to ensure a fair hearing and and to ensure that there is no failure of justice.
22. Based on the judgment of the Apex Court in L.Kapoor v. Jagmohan and others [(1980) 4 SCC 379], the learned counsel urged that the person proceeded against must know that he is being required to meet the allegations which might lead to a certain action being taken against him and the requirement of natural justice would be met only if that is made known to the person.
23. Shameem Ahmed, learned counsel appearing for petitioners relied on the judgment in Meethelaveetil Kaitheri Muralidharan and others v. Union of India and others [(2020) 7 MLJ 641] to urge that there can be divergent views on the exact period of default in filing Financial Statements and Annual Reports and hence principles of natural justice cannot be dispensed with. The learned counsel argued that the consequence of disqualification of Directors spreads over to non-defaulting companies also, and the impact will be very serious as far as corporate entrepreneurs are concerned. Compliance of audi alteram partem principle should therefore be held mandatory.
24. Mohan Pulickkal learned counsel representing writ petitioners argued that the dates for filing Financial Statements / Annual Returns vary even under the statute. Failure to file Financial Statements / Annual Returns may occur for reasons not attributable to Directors and may be for reasons even beyond their control. There may be instances where default persists in spite of earnest efforts taken by the Directors. Liability of Directors can not therefore be automatically deemed or feigned.
25. There is a further fundamental question as to who will be the authority deciding the question of default and to decide who all are the Directors who stand disqualified. Such important questions cannot be left to be decided by a computer data processing system, without application of human mind. Sri. Mohan Pulickkal further pointed out that Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 also give rise to a presumption of requirement of a pre-decisional hearing in the matter. Explaining the facts in W.P. (C) No.8193/2019, Mr.Mohan Pulickkal, the counsel for the petitioners pointed out that the petitioners are the only Directors in the Company Color Harmony Decor Private Limited, which has allegedly defaulted in filing statutory returns. Their disqualification under Section 164(2) in the defaulted Company will arise only as and when they are reappointed. The petitioners cannot therefore be treated as disqualified Directors as on date.
26. Sri.Sukumar Nainan Oommen and Sri. Sherry Samuel Oommen, counsel representing the petitioners in some of the writ petitions, relied on the judgment of the Hon’ble Apex Court in The State of Jharkhand and others v. Brahmaputra Metallics Ltd and others [2021 (1) SCJ 131] and argued that a decision taken in an arbitrary manner contradicts the principle of legitimate expectation. An authority is under a legal obligation to exercise the power reasonably and in good faith to effectuate the purpose for which power stood conferred. Applying the above mentioned principles to these cases, the counsel urged that disqualifying Directors for alleged violation of section 164 of the Companies Act in other non-defaulting Companies, would go against the settled principles of Legitimate Expectation.
27. The counsel, placing reliance on the judgment in Narmada Bachao Andolan and others v. State of Madhya Pradesh and others [(2011) 7 SCC 639], urged that where the language of a statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or justice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. An interpretation having a social justice mandate is warranted under the circumstances of the case, contended the counsel. The court has to take a pragmatic view while interpreting Sections 164 and 167. Any interpretation which eludes or frustrates the recipient of justice is not to be followed.
28. Counsel for the petitioners Ms. Ramola Nayanpalli argued that the court has to interpret Sections 164 and 167 giving them a construction agreeable to reason and justice. The interpretation so given must not produce unworkable and impractical results or cause unnecessary hardship, serious inconvenience or anomaly. The Court also has to keep in mind the object of the legislation.
29. As regards retrospective operation of Sections 164 and 167, the counsel for the petitioners argued that Section 164(2)(a) would apply only prospectively. The respondents therefore cannot take into consideration any period anterior to 01.04.2014 for determining default for three consecutive years. Relying on the judgment of the Apex Court in Sajjan Singh v. State of Punjab [AIR 1964 SC 464], the counsel urged that when an act or conduct is made subject to penalty for the first time, then, only those acts / conduct subsequent to the enactment/amendment can be taken into account.
30. On the issue of deactivation of DINs of the disqualified Directors, the counsel for the petitioners argued that the Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the cancellation/surrender/deactivation of DINs. The DINs can be deactivated only in the circumstances specified therein. Temporary disqualification of Directors of Companies cannot be a reason for suspension or deactivation of DIN.
31. Mohan Pulickkal, learned counsel appearing for the petitioners, urged that cancellation or surrender or deactivation of DIN and DSC by the Registrar of Companies is illegal as it can be effected only for the reasons and under the circumstances set out in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and the Registrar of Companies has no authority or power to deactivate DIN or DSC. Such deactivation will disable the petitioners from making up the default, which would go against the intent and purpose of the statute.
32. The learned Assistant Solicitor General Sri. P.Vijayakumar representing the Union of India and other respondents pointed out that failure to file Financial Statements / Annual Returns is considered as a grave offence even under Section 92, and the officers concerned are liable for imprisonment. The Annual Returns are statutorily required to be kept and maintained in the registered office of a Company, in view of Section 94. Annual General Meeting is to be held every year as per Section 96. Under Section 102, a Statement is to be annexed to the notice calling a general meeting of a Company. Financial Statements giving a true and fair view of the state of affairs of a Company is mandatory under Section 129.
33. These provisions are incorporated in the Act, 2013 in order to ensure transparency in corporate governance. When the Directors who are at the helm of affairs of a Company are aware of the statutory requirement of preparation and filing of Annual Returns and Financial Statements, and the gravity and consequences of non-filing, then, failure of such Directors to ensure in three consecutive years that the Returns and Statements are duly filed by the Company, should be taken seriously and such Directors cannot be permitted to continue as Directors. The disqualification should be extended to other companies also where such irresponsible Directors are in office. Only such extreme steps would ensure prompt compliance of statutory requirements, which are intended to protect the interests of all stakeholders, contended the learned Assistant Solicitor General of India.
34. Sri. M.N. Manmadan, learned Central Government Counsel representing the Union of India and other respondents in W.P.(C) No.6321/2021, argued that the object of Sections 164 and 167 is to protect shareholders’ money. It is also intended to maintain the credibility of Indian Corporate Sector. The learned Central Government Counsel stated that the Legislature in its wisdom noted that mere imposition of fine and prosecution would not be sufficient to remedy the malady of non compliance of statutory requirements grasping the corporate entities and hence decided to bring in disqualification of erring Directors. The provisions are incorporated in the larger national interest and this court should not interfere in the matter at the instance of erring Directors.
35. No Director has a vested right to continue as Director in any incorporated Company forever, contended Sri. M.N. Manmadan, the Central Government Counsel. The rights of the Directors are neither fundamental nor constitutional. The rights, if any, are contractual in nature and can always be regulated by statute. Statutory restrictions under Sections 164 and 167 are brought about in public interest. As the disqualification is temporary, limited to five years, the consequence of Section 164(2) cannot be termed as excessive or disproportionate. The learned Central Government Counsel Mr. Dayasindhu Srihari argued that non-issuance of notice under Section 455(4) is of no consequence as the said provision is intended to apply in a diverse context and for a different purpose. The learned Central Government Counsel pointed out that even a dormant Company is mandated by law, to file Annual Returns.
36. Heard learned counsel appearing for the petitioners and the learned Assistant Solicitor General of India and Central Government Counsel appearing for the respondents.
A. Constitutionality of Section 164 and Section 167
Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations fall under Entry 43, List I, Schedule VII of the Constitution of India. Therefore the legislative competence of the Union Parliament is beyond doubt. The question therefore is whether Sections 164 or 167 offend any of the provisions in Part III of the Constitution. As rightly pointed out by the Central Government Counsel, the petitioners do not have a fundamental right to be Directors of any company incorporated. The right to be a Director of an incorporated Company is not an absolute statutory right.
37. The contention of the petitioners is that the consequences arising from the operation of Sections 164 and 167 of the Act, 2013 are serious and grossly disproportionate and hence the provisions are arbitrary, offending Article 14. It is well settled that if a constitutional infirmity is found on the touchstone of Article 14, the legislation is “‘manifestly arbitrary”. Arbitrariness in legislation is also a facet of unreasonableness. At the same time, the Hon’ble Apex Court has held in Dr. Subramanian Swamy v. Director, Central Bureau of Investigation [(2005) 2 SCC 317] that a court considering the validity of a legislation must be mindful that a legislation does not become unconstitutional merely because there is another view or because there is another method which may be considered to be as good or even more effective. The courts cannot substitute their views on what a policy is.
38. In this context, it has to be kept in mind that one of the important purposes for enacting the Act, 2013 is to bring transparency in corporate governance. Financial disclosure is a critical component of effective corporate governance. Filing of Financial Statements and Annual Returns by incorporated entities at regular and stipulated intervals, is crucial to ensure transparency. Section 166 makes it a duty of Directors to act in good faith in order to promote the objects of the Company for the benefit of its members as a whole, and in the best interest of the Company, its employees, the shareholders, the community and for the protection of environment.
39. Section 164(2) of the Act, 2013 in effect creates a liability of disqualification on Directors of Companies, on failure to file Financial Statements / Annual Returns. Therefore, there is a corresponding duty on directors, to ensure that Financial Statements / Annual Returns are filed promptly. In this regard, it is relevant to note the observations of the Hon’ble Apex Court in Official Liquidator v. P.A.Tendolkar [(1973) 1 SCC 602] that ‘a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed not merely cognisant of but liable for fraud in the conduct of the business of a Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially.
40. An inadvertent or unintended exceptional failure in filing a Financial Statement or Annual Return, does not result in automatic disqualification of Directors. It is only when a company fails to file Statements / Returns for a consecutive period of three long years that the disqualification entails. In fact, Companies can file their annual returns within a period of sixty days from the date on which the annual general meeting is held, in view of Section 92. Similarly, under Section 137, Financial Statements can be filed within 30 days of the Annual General Meeting. In effect the petitioners as well the Companies they represent may get more than three years to avoid the adverse consequences arising from Section 164 and Section 167.
41. The argument of the petitioners is that there may be circumstances like pandemic, prolonged Lockdowns, shutting down of internet facilities etc. which may be the reasons for failure to file Annual Returns / Financial Statements. But the disqualification of Directors consequent to non-filing would arise only at the end of three years. Any of the eventualities pointed out by the petitioners can not last for a continuous period of three years. In the circumstances, this court is not inclined to accept the argument of the petitioners that Sections 164 and 167 are arbitrary, offending the right of the petitioners under Article 14.
42. The disqualification of Directors of a defaulting company for appointment as Directors in other companies, offends Article 19 of the Constitution, it was urged on behalf of the petitioners. The purpose of disqualification of defaulting Directors in other Companies is to make the Directors answerable to the corporate sector. The purpose is to save the corporate community from the consequences of mismanagement. It is intended to increase the standards of corporate governance. It is intended to protect creditors and the general public from mismanagement of Companies. Therefore the provisions Section 164 and Section 167 will fall within the exceptions under Article 19(6).
43. The Hon’ble High Court of Karnataka in Yashodhara Shroff v. Union of India [2019 SCC OnLine Kar 682] considered the constitutional validity of Sections 164 and 167 and held that the provisions are not ultra vires Article 14 and / or Article 19(1)(g) of the Constitution of India. For the reasons stated herein above, this Court concur with the judgment in Yashodhara Shroff (supra) and hold that Section 164(2) and Section 167(1) of the Companies Act, 2013 are not ultra vires Article 14 or Article 19(1)(g) of the Constitution of India.
B. Section 164 and the Principles of Natural Justice
44. The argument of the petitioners is that since the disqualification for being appointed / re-appointed as Directors, resulting from Section 164(2) of the Companies Act, 2013 has grave and serious consequences affecting the civil and statutory rights of the petitioners, the disqualification can be effected only after giving a fair hearing to the petitioners in compliance of the well settled principles of natural justice. The Section 164 envisages that with effect from 01.04.2014, the eligibility of a person for appointment or re-appointment as Director in a company should be considered in the light of Section 164.
45. The ineligibility arises by operation of law. Therefore the requirement of hearing does not arise. It has to be noted that the law does not condone and there is no provision to condone the disqualification of Directors on the failure of their Companies to file Annual Returns / Financial Statements for a consecutive period of three years, for any reason. No authority is empowered under law to condone or waive disqualification resulting from violation of Section 164(2).
46. Principles of natural justice are important procedural safeguards against arbitrary exercise of power by executive or quasi judicial authorities. However a statute can exclude the requirement of principles of natural justice expressly or by necessary implication. Whether the statute excludes the principles of audi alteram partem, would depend upon the language of the statutory provisions and the scheme of the statute.
47. On the issue of exceptions to the rule of principles of natural justice, the Hon’ble Apex Court in Union of India v. W.N Chadha [1993 Supp(4) SCC 260] held that the rule of audi alteram partem is not attracted unless the impugned order is shown to have deprived a person of his liberty or property and the rule cannot be applied to make the law lifeless, absurd, stultifying and self defeating or plainly contrary to common sense and this rule may be jettisoned in exceptional circumstances where compulsive necessity so demands.
48. In the case of non-filing of Annual Returns / Financial Statements by a company, the facts speak for themselves. No amount of explanation can alter the facts. As long as the statute does not provide for any exceptions in the matter of filing of Financial Statements / Annual Returns or in the matter of disqualification under Section 164(2), grant of opportunity of hearing would be nothing but an empty formality. The law imposes a strict liability on Directors. Furthermore, as held by the Hon’ble Karnataka High Court in Yashodhara Shroff (supra), the ineligibility of Directors under Section 164 is in the nature of suspension and is temporary, for a period of five years, and not perpetual.
49. For all the afore reasons, this court hold that the Companies Act, 2013 does not contemplate extension of opportunity of hearing to Directors of a Company while incurring disqualification under Section 164(2), and going by the scheme of the Act the principles of natural justice cannot be read into Section 164(2) or Section 167(1).
C. Section 164(2) whether retrospective
50. The petitioners urged that since the Sections 164(2) and 167(1) were brought into statute book only with effect from 01.04.2014, the continuous three years period of default should commence only from 01.04.2014 and the relevant years should be 2014-’15, 2015-’16, 2016-’17 and later years. For counting three continuous period of three years, no period anterior to 01.04.2014 can be taken into account. The learned Assistant Solicitor General on the other hand argued that whether the default includes any period prior to 01.04.2014 is immaterial. What is relevant is whether a person is eligible to be appointed or reappointed as Director after 01.04.2014, after the law is enforced.
51. It is a settled proposition of law that no statute shall be construed to have retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary implication. A retrospective statute operates forward, but it can look backward and attach new consequences for the future to an event that took place before the statute was enacted.
52. In the case of non-filing of Annual Returns or Financial Statements prior to 01.04.2014, a Director would be disqualified under Section 274(1)(g) of the Companies Act, 1956 but it would not result in vacating the office under Section 283. Under the Act,1956 a Director of a defaulting company could not have been appointed as Director of another company for five years. He could, however, have been re-appointed as Director in the defaulting company.
53. There was no provision for disqualification of Directors of defaulting private Companies under the Act,1956. Such disqualification of Directors of private Companies was brought into force for the first time by the Act, 2013 with effect from 01.04.2014. Since the disqualification of Directors of defaulting private Companies is brought about for the first time, the provision Section 164(2) must be given only prospective operation and the continuous default period of three years should commence from or after 01.04.2014. This would be especially so because up to 31.03.2014 the provisions of Section 274(1)(g) of the Act,1956 were governing the field.
54. In Yashodhara Shroff (supra), the Hon’ble High Court of Karnataka held that a new law imposing a disqualification which is more severe, cannot be applied to facts which have not fructified so as to result in the concluded or completed event i.e., when the time to apply it is not ripe as on the date of the enforcement of the new law. It could be applied only after the commencement of the new law, but not by taking into consideration any period prior to the enforcement of the law. This is because when the material period of three continuous financial years is to be reckoned, no period prior to 01.04.2014 can be taken into consideration as and when such a period and commenced the new law with different consequences were not envisaged. This is different from applying the new law to an event which is a past, concluded one prior to the enforcement of the new law as the same could be taken into consideration. In such a case, the law is being applied retroactively and not retrospectively, which is permissible.
55. In view of the reasons stated above, this Court holds that Directors of private Companies cannot be disqualified for appointment / re-appointment as mandated under Section 164(2) if any of such three consecutive defaults in filing Annual Returns/Financial Statements, is before the financial year 2014-’15.
D. Impact of provisos to Section 164(2) & 167(1)(a)
56. Two provisos were inserted below Subsection (2) of Section 164 of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from 07.05.2018. Prior to the insertion of the first proviso to Section 164(2), Director of a defaulting Company was ineligible to be appointed as a Director of that Company. The Section created a situation where, after the disqualification of all the existing Directors of a defaulting Company, if any new Director/s is/are appointed in the Company, he/she/they also stood disqualified eo instanti. To overcome the situation, first proviso was inserted below Section 164(2) providing that where a person is appointed as a Director of a Company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.
57. Similarly, Section 167(1)(a) stated that the office of a Director shall become vacant in case he incurs any of the disqualification specified in Section 164. By the Companies (Amendment ) Act, 2017 a proviso was inserted below Section 167(1)(a) to the effect that if he incurs disqualification under Subsection (2) of Section 164, the office of the Director shall become vacant in all the Companies, other than the Company which is in default under that subsection. The said proviso also was brought into force with effect from 07.05.2018.
58. The effect of the two provisos is that though a Director of a defaulting Company vacates his office of Director in all other Companies, he continues to be in office in the defaulting Company and any new Directors appointed in any such defaulting Companies, can hold office for a period of six months in spite of the default committed by the Company. The amendments inserting the provisos to Section 164(2) and 167(1)(a) are intended to enable the defaulting Companies to file Financial Statements / Annual Returns in respect of the defaulted years and thus avert striking off of the Company from the Register of Companies. This court does not find any illegality or unconstitutionality in the inserted provisos.
59. Still, question arises as to whether the provisos will have effect only with effect from 07.05.2018 on which date the amendments were brought into force or whether they will relate back to periods anterior to 07.05.2018. In some of these writ petitions (for instance WP(C) No.13940/2019) the disqualification was effected from 01.11.2015. In such cases, whether the proviso to Section 167(1)(a) inserted with effect from 07.05.2018 can be made applicable ? If it can be made applicable in such cases, then such petitioners would not vacate the office of the Directors in the defaulting Companies, but would vacate Directorship in all other Companies in which they are Directors. Whether proviso to Section 167(1)(a) has retrospective effect, is the question.
60. Section 167(1)(a) provides that the office of the Director shall become vacant in case he incurs any disqualification specified in Section 164 of the Act. The proviso applies to disqualification under Section 164(2) also. The purpose of Section 167(1)(a) is to bring in a higher degree of responsibility in corporate governance. Proviso is intended to make Directors of defaulting companies to continue to hold office in the defaulting companies, but at the same time to vacate them from the office of Directors in all other Companies. Therefore the proviso should be construed as clarificatory in nature and should relate back. When some of the petitioners herein had to vacate the office on 02.11.2015, it could have been only from the defaulting Company. The legislature, when realised that it would create an anomalous situation where there will be no Directors in a defaulting Company, introduced the proviso to Section 167(1)(a). Taking into consideration the purpose of incorporating the proviso, it should necessarily be given retrospective operation.
61. The proviso however also contemplates that such Directors would vacate the office of Directors in all other Companies. Such a consequence was not contemplated originally under Section 167(1)(a). The proviso if applied retrospectively in its entirety, it would result in some of the petitioner-Directors vacating their offices in other companies retrospectively. Faced with this situation, the Hon’ble High Court of Karnataka in Yashodhara Shroff (supra) applied the doctrine of severability and held that that part of the proviso has to be construed as prospective in application. This Court is in agreement with the findings of the Hon’ble Karnataka High Court in Yashodhara Shroff (supra) on that point. Following the judgment of the Hon’ble Karnataka High Court, I hold that the words “provided that where he incurs disqualification under sub-Section (2) of Section 164, the office of director shall become vacant …………… , other than the company which is in default under that sub-Section” will have retrospective operation, and the words “in all the companies” will have only prospective operation.
E. Whether notice under Section 455(4) a sine qua non
Section 455 of the Companies Act, 2013 falls in Chapter XXXIX titled “Miscellaneous”. Section 455 reads as follows:
“455. Dormant company – (1)Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
Explanation.—For the purposes of this section,—
(i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;
(ii) “significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
(2) The Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect.
(3) The Registrar shall maintain a register of dormant companies in such form as may be prescribed.
(4) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.
(5) A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed.
(6) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section.”
62. The provision is primarily intended to apply to Companies formed and registered for a future project or to hold an asset or intellectual property and have no significant financial transaction and also to an inactive company, to enable such companies to apply for the status of a dormant Company. True, the term “inactive company” would include Companies which have not filed financial statements or annual returns during the last two financial years.
63. The Registrar of Companies is mandated to maintain a register of dormant Companies. The register is to include names of Companies which have applied and obtained dormant Company status. Section 455 requires such dormant Companies to have minimum number of Directors and to pay such annual fees to maintain dormant status. Dormant Companies can make applications for becoming an active Company and can become active.
64. As far as companies which have not filed Financial Statements / Annual Returns for two financial years consecutively, subsection (4) of Section 455 requires the Registrar to issue notice to such Companies before entering the names of such Companies in the register of dormant Companies. A wholistic reading of Section 455 would reveal that the notice under Section 455(4) is intended to ascertain whether a Company which has not filed Financial Statements / Annual Returns for two consecutive financial years, is in fact a dormant Company without any significant financial transaction or activity.
65. Every company which has not filed Financial Statements / Annual Returns for two years cannot be invariably treated as a dormant Company. Companies which are active and having significant financial transactions may fail to file Financial Statements/Annual Returns for two consecutive years. Such companies cannot be treated as dormant Companies for that reason, for the purpose of being included in the Register of dormant Companies. It is evident from Section 455 that the provision is intended for an altogether different purpose. Section 455 cannot be construed as a provision to issue notice to defaulting Companies before their Directors become amenable to disqualification under Section 164(2). This court therefore hold that a notice under Section 455(4) is not a sine qua non for applying the provisions of Section 164(2) or 167.
F. Deactivation of DIN whether justified
66. The argument of the petitioners against deactivation of DINs is that the Companies (Appointment and Qualification of Directors) Rules, 2014 do not empower the Registrar of Companies to deactivate DINs. Rule 14(1) mandates that every Director shall inform the company concerned about his/her disqualification under 164(2) by filing Form DIR-8 before he/she is appointed or reappointed, respectively as a Director of any other company or by the defaulting company. Under Rule 14(2) the company is required to file Form DIR-9 with the Registrar immediately upon commission of default in complying with Section 164(2)(a) or (b) by providing the names and addresses of all the Directors of the Company during the relevant financial years. If the Company fails to file Form DIR-9 within a period of 30 days from the date of the default, the disqualification under Section 164(2) would become applicable as provided in Rule 14(3).
67. The counsel for the petitioners argued that deactivation of DIN for the sole reason that a Director is temporarily disqualified to hold office, under Section 164(2), is impermissible. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the cancellation or surrender of or deactivation of DIN. The Rule enables deactivation or cancellation only under the circumstances specified therein.
68. The counsel for petitioners pointed out that the Hon’ble High Court of Gujarat has considered the issue in Gaurang Balvantlal Shah v. Union of India [(2019)214 Comp Cas 199(Guj)] and held that DIN could not be cancelled or deactivated merely because one of the Companies in which such person was a Director has been struck off from the Register of Companies. In Yashodhara Shroff (supra) the Hon’ble High Court of Karnataka directed restoration of DIN. In Mukul Pathak and others v. Union of India and others [(2020) 222 Comp Cas 383 (Delhi)], the Hon’ble Delhi High Court held that there is no provision for cancelling DIN on the basis of disqualification under Section 164. The Hon’ble Allahabad High Court also held in Jai Shankar Agrahari v. Union of India [2020 SCC OnLine All 24] that there is no provision to deactivate the DIN.
69. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 reads as follows:
“11. Cancellation or surrender or Deactivation of DIN – (1) The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received from any person, cancel or deactivate the DIN in case-
(a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
(b) the DIN was obtained in a wrongful manner or by fraudulent means;
(c) of the death of the concerned individual;
(d) the concerned individual has been declared as a person of unsound mind by a competent Court;
(e) if the concerned individual has been adjudicated an insolvent: Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned individual;
(f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as Director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN:
Provided that before deactivation or any DIN in such case, the Central Government shall verify e-records.
[(2) The Central Government or Regional Director (Northern Region), or any officer authorised by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC [or the web service DIR- 3 – KYC-WEB] within stipulated time in accordance with Rule 12A.
(3) The de-activated DIN shall be re-activated only after e-form DIR-3-KYC [or the web service DIR-3-KYC-WEB] is filed along with fee as prescribed under Companies (Registration Offices and Fees) Rules, 2014.]
Explanation. – For the purposes of clause (b)-
(i) the term “wrongful manner” means if the DIN is obtained on the strength of documents which are not legally valid or incomplete documents are furnished or on suppression of material information or on the basis of wrong certification or by making misleading or false information or by misrepresentation;
(ii) the term “fraudulent means” means if the DIN is obtained with an intent to deceive any other person or any authority including the Central Government.”
From the Rule 11, it is evident that the Rule does not empower any authority to cancel or deactivate DIN upon disqualification under Section 164(2). Cancellation or deactivation is contemplated only where the DIN is found to be duplicated or it was obtained in a wrongful manner or by fraudulent means or on the death of the concerned individual or on the concerned individual being declared as of unsound mind or the concerned individual has been adjudged as insolvent.
70. It has to be kept in mind that DIN is an Identification Number and disqualification under Section 164(2) is of temporary nature. It is also submitted at the Bar that the DIN number is common to persons who are at the same time Directors of Companies and partners of Limited Liability Partnerships as in the case of petitioners in W.P.(C) Nos.19228/2020 and 19249/2020. In such circumstances, there is no justification for cancelling or deactivating DINs of Directors consequent on their disqualification resulting from Section 164(2).
71. On an analysis of Rules 9 to 11 of the Rules, 2014 the Hon’ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan (supra) has also held that DIN of Directors of a defaulting Company cannot be cancelled or deactivated solely on the basis of disqualification of Directors under Section 164(2). For all the afore reasons, this court hold that the DIN of the petitioners allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014 ,are not liable to be deactivated or cancelled solely for the reason that the petitioners stand disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2).
G. Striking off and Disqualification
72. Section 248 of the Companies Act, 2013 empowers the Registrar of Companies to strike off the name of a Company from the Register of Companies if the Company is not carrying on any business or operation for a period of immediately preceding two financial years and has not made any application within such period for obtaining the status of a dormant Company. Name of defaulting Companies in which some of the petitioners are Directors, have been struck off by the Registrar of Companies and the petitioners have been disqualified for being appointed as Directors in other Companies.
73. Such petitioners apprehend that if they take recourse to legal proceedings for setting aside their disqualification incurred under Section 164(2), such proceedings are likely to go against them if the authorities / legal fora take a stand that since the names of the defaulting Companies itself are struck off, such petitioners / Directors cannot be restored with their Directorship and hence the proceedings are of no consequence.
74. The petitioner and their Companies in such cases have a remedy for challenging striking off, under Section 252 of the Act, 2013 before the National Company Law Tribunal (NCLT). Striking off of Companies would not automatically result in disqualification of their Directors. Disqualification would entail only if the conditions in Section 164 are satisfied. The Directors in such cases will have whatever remedies available to them under law, to challenge their disqualification, irrespective of striking off of the Companies from the Register of Companies, because irrespective of striking off of the defaulting Company, their disqualification will subsist for the purpose of their appointment in other Companies.
75. In the result, the writ petitions are disposed of with the following declarations and directions:
1. Section 164(2) and Section 167(1) of the Companies Act, 2013 are not ultra vires Article 14 or Article 19(1)(g) of the Constitution of India.
2. Disqualification of the petitioners under Section 164(2) of the Companies Act, 2013 is by operation of law and the petitioners are not entitled to any opportunity of hearing in the matter.
3. Section 164(2) is not retrospective in operation and only the defaults made by Companies in filing Financial Statements / Annual Returns in the financial year 2014-15 and subsequent financial years can be taken into account for disqualifying a Director under Section 164(2) of the Companies Act, 2013.
4. Where disqualification of petitioners is based on any period of default prior to 01.04.2014, such disqualifications are bad in law and are hence set aside.
5. The provisos inserted below Section 164(2) and Section 167(1)(a) of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from 07.05.2018 are constitutionally valid and the same being clarificatory in nature, would apply retrospectively. However, the words “ in all the companies” appearing in the proviso to Section 167(1)(a) will have only prospective operation.
6. Notice under Section 455(4) of the Companies Act, 2013 is not a sine qua non for applying the provisions of Section 164(2) or 167 to the Directors of any Defaulting Company.
7. The Director Identification Numbers (DINs) of the petitioners allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014, are not liable to be deactivated or cancelled solely for the reason that the petitioners stand disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2).
8. Consequently, there will be a direction to the respondents to re-activate the Director Identification Numbers (DINs) of the petitioners forthwith. However, it is made clear that the respondents will be at liberty to cancel or deactivate the DINs of the petitioners for any reasons laid down in Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 2014.
9. Where the names of any Companies stand struck off , the petitioners in respect of such Companies are at liberty to invoke Section 252 of the Companies Act, 2013 to challenge striking off the names of their Companies from the Register of Companies and to resort to legal remedies available to them, to challenge their disqualification for holding the office of Director.
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