2020 (1) TMI 1212 - HC - Companies Law

Disqualification of Directors - Deactivation of DIN - Striking off the name of the Company from the Register of the Companies - non filing of annual returns for a continuous period of three years - Section 248(1) of the Companies Act 2013 - vires of the proviso under Section 167(2)(a) of the Act which was inserted to the Companies (Amendment Act 2017) - HELD THAT - The Companies Act 2013 had come into effect from 12.09.2013. It had brought about sweeping changes with respect to the filing of Annual Returns and Financial Status, brining strict compliance thereof. The equivalent provision to Section 164 of the 2013 Act was Section 274 of the Companies Act 1956. One important change which had been brought about was that under Section 274 of http //www.judis.nic.inthe Company Act 1956, it was provided that there would be disqualification with respect to Directorship of 'Public' companies and it would be attracted when annual returns and financial statements were not filed. In the Act of 2013, disqualification was attracted even for Directors of all Companies, not just public companies, and disqualification was attracted for non filing of financial statements or annual returns. The provisions are clear. There is no scope for ambiguity for the same. This Court had not been called to give a ruling on the vires of Section 164(2)(a). According to this provision, if a person, who is a Director of a Company which had not filed financial statements or annual returns for a continuous period of three financial years, then he/she was not eligible to be reappointed as a Director on that Company or can be appointed in other Company for a period of five years - A proviso was inserted in Section 167(1)(a) with effect from 07.05.2018, which stated that if disqualification is incurred then the office of Director shall become vacant in all other companies where the individual was a Director. The vires of this proviso was questioned and challenged before a Division Bench of this Court. In the present batch of writ petitions, the three financial years, 2014-15, 2015-16 and 2016-17 have been completed. The Companies have not filed the annual returns / financial statements. They have defaulted in such filing of annual returns / financial statements. The Act very clearly states that if there is such a default then the Directors would be disqualified. This Court cannot extend the time for filing of annual returns or financial statements. When a period of time is stipulated in a statute, it has to be strictly interpreted. In the earlier batch, leverage was granted because the annual general meeting should be called within a period of six months namely on or before 30th September of each succeeding year and thereafter a further period of 30 days / 60 days is given to file the annual returns. Here the three financial years had come to an end. The said period of six months had also been completed - There cannot be any alternate interpretation of the said provision. It is clear crystal clear. Issuance of notice would be of no avail since only one conclusion is possible. The principle of natural justice cannot be stretched to extreme limits when issue of notice would be an empty formality. The law is clear. The three financial years are 2014-2015; 2015-2016 and 2016-2017. If annual returns are not filed for the said three consecutive years, then disqualification is the only option available. The other provisions relating to penalty /punishment relied on by the petitioners would be attracted when for a single year annual returns/financial statements are not filed. But when they are not filed for three consecutive years then the Directors are automatically disqualified. An irrational interpretation cannot be given that the Director Identification Number can still attach itself to the individual even after he resigns, or is disqualified from the post of Directorship or vacates the office. Consequently, when a Director is disqualified, it follows that the DIN should be deactivated. In the present writ petition, the three financial years 2014-2015, 2015-16 and 2016-17 have been completed and since annual returns / financial statements have not been filed, disqualification automatically follows and when disqualification is incurred, deactivation of Director Identification Number also automatically follows. The DIN number can exist only during the life time of post of Directorship and not for the entire life of the individual. Issuing a prior notice would be of no avail and would only be an empty formality since the provision of law is clear on this aspect. There are no merits in the petition - petition dismissed.

Summary

Issues Involved:
1. Lack of Jurisdiction
2. Failure to Issue Notice Before Disqualification
3. Impermissibility to Deactivate the Director Identification Number (DIN)
4. Sustainability of the Order to Vacate Office of Directorship in All Other Companies

Detailed Analysis:

1. Lack of Jurisdiction:
The petitioners argued that the Registrar of Companies lacked jurisdiction to disqualify directors under Section 164(2) of the Companies Act, 2013. They contended that the company was required to file form DIR-9 to the Registrar, listing the names and addresses of its directors, and failure to do so would attract disqualification. The learned Senior Counsel emphasized that the Registrar did not have the authority to pass the impugned order, as non-filing of returns should only attract penalties or punishments, not disqualification. The court, however, found that the provisions of the Companies Act, 2013, including Sections 164 and 167, were clear and unambiguous, and that the Registrar had the authority to disqualify directors for non-filing of financial statements or annual returns for three consecutive years.

2. Failure to Issue Notice Before Disqualification:
The petitioners claimed they were not given notice prior to their disqualification, which violated principles of natural justice. They cited various judgments, including those from the Gujarat High Court, Delhi High Court, and Karnataka High Court, which emphasized the necessity of notice. However, the court held that in the present case, the three financial years (2014-15, 2015-16, and 2016-17) had been completed without filing the required documents, making disqualification automatic. The court reasoned that issuing a notice would be an empty formality, as the law was clear and only one conclusion was possible. The court referenced the "useless formalities" theory, which allows for exceptions to the principles of natural justice when notice would be futile.

3. Impermissibility to Deactivate the Director Identification Number (DIN):
The petitioners argued that the Registrar did not have the authority to deactivate their DINs, as neither the Companies Act nor the rules provided for such deactivation. They relied on Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014. The court, however, found that when disqualification is incurred due to non-filing of annual returns for three consecutive years, deactivation of the DIN naturally follows. The court interpreted that the DIN is linked to the office of directorship and can only exist during the tenure of the directorship, not for the individual's entire life. Thus, deactivating the DIN upon disqualification was deemed logical and necessary.

4. Sustainability of the Order to Vacate Office of Directorship in All Other Companies:
The petitioners contended that the disqualification order, which required them to vacate their directorships in all other companies, was unsustainable and severely impacted their reputation. The court, however, upheld the provision under Section 167(1)(a) of the Companies Act, which mandates that a director who incurs disqualification must vacate office in all other companies. The court referenced a Division Bench judgment that upheld the vires of this provision, emphasizing that it serves the interest of transparency and probity in governance. The court concluded that the disqualification and the consequent requirement to vacate office in other companies were valid and enforceable.

Conclusion:
The court dismissed all the writ petitions, holding that the Registrar of Companies had the jurisdiction to disqualify directors for non-filing of annual returns for three consecutive years. It found that issuing a notice would be an empty formality, as the law was clear and only one conclusion was possible. The court also upheld the deactivation of the DINs and the requirement for disqualified directors to vacate office in all other companies. The court emphasized that these provisions were in the interest of maintaining transparency and accountability in corporate governance.