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2019 (11) TMI 319 - HC - Companies LawDisqualification of Directors - defaulting directors - Use of DSC and DIN no by the disqualified director - Interpretation of statute - provisions of Section 164(2) and Section 167(1)(a) of the Companies Act, 2013 - default on the part of concerned companies in filing the annual returns and financial statements for the financial years 2014-2016. Whether the provisions of Section 164(2)(a) are retrospective? - HELD THAT - A plain reading of Clause (a) of Section 167 (1) of the Act indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act. The proviso to Clause (a) of Section 167(1) of the Act was introduced with effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018 Indisputably, the plain language of Section 164(2) read with Section 167(1)(a) of the Act leads to an absurd situation as discussed earlier. In this view, the rule of literal interpretation cannot be applied for interpreting the provisions of Section 167(1)(a) of the Act. There is no dispute that the provisions of Section 164(2) of the Act must be applied prospectively - The Karnataka High Court, Gujarat High Court and Madras High Court have also considered a similar challenge - All of the aforesaid Courts are unanimous in their opinion that the provisions of Section 164 apply prospectively. The petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company. Automatic vacancy of officer of director - Whether the consideration of the default committed in filing financial statements and annual returns for the financial years 2013-14 would amount to applying the provisions of Section 164(2) of the Act retrospectively? - HELD THAT - The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations otherwise than in regard to matters of procedure cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act. Whether a law is retrospective has to be viewed in the context whether it divests a person of accrued rights, or creates new obligations, or attaches a disability in respect of transactions or actions done in the past? - HELD THAT - The penal consequences of not filing returns for three consecutive financial years would be attracted on section 164 of the Act coming into force. Section 164 of the Act came into force on 01.04.2014 and thus, the failure of a company/its directors to file annual returns (for three financial years) thereafter would result in the directors incurring the disqualification as specified under Section 164(2) of the Act. It is of little consequence that such defaults relate to filing annual returns that pertain to a period prior to 01.04.2014 Section 164(2) of the Act operates prospectively. However, such prospective operation would entail taking into account failure to file the financial statements pertaining to the financial year ending 31.03.2014 on or before 30.10.2014. This Court is of the view that the taking into account such default does not amount to a retrospective application of Section 164 of the Act and the contentions advanced by the petitioners in this regard, are unmerited. Whether principles of natural justice are applicable is required to be considered in the context of the statutory provisions? - HELD THAT - The principles of natural justice have been accepted as a part of procedural law, where it is necessary to supplement it. The question whether such principles are required to be read into any law must be considered in the context of the basic scheme of the statutory provisions - the contention that the impugned list is void as having been published without following the principles of natural justice, is rejected. Deactivation of the DIN of the defaulting directors - Held that - Neither any of the provisions of the Companies Act nor the Rules framed thereunder stipulate cancellation or deactivation of DIN on account of a director suffering a disqualification under Section 164(2) of the Act. It is relevant to note that Rule 11 of the Company (Appointment and Qualification of Directors) Rules, 2014 was amended with effect from 05.07.2018 to provide for deactivation of DIN in the event of failure to file Form DIR-3-E-KYC within the period as stipulated under Rule 12A of the said Rules. The amendment so introduced also does not empower the Central Government to cancel or deactivate the DIN of disqualified directors. - None of the provisions of Rule 14 of the said Rules indicates that the DIN of directors incurring the disqualification under section 164(2) of the Act, is required to be deactivated. Conclusion the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act. As discussed above, there is also much merit in the contention that the DIN and DSC of the petitioner could not be deactivated. Accordingly, the respondents are directed to reactivate the DIN and DSC of the petitioners. It is clarified that the petitioners would continue to be liable to pay penalties as prescribed under the Act. Petition disposed off.
Issues Involved:
1. Retrospective application of Section 164(2) of the Companies Act, 2013. 2. Violation of principles of natural justice. 3. Interpretation of Section 164(2) regarding disqualification of directors. 4. Application of Section 167(1)(a) concerning vacation of office by disqualified directors. 5. Deactivation of Director Identification Number (DIN) and Digital Signature Certificate (DSC). Detailed Analysis: 1. Retrospective Application of Section 164(2) of the Companies Act, 2013: The court addressed whether Section 164(2) operates retrospectively. It was argued that considering defaults in filing financial statements for the financial year ending 31.03.2014 and prior years for imposing disqualification under Section 164(2) amounts to retrospective application. The court noted that Section 164(2) disqualifies directors for defaults in filing financial statements for three consecutive years. The court clarified that the defaults for the financial year ending 31.03.2014 could be considered since the default in holding the AGM and filing returns occurred after Section 164 came into force on 01.04.2014. The court disagreed with the Karnataka, Gujarat, and Madras High Courts, which held that defaults prior to 01.04.2014 could not be considered. The court concluded that Section 164(2) operates prospectively but includes defaults that occurred after its enactment, even if they pertain to earlier financial years. 2. Violation of Principles of Natural Justice: The petitioners contended that the impugned list of disqualified directors was void as it was published without affording them an opportunity to be heard, violating principles of natural justice. The court held that Section 164(2) merely sets out conditions for disqualification without requiring any decision-making process or discretion by the authorities. Therefore, the rule of audi alteram partem (right to be heard) was inapplicable. The court emphasized that the principles of natural justice are meant to supplement the law to ensure procedural fairness, but they are not applicable when no qualitative decision is required. The court rejected the contention that the impugned list was void due to the violation of natural justice principles. 3. Interpretation of Section 164(2) Regarding Disqualification of Directors: The petitioners argued that they should not be disqualified from acting as directors of companies that had not defaulted. The court clarified that Section 164(2) disqualifies a director from being reappointed in the defaulting company and from being appointed in any other company. The court rejected the interpretation that "other companies" referred only to non-defaulting companies in which the director was not already serving. The court held that the expression "other company" includes all companies other than the defaulting company. 4. Application of Section 167(1)(a) Concerning Vacation of Office by Disqualified Directors: The court examined whether directors who incur disqualification under Section 164(2) would vacate their office in all companies under Section 167(1)(a). The court noted that Section 167(1)(a) leads to an absurd situation where all directors of a defaulting company would demit office immediately, making it impossible for the company to appoint new directors. The court concurred with the Bombay High Court's view in Kaynet Finance Limited that Section 167(1)(a) should be read to apply only to disqualifications under Section 164(1). The court held that directors who incurred disqualification under Section 164(2) before 07.05.2018 would not demit their office in other companies. However, after the statutory amendments with effect from 07.05.2018, directors incurring disqualification under Section 164(2) would vacate their office in all companies other than the defaulting company. 5. Deactivation of Director Identification Number (DIN) and Digital Signature Certificate (DSC): The court addressed the deactivation of DIN and DSC of disqualified directors. The court noted that the provisions pertaining to DIN ensure unique identification for directors and are not meant to be deactivated due to temporary disqualification. The court found no statutory provision supporting the deactivation of DIN and DSC for directors disqualified under Section 164(2). The court directed the respondents to reactivate the DIN and DSC of the petitioners. Conclusion: The court upheld the inclusion of petitioners in the list of disqualified directors under Section 164(2) but rejected the applicability of Section 167(1)(a) for disqualifications incurred under Section 164(2) before 07.05.2018. The court directed the reactivation of DIN and DSC of the petitioners and clarified that the petitioners would continue to be liable for penalties under the Act. The petitions were disposed of accordingly.
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