2021 (1) TMI 258 - HC - Companies Law

Disqualification of Director - deactivation of DIN - effect of Section 164(2)(a) and the proviso to Section 167(1)(a), as introduced by the 2014 Amendment, prospective, retrospective or retroactive in nature. Whether there is any scope for giving opportunity to the defaulting company or its directors to represent against the disqualification under Section 164, read with Section 167 of the 2013 Act? - HELD THAT - A clear reading of Section 164(2) and Section 167(1)(a), both with the corresponding provisos (as amended) leaves no scope of any discretion on the part of the authorities in case of a company incurring the defaults as contemplated therein. It is well-settled that the rules of natural justice can only be applied if an opportunity of hearing/representation is of relevance and affects the outcome of the procedure. In the absence of any discretion of the authorities, since the disqualification under the said sections is automatic on the perpetration of the defaults contemplated therein, an opportunity of representation/hearing to the defaulter would merely be an exercise in futility. Thus, question (ii) as formulated above, is answered in the negative. Whether Section 164(2)(a), as introduced by the 2014 Amendment and the proviso to Section 167(1)(a), as introduced by the 2018 Amendment, are prospective, retrospective or retroactive in nature - HELD THAT - The noncompliance of the provisions regarding filing/submission of annual returns and financial statements by a company, as envisaged in Sections 92 and 137 of the 2013 Act, shall result in pecuniary fines as penalty; nothing more, nothing less - However, the scenario has completely changed with the introduction of the 2014 Amendment to Section 164(2), with effect from April 1, 2014. The directors of a defaulting company now become liable, for contravention of Sections 92 and 137, to ineligibility for re-appointment as a director of that company or appointment in any other company for a period of five years from the date of default. This consequence has been newly-introduced and had no parallel in the 2013 Act or, for that matter, in the 1956 Act. Similarly, before the amendment to Section 167(1)(a) by way of a proviso, with effect from May 7, 2018, there was no provision in the 2013 or 1956 Act which automatically vacated the office of the director in all companies other than the defaulting company in case a director incurs disqualification under sub-section (2) of Section 164. The unorganized or non-corporate sector holds sway over a major chunk of the economy of developing countries, including India, primarily in the manufacturing and production domains, apart from tourism and partially in trading. The capital incentives gained by the corporate sector is off-set by the implicit advantages available to the unorganized sector, since the latter is unfettered with several liabilities with regard to revenue, capital, adherence to the industrial and labour laws and manipulation of resources. While the corporate sector has to pay higher interest and viably stick to corporate laws and labour laws, the unorganized sector thrives on exploitation of means and people. This has a direct effect on the business of the corporate sector, in particular small operators and private limited companies, barring a few eminent and resourceful ones - In the absence of any requirement of adherence to the principles of natural justice or any scope of discretion in applying the amended provisions of Sections 164 and 167 of the 2013 Act, there is no scope for the authorities to consider the reason behind defaults and desist from disqualifying the directors if necessary. This lack of discretion in the matter of disqualification operates directly to the detriment of corporate functioning of the small and medium corporate operators. The fall-out of retrospective operation of the amendments is fatal to small and medium businesses, which still comprise the backbone of the economy. There can be umpteen reasons, arising from the inherent disadvantages of functioning befalling private limited companies and small corporate units, which might result in unintentional contravention of Sections 92 and 137 of the 2013 Act. It cannot but be held that the operation of the 2014 and 2018 Amendments to the 2013 Act are prospective in nature - To be specific, the amendment to Section 164(2), with effect from April 1, 2014 has to be applied prospectively. The three-year default contemplated therein has to commence from the financial year 2014- 2015 (April 1, 2014 - March 31, 2015) and end in the financial year 2016-2017 (ending on March 31, 2017). As far as the amended proviso to Section 167(1)(a) of the 2013 Act is concerned, the operation of such proviso has also to be construed prospectively by applying it to companies in default of Sections 92 and 137 of the 2013 Act only after May 7, 2018. On a conjoint reading of the provisions in proper perspective, the distilled effect is that, the DIN of directors of defaulting companies can only be deactivated for violations of Sections 92 and 137 of the 2013 Act commencing from April 1, 2014 and such disqualification shall extend to other companies than the defaulting company, as envisaged in the amended proviso to Section 167(1)(a), only in case the default takes place post-May 7, 2018. Needless to mention, the deactivation of DIN for violation of pre-existing Company Rules, framed under the 2013 Act, can happen within the limited scope of such Rules only, and not on blanket non-compliance of Sections 92 and 137 of the 2013 Act. The question is thus answered to the effect that Section 164(2)(a), as introduced by the 2014 Amendment, and the proviso to Section 167(1)(a), as introduced by the 2018 Amendment, to the 2013 Act are prospective in operation. Petition allowed.

Summary

Issues Involved:
1. The retrospective application of Section 164(2) and the proviso to Section 167(1)(a) of the Companies Act, 2013.
2. The necessity of providing an opportunity for representation against disqualification under Section 164, read with Section 167 of the Companies Act, 2013.

Detailed Analysis:

Issue 1: Retrospective Application of Section 164(2) and Proviso to Section 167(1)(a)
The petitioner argued that Section 164(2) of the Companies Act, 2013, which came into force on April 1, 2014, should be applied prospectively. Therefore, the three financial years for which non-filing would make the petitioner liable should commence from April 1, 2014. The relevant financial years would be 2014-2015, 2015-2016, and 2016-2017. Consequently, the deactivation of the Director Identification Number (DIN) on November 1, 2016, was illegal. The petitioner also contended that the last date for filing financial statements for the third financial year was October 30, 2017, and hence, no disqualification should arise before this period.

The respondent countered that the provisions of Section 164(2)(a) and Section 167(1)(a) are disqualifying and not penal, thus retrospective in nature. They argued that the disqualification is automatic and does not require any adjudicatory hearing. The court examined various provisions of the Companies Act, 2013, including Sections 92, 96, 137, and 403, which deal with the filing of annual returns and financial statements. It was noted that non-compliance results in pecuniary penalties.

The court highlighted that the 2014 Amendment to Section 164(2) introduced a new consequence—disqualification for re-appointment as a director for five years, which did not exist in the 2013 Act or the 1956 Act. Similarly, the 2018 Amendment to Section 167(1)(a) introduced automatic vacation of office in all companies other than the defaulting company. The court concluded that these amendments are penal in nature and affect the fundamental right under Article 19(g) of the Constitution of India, making them disproportionate and unreasonable if applied retrospectively.

The court held that the amendments are prospective, with the three-year default period commencing from the financial year 2014-2015 and the disqualification extending to other companies only for defaults post-May 7, 2018.

Issue 2: Opportunity for Representation Against Disqualification
The court examined whether there is any scope for giving an opportunity to the defaulting company or its directors to represent against the disqualification under Section 164, read with Section 167 of the Companies Act, 2013. It was concluded that the disqualification under these sections is automatic upon default, leaving no discretion for the authorities. Therefore, providing an opportunity for representation would be futile. The court emphasized that the rules of natural justice apply only if an opportunity of hearing affects the outcome, which is not the case here.

Conclusion:
The court concluded that Section 164(2)(a) and the proviso to Section 167(1)(a) of the Companies Act, 2013, are prospective in operation. The three-year default period under Section 164(2) starts from the financial year 2014-2015, and the disqualification extends to other companies only for defaults occurring after May 7, 2018. Consequently, the deactivation of the petitioner's DIN by the notice dated April 7, 2017, was set aside. The writ petition was allowed with no order as to costs.