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2018 (8) TMI 436 - HC - Companies LawDisqualification of directors - retrospective effect of new amendment act 2013 - striking off the name of the company from the Registrar of Companies on the premise that the company has not been carrying on any business for a period of two financial years - Held that - a) When the New Act 2013 came into effect from 1.4.2014, the second respondent herein has wrongly given retrospective effect and erroneously disqualified the petitioner-directors from 1.11.2016 itself before the deadline commenced wrongly fixing the first financial year from 1.4.2013 to 31.3.2014. (b) By virtue of the new Section 164(2)(a) of the 2013 Act using the expression for any continuous period of three financial years and in the light of Section 2(41) defining financial year as well as their own General Circular No.08/14 dated 4.4.2014, the first financial year would be from 1.4.2014 to 31.3.2015, the second financial year would be from 1.4.2015 to 31.3.2016 and the third financial year would be from 1.4.2016 to 31.3.2017, whereas the second respondent clearly admitted in paras 15 and 22 of the counter affidavit that the default of filing statutory returns for the financial years commenced from 2013-14, 2014-15 and 2015-16 i.e., one year before the Act 2013 came into force. This is the basic incurable legal infirmity that vitiates the entire impugned proceedings. (c) By virtue of the first proviso to Section 96(1) of the 2013 Act, Annual General Meeting for the year ending on 31.3.2017 can be held within six months from the closing of financial year i.e., 30.9.2017, additionally in the light of Section 164(2)(a) referring to annual return and financial statement , the time limit to file annual return under Section 92(4) of 2013 Act is sixty days from Annual General Meeting or the last date on which Annual General Meeting ought to have been held, hence, the time limit to file balance sheet under Section 137(1) of the 2013 Act is again thirty days from Annual General Meeting. In view of these legal position, the disqualification could get triggered off only on or after 30.10.2017 only, if any company fails to file annual forms for three financial years. Importantly, it is to be borne in mind that even beyond that time limit, additional time limit of 270 days was available by virtue of the then first proviso to Section 403. (d) Although there is no statute or provision expressly spelling out the observance of the principles of natural justice against disqualification of directors, as the legal right of the petitioners to continue as director in other company or reappointed in any other company, which are scrupulously following the provisions of the Companies Act, have been deprived of, the principles of natural justice should have been adhered to by issuing proper notice to all the directors. (e) When the disqualification clause was not attracted to the directors of private companies under the old Act of 1956, the same cannot be allowed to take a retrospective effect under the new Act, when the provision of Section 164(2)(a) came into force only from 1.4.2014. This is also for one more reason that the failure to file the annual returns has been adequately taken care of by the penal provision under Section 92, making it clear that every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. Again under Section 137, the failure to file the financial statement visits punishment with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. Further, under Section 441(4), the default in filing returns or accounts compoundable by Tribunal or Regional Director or by any officer authorized by the Central Government. (f) Although the petitioners have not challenged the provision of Section 164(2)(a), as the respondents have not followed the principles of natural justice, extinguishing the corporate life of the directors to the extent of disqualifying them to hold the directorship in the other companies, the said provision is liable to be read down, hence, Section 164(2)(a) is read down to the extent it disqualifies the directors in other companies which are scrupulously following the requirements of law, making it clear that no directors in other companies can be disqualified without prior notice. (g) However, it is made clear beyond any pale of doubt that the mischief of removal of the names of the companies by the Registrar of Companies and the disqualification of the directors in the defaulting company will go together, as it is inseparable, and the Registrar of Companies need not give fresh notice to the directors for their disqualification from the dormant company, if there is a failure to file the financial statement or annual return for any continuous period of three financial years as per Section 164(2)(a). The impugned orders are set aside and the writ petitions shall stand allowed. Consequently, all the connected writ miscellaneous petitions are closed.
Issues Involved:
1. Disqualification of directors under Section 164(2)(a) of the Companies Act, 2013. 2. Retrospective application of Section 164(2)(a). 3. Principles of natural justice and procedural fairness. 4. Interpretation of financial years under the Companies Act, 2013. 5. Validity of the Registrar of Companies' actions and notices. Detailed Analysis: 1. Disqualification of Directors under Section 164(2)(a) of the Companies Act, 2013: The petitioners challenged the impugned orders disqualifying them under Section 164(2)(a) of the Companies Act, 2013, which states that directors of companies that have not filed financial statements or annual returns for any continuous period of three financial years shall be disqualified. The petitioners argued that the disqualification was arbitrary, unreasonable, and unconstitutional. They contended that the disqualification would apply only if the defaults occurred after the provision came into effect on 1.4.2014. 2. Retrospective Application of Section 164(2)(a): The petitioners argued that the disqualification provision should be applied prospectively from 1.4.2014 and not retrospectively. They contended that the first financial year for the purpose of Section 164(2)(a) would be 31.3.2015, and the second and third financial years would be 1.4.2015 to 31.3.2016 and 1.4.2016 to 31.3.2017, respectively. The respondents, however, considered defaults for the financial years 2013-14, 2014-15, and 2015-16, which was prior to the provision coming into force. 3. Principles of Natural Justice and Procedural Fairness: The petitioners argued that the principles of natural justice were violated as they were not given an opportunity to be heard before being disqualified. They emphasized that the Registrar of Companies should have issued show cause notices before disqualifying them, as the disqualification affected their right to continue as directors in other companies that were in compliance with the law. 4. Interpretation of Financial Years under the Companies Act, 2013: The court analyzed the definition of "financial year" under Section 2(41) of the Companies Act, 2013, and concluded that the first financial year for the purpose of Section 164(2)(a) would be 1.4.2014 to 31.3.2015. The court noted that the respondents had wrongly considered the financial year 2013-14, which was not in accordance with the Act. The court also referred to the General Circular No.08/14 dated 4.4.2014, which clarified that the provisions of the new Act would apply to financial years commencing on or after 1.4.2014. 5. Validity of the Registrar of Companies' Actions and Notices: The court found that the Registrar of Companies had erroneously given retrospective effect to the disqualification provision and disqualified the petitioners from 1.11.2016, which was before the deadline for filing returns for the financial year ending 31.3.2017. The court held that the disqualification could only be triggered on or after 30.10.2017, if the company failed to file annual returns for three financial years. The court also emphasized that the principles of natural justice required the issuance of proper notices to the directors before disqualification. Conclusion: The court set aside the impugned orders disqualifying the petitioners and allowed the writ petitions. The court held that the disqualification under Section 164(2)(a) of the Companies Act, 2013, could not be given retrospective effect and that the principles of natural justice were violated. The court directed the Registrar General to transmit the deposits made by the petitioners to the Registrar of Companies for reconciliation.
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