2021 (12) TMI 347 - HC - Companies Law

Disqualification as Directors - Section 164(2) read with Section 167 of the Companies Act, 2013 - Case referred to Larger Bench - HELD THAT - Following questions are referred for consideration by a larger bench of such strength as is deemed appropriate by Hon'ble the Chief Justice under Chapter V Rule 6 of the Allahabad High Court Rules, 1952 - i) Whether deactivation of Director Identification Number (DIN) under the Act, 2013 is permissible and sustainable in law as a consequence of disqualification of Director of a company under Section 164(2)(a) in the absence of any specific provision in this regard in the Act, 2013? ii) Whether the decision in the case of Jai Shankar Agrahari 2020 (4) TMI 354 - ALLAHABAD HIGH COURT and Mohd. Tariq Siddiqui 2019 (10) TMI 1269 - ALLAHABAD HIGH COURT rendered by two Division Benches of this Court relying upon decision of various other High Courts lay down the law correctly in this regard?

Issues Involved:
1. Disqualification of Directors under Section 164(2)(a) read with Section 167(1)(a) of the Companies Act, 2013.
2. Deactivation of Director Identification Number (DIN) without specific provision.
3. Applicability of principles of natural justice.
4. Prospective or retrospective application of the proviso to Section 167(1).
5. Validity of judgments from other High Courts on similar issues.

Issue-wise Detailed Analysis:

1. Disqualification of Directors under Section 164(2)(a) read with Section 167(1)(a) of the Companies Act, 2013:
The petitioners, who were directors of various companies, were disqualified for not filing annual returns/financial statements for three continuous years. This resulted in their disqualification under Section 164(2)(a) and the consequent vacation of their office under Section 167(1)(a). The court noted that the disqualification is automatic by operation of law, and no adjudication or order from the Registrar of Companies is required. The relevant sections were interpreted to mean that if a company fails to file the required documents for three years, the directors are automatically disqualified, and their office becomes vacant.

2. Deactivation of Director Identification Number (DIN) without specific provision:
The court examined whether the deactivation of DINs of disqualified directors is permissible. The petitioners argued that Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, does not list disqualification as a ground for deactivation of DIN. However, the court held that deactivation of DIN is a natural and logical consequence of disqualification. The rationale is to prevent misuse of DIN by disqualified directors. The court disagreed with the judgments of other High Courts and previous decisions of the Allahabad High Court that held deactivation of DIN without specific provision as impermissible.

3. Applicability of principles of natural justice:
The petitioners contended that they were not given notice or an opportunity to be heard before being disqualified. The court referred to the Division Bench judgment in 'Jai Shankar Agrahari vs. Union of India' and other High Court decisions, concluding that principles of natural justice are not required in cases of automatic disqualification under Section 164(2)(a). The court emphasized that the disqualification is by operation of law, and the fact of non-filing of returns is readily ascertainable from the records of the Registrar of Companies.

4. Prospective or retrospective application of the proviso to Section 167(1):
The court discussed the application of the proviso to Section 167(1), which was inserted w.e.f. 07.05.2018. The proviso states that the office of a director shall become vacant in all companies other than the defaulting company. The court noted that the proviso applies prospectively. However, it did not delve deeply into whether the proviso would apply to disqualifications incurred before 07.05.2018, as the petitioners were disqualified after this date.

5. Validity of judgments from other High Courts on similar issues:
The court reviewed judgments from other High Courts, such as the Gujarat High Court in 'Gaurang Balvantial Shah vs. Union of India,' the Karnataka High Court in 'Yashodhara Shroff vs. Union of India,' and the Delhi High Court in 'Mukut Pathak & Ors. vs. Union of India.' These judgments held that deactivation of DIN for disqualified directors is impermissible without specific provision. The court respectfully disagreed with these judgments, asserting that deactivation of DIN is a consequential action to prevent misuse and is permissible even without a specific provision.

Conclusion:
The court concluded that the deactivation of DINs of disqualified directors is permissible and sustainable in law as a consequence of disqualification under Section 164(2)(a) read with Section 167(1)(a). The court referred the matter for consideration by a larger bench on the specific questions of law regarding the deactivation of DIN and the correctness of the decisions in 'Jai Shankar Agrahari' and 'Mohd. Tariq Siddiqui.'

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