2019 (7) TMI 1686 - HC - Companies Law

Principles of natural justice - Disqualification of Directors - Section 164(2) of the Companies Act - direction to 2nd respondent to activate DINs of the petitioners, to enable them to function other than in strike off companies - petitioner contend that before passing the impugned order, notices have not been issued, giving them opportunity, and this amounts to violation of principles of natural justice, and on this ground alone, the impugned orders are liable to be set aside - HELD THAT - The 2nd respondent has disqualified the petitioners under Section 164(2)(a) of the Act 18 of 2013, for not filing financial statements or annual returns, for period prior to 01.04.2014. The action of the 2nd respondent runs contrary to the circular issued by the Ministry of the Corporate Affairs, and he has given the provisions of Act 18 of 2013, retrospective effect, which is impermissible - as the impugned orders in present writ petitions disqualifying the petitioners as directors under Section 164(2)(a) of the Act, have been passed considering the period prior to 01.04.2014, the same cannot be sustained, and are liable to be set aside to that extent. Issuance of prior notice before disqualifying the petitioners as directors - HELD THAT - Section 164(2)(a) makes it clear that it provides disqualification on happening of an event i.e., if a person who is or has been a director of a company has not filed financial statements or annual returns for any continuous period of three financial years, shall be ineligible to be re-appointed as a director of that company or appointed in any other company for a period of five years from the date on which the said company fails to do so. The provision does not provide for issuance of any prior notice or hearing. Thus, it is clear that Section 164(2)(a) of the Act is a deeming provision and the disqualification envisaged under the said provision comes into force automatically by operation of law on default and Legislature did not provide for issuance of any prior notice, but the respondents notified disqualification even before it incurred, and deactivated DINs, which is illegal arbitrary and against provisions contained in Section 164(2)(a) of the Act. Deactivation of DINs - contention of the learned counsel for the petitioners is that except for the grounds mentioned under Rule 11 (a) to (f) of the Rules, the DINs cannot be cancelled or deactivated, and the violation mentioned under Section 164(2)(a) of the Act, is not one of the grounds mentioned under clauses (a) to (f) of Rule 11, and hence for the alleged violation under Section 164(2)(a) of the Act, DIN cannot be cancelled - HELD THAT - Clauses (a) to (f) of Rule 11, provides for the circumstances under which the DIN can be cancelled or deactivated. The said grounds, are different from the ground envisaged under Section 164(2)(a) of the Act. Therefore, for the alleged violation under Section 164 of the Act, DINs cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules - the deactivation of the DINs of the petitioners for alleged violations under Section 164 of the Act, cannot be sustained. The impugned orders in the writ petitions to the extent of disqualifying the petitioners under Section 164(2)(a) of the Act and deactivation of their DINs, are set aside, and the 2nd respondent is directed to activate the DINs of the petitioners, enabling them to function as Directors other than in strike off companies - Petition disposed off.

Issues Involved:
1. Disqualification of directors under Section 164(2)(a) of the Companies Act, 2013.
2. Deactivation of Director Identification Numbers (DINs).
3. Applicability of retrospective effect to Section 164(2)(a).
4. Violation of principles of natural justice.
5. Availability of alternative remedy under Section 252 of the Companies Act, 2013.

Detailed Analysis:

1. Disqualification of Directors under Section 164(2)(a) of the Companies Act, 2013:
The petitioners, who were directors of struck-off companies, were disqualified under Section 164(2) of the Companies Act, 2013, for not filing financial statements or annual returns for a continuous period of three years. The disqualification also made them ineligible to be re-appointed as directors of any company for five years from the date of default. The petitioners argued that the provision should have prospective operation from 1.4.2014, and not be applied retrospectively.

2. Deactivation of Director Identification Numbers (DINs):
The DINs of the petitioners were deactivated following their disqualification. The petitioners contended that DINs, granted for a lifetime under Rule 10(6) of the Companies (Appointment and Qualification of Directors) Rules, 2014, could not be deactivated for the reasons provided under Section 164(2)(a). They argued that Rule 11 of the Rules does not include disqualification under Section 164 as a ground for deactivation.

3. Applicability of Retrospective Effect to Section 164(2)(a):
The court examined whether Section 164(2)(a) should be applied retrospectively. The petitioners argued that the provision should only apply prospectively from 1.4.2014. The court referred to the General Circular No.08/14 dated 4.4.2014 issued by the Ministry of Corporate Affairs, which clarified that financial statements for periods before 1.4.2014 should be governed by the Companies Act, 1956. The court held that applying Section 164(2)(a) retrospectively was impermissible and contrary to the circular and the law laid down by the Supreme Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited.

4. Violation of Principles of Natural Justice:
The petitioners argued that the disqualification orders were passed without issuing notices, violating principles of natural justice. The court noted that Section 164(2)(a) is a deeming provision that does not require prior notice or hearing, as it operates automatically upon default. The court concurred with judgments from the High Courts of Karnataka, Gujarat, and Madras, which held that Section 164(2)(a) does not violate principles of natural justice.

5. Availability of Alternative Remedy under Section 252 of the Companies Act, 2013:
The respondents argued that the petitioners had an alternative remedy under Section 252 of the Act. However, the court clarified that Section 252 provides a remedy for challenging the dissolution and striking off of companies, not for disqualification of directors or deactivation of DINs. Therefore, the court rejected the contention that Section 252 was an alternative remedy for the petitioners.

Conclusion:
The court set aside the impugned orders disqualifying the petitioners as directors under Section 164(2)(a) and deactivating their DINs, directing the 2nd respondent to activate the DINs. The court clarified that the provision should have prospective effect from 1.4.2014 and that the respondents could take appropriate action for violations occurring after this date. The court also noted that the petitioners could seek alternative remedies under Section 252 if aggrieved by the striking off of their companies. The writ petitions were allowed to the extent indicated, and interlocutory applications, if any, were closed without costs.

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