2020 (10) TMI 595 - HC - Companies Law

Disqualifications for appointment of a Directors - Deactivation of DIN - whether a prior notice is required before disqualifying a director under Section 164(2) of CA 2013? - HELD THAT - When Section 164(2) of CA 2013 is read with Rule 14 of the AQD Rules, it appears that, if Form DIR-9 is filed, the Registrar of Companies could rely on the names and addresses of directors that were provided by the Defaulting Company. Such reliance may not, however, be bereft of controversy especially when neither statute nor rule sets out the criteria for the preparation of such list. In any event, in all the cases at hand, such a list was not provided because the Defaulting Company did not file DIR-9. In such case, Rule 14(3) provides for resort to Section 2(60) of CA 2013 - it is evident that the statutory prescription is generic except with regard to the managing director and whole-time director and, consequently, insufficient to fix responsibility and attribute the default to a specific set of directors. As a corollary, an enquiry would be necessary. However, the scope of enquiry under Section 164(2) would vary from that under Section 164(1). In specific, the first question under Section 164(2) would be whether the company concerned has defaulted in fulfilling the obligations specified in Clauses (a) or (b). As regards Section 164(2)(a), the learned ASGI contended that this determination would be fairly straight forward. While this contention has some basis, such determination may not necessarily be devoid of challenge as would be evident from the following. As per the proviso to Section 96 (1) of CA 2013, the first annual general meeting (AGM) may be held by a company within nine months from the last date of the preceding financial year and the subsequent AGM's within six months from the last date of the preceding financial year. The time limit for filing the financial statements runs from the date of AGM and Section 137(1) of CA 2013 provides that the same should be filed within 30 days from the date of the AGM. Consequently, the prescribed time limit for filing the financial statements would vary depending on the date of AGM and, as a corollary, the date of default in filing the financial statements would also vary, including with reference to whether it is the first AGM or a subsequent AGM. It could become even more complicated if the AGM is not held as the time limits would run from the last date prescribed for holding the AGM in such situation. As regards the annual return, as per Section 92(4) of CA 2013, it is required to be filed within sixty days of the AGM. Once again, the date of default would vary depending on the date of AGM as also if the AGM is not held. Rules 9 and 10 deals with the application for allotment of DIN. Rule 10 (6) specifies that the DIN is valid for the life time of the applicant and shall not be allotted to any other person. Rule 11 provides for the cancellation or surrender or deactivation of the DIN. It is very clear upon examining Rule 11 that neither cancellation nor deactivation is provided for upon disqualification under Section 164(2) of CA 2013. In this connection, it is also pertinent to refer to Section 167(1) of CA 2013 which provides for vacating the office of director by a director of a Defaulting Company - it follows that if a person is a director of five companies, which may be referred to as companies A to E, if the default is committed by company A by not filing financial statements or annual returns, the said director of company A would incur disqualification and would vacate office as director of companies B to E. However, the said person would not vacate office as director of company A. If such person does not vacate office and continues to be a director of company A, it is necessary that such person continues to retain the DIN. The publication of the list of disqualified directors by the ROC and the deactivation of the DIN of the Appellants is hereby quashed - Appeal allowed.

Summary

Issues Involved:
1. Requirement of prior notice before disqualification under Section 164(2) of the Companies Act, 2013.
2. Power of the Registrar of Companies (ROC) to deactivate Director Identification Numbers (DINs) of disqualified directors.
3. Attribution of default to specific directors under Section 164(2) of the Companies Act, 2013.

Detailed Analysis:

1. Requirement of Prior Notice Before Disqualification:

Section 164 of the Companies Act, 2013 (CA 2013) outlines the grounds for disqualification of directors. Section 164(1) lists individual-specific disqualifications, while Section 164(2) addresses disqualifications due to company defaults. The appellants argued that prior notice is implicit under Section 164(2), citing the principles of natural justice and previous court rulings, including Bhagavan Das Dhananjaya Das v. Union of India, which emphasized the necessity of notice before disqualification. The court agreed, stating that disqualification under Section 164(2) involves two stages: determining the company's default and attributing this default to specific directors. This attribution requires an enquiry, making prior notice essential.

2. Power of the ROC to Deactivate DINs:

The appellants contended that the ROC lacks the authority to deactivate DINs under CA 2013 and the associated rules. They referred to Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 (AQD Rules), which specifies the conditions for DIN deactivation, none of which include disqualification under Section 164(2). The court concurred, noting that Rule 11 does not empower the ROC to deactivate DINs for disqualification under Section 164(2). Additionally, the court highlighted that deactivating DINs would contradict Section 164(2) read with Section 167(1) of CA 2013, as disqualified directors continue to hold office in the defaulting company and need their DINs to rectify defaults.

3. Attribution of Default to Specific Directors:

Section 164(2) of CA 2013 disqualifies directors of companies that fail to file financial statements or annual returns for three consecutive financial years. The court examined Rule 14 of the AQD Rules, which requires companies to file Form DIR-9 listing directors during the default period. If not filed, Section 2(60) of CA 2013 applies, defining "officers in default." The court emphasized that attributing default to specific directors necessitates an enquiry, as the criteria for such attribution are not explicitly defined in the statute or rules. The court provided several plausible criteria for determining responsible directors, illustrating the complexity and necessity of prior notice and enquiry.

Conclusion:

The appeals were allowed, setting aside the impugned order and quashing the ROC's publication of the disqualified directors' list and DIN deactivation. The court ordered the reactivation of the appellants' DINs within 30 days and clarified that the ROC could initiate disqualification actions subject to an enquiry to attribute defaults to specific directors.