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2021 (6) TMI 800 - HC - Companies LawDisqualification upon the petitioners for acting as Directors of Companies - Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 - Constitutionality of Section 164 and Section 167 - Section 164 and the Principles of Natural Justice - Section 164(2) whether retrospective - Impact of provisos to Section 164(2) 167(1)(a) - Whether notice under Section 455(4) a sine qua non - Deactivation of DIN whether justified - case of petitioners is that the disqualification is mainly due to personal reasons. Constitutionality of Section 164 and Section 167 - HELD THAT - The disqualification of Directors of a defaulting company for appointment as Directors in other companies, offends Article 19 of the Constitution, it was urged on behalf of the petitioners. The purpose of disqualification of defaulting Directors in other Companies is to make the Directors answerable to the corporate sector. The purpose is to save the corporate community from the consequences of mismanagement. It is intended to increase the standards of corporate governance. It is intended to protect creditors and the general public from mismanagement of Companies. Therefore the provisions Section 164 and Section 167 will fall within the exceptions under Article 19(6). Section 164 and the Principles of Natural Justice - HELD THAT - In the case of non-filing of Annual Returns / Financial Statements by a company, the facts speak for themselves. No amount of explanation can alter the facts. As long as the statute does not provide for any exceptions in the matter of filing of Financial Statements / Annual Returns or in the matter of disqualification under Section 164(2), grant of opportunity of hearing would be nothing but an empty formality. The law imposes a strict liability on Directors - this court hold that the Companies Act, 2013 does not contemplate extension of opportunity of hearing to Directors of a Company while incurring disqualification under Section 164(2), and going by the scheme of the Act the principles of natural justice cannot be read into Section 164(2) or Section 167(1). Section 164(2) whether retrospective - HELD THAT - There was no provision for disqualification of Directors of defaulting private Companies under the Act,1956. Such disqualification of Directors of private Companies was brought into force for the first time by the Act, 2013 with effect from 01.04.2014. Since the disqualification of Directors of defaulting private Companies is brought about for the first time, the provision Section 164(2) must be given only prospective operation and the continuous default period of three years should commence from or after 01.04.2014. This would be especially so because up to 31.03.2014 the provisions of Section 274(1)(g) of the Act,1956 were governing the field - this Court holds that Directors of private Companies cannot be disqualified for appointment / re-appointment as mandated under Section 164(2) if any of such three consecutive defaults in filing Annual Returns/Financial Statements, is before the financial year 2014-'15. Impact of provisos to Section 164(2) 167(1)(a) - HELD THAT - When some of the petitioners herein had to vacate the office on 02.11.2015, it could have been only from the defaulting Company. The legislature, when realised that it would create an anomalous situation where there will be no Directors in a defaulting Company, introduced the proviso to Section 167(1)(a). Taking into consideration the purpose of incorporating the proviso, it should necessarily be given retrospective operation - The proviso however also contemplates that such Directors would vacate the office of Directors in all other Companies. Such a consequence was not contemplated originally under Section 167(1)(a). The proviso if applied retrospectively in its entirety, it would result in some of the petitioner-Directors vacating their offices in other companies retrospectively. Whether notice under Section 455(4) a sine qua non - HELD THAT - Every company which has not filed Financial Statements / Annual Returns for two years cannot be invariably treated as a dormant Company. Companies which are active and having significant financial transactions may fail to file Financial Statements/Annual Returns for two consecutive years. Such companies cannot be treated as dormant Companies for that reason, for the purpose of being included in the Register of dormant Companies. It is evident from Section 455 that the provision is intended for an altogether different purpose. Section 455 cannot be construed as a provision to issue notice to defaulting Companies before their Directors become amenable to disqualification under Section 164(2). This court therefore hold that a notice under Section 455(4) is not a sine qua non for applying the provisions of Section 164(2) or 167. Deactivation of DIN whether justified - HELD THAT - On an analysis of Rules 9 to 11 of the Rules, 2014 the Hon ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan 2020 (10) TMI 595 - MADRAS HIGH COURT has also held that DIN of Directors of a defaulting Company cannot be cancelled or deactivated solely on the basis of disqualification of Directors under Section 164(2). For all the afore reasons, this court hold that the DIN of the petitioners allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014, are not liable to be deactivated or cancelled solely for the reason that the petitioners stand disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2). Striking off and Disqualification - HELD THAT - Section 248 of the Companies Act, 2013 empowers the Registrar of Companies to strike off the name of a Company from the Register of Companies if the Company is not carrying on any business or operation for a period of immediately preceding two financial years and has not made any application within such period for obtaining the status of a dormant Company. Name of defaulting Companies in which some of the petitioners are Directors, have been struck off by the Registrar of Companies and the petitioners have been disqualified for being appointed as Directors in other Companies - Striking off of Companies would not automatically result in disqualification of their Directors. Disqualification would entail only if the conditions in Section 164 are satisfied. The Directors in such cases will have whatever remedies available to them under law, to challenge their disqualification, irrespective of striking off of the Companies from the Register of Companies, because irrespective of striking off of the defaulting Company, their disqualification will subsist for the purpose of their appointment in other Companies.
Issues Involved:
1. Constitutionality of Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013. 2. Application of Principles of Natural Justice to Section 164(2). 3. Retrospective application of Section 164(2). 4. Impact and constitutionality of the first proviso to Section 164(2) and the proviso to Section 167(1)(a). 5. Necessity of notice under Section 455(4) before applying Section 164(2)(a). 6. Justification for deactivation of Director Identification Numbers (DINs). 7. Impact of striking off a defaulted company on disqualified Directors. Detailed Analysis: A. Constitutionality of Section 164 and Section 167: The court held that Sections 164(2) and 167(1) of the Companies Act, 2013 are not ultra vires Articles 14 or 19 of the Constitution of India. It affirmed that the legislative competence of the Union Parliament is beyond doubt and that the petitioners do not have a fundamental right to be Directors of any company. The provisions were found to be reasonable restrictions under Article 19(6) aimed at ensuring transparency in corporate governance and protecting the interests of stakeholders. B. Section 164 and the Principles of Natural Justice: The court ruled that the disqualification under Section 164(2) arises by operation of law and does not necessitate a hearing. The statute does not provide for condonation or waiver of disqualification, and the principles of natural justice cannot be read into these provisions. The court emphasized that the ineligibility is temporary and not perpetual, aligning with the scheme of the Act. C. Section 164(2) whether retrospective: The court held that Section 164(2) is not retrospective. Disqualification can only be based on defaults occurring in the financial year 2014-15 and subsequent years. The court noted that the Act, 2013 brought disqualification of Directors of private companies for the first time, and thus, the continuous default period should commence from or after 01.04.2014. D. Impact of provisos to Section 164(2) & 167(1)(a): The court found the provisos to Section 164(2) and Section 167(1)(a) constitutionally valid and clarificatory in nature, thus applicable retrospectively. However, the words "in all the companies" in the proviso to Section 167(1)(a) will have only prospective operation. This means Directors disqualified before 07.05.2018 will not vacate offices in other companies retrospectively. E. Whether notice under Section 455(4) a sine qua non: The court clarified that Section 455(4) is intended for a different purpose and is not a prerequisite for applying Section 164(2) or 167. The notice under Section 455(4) is to determine if a company is dormant and not for disqualification of Directors. F. Deactivation of DIN whether justified: The court held that the deactivation of DINs of Directors solely based on disqualification under Section 164(2) is not justified. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 does not empower the Registrar to deactivate DINs on this ground. The court directed the reactivation of DINs of the petitioners. G. Striking off and Disqualification: The court noted that striking off a company does not automatically disqualify its Directors. Directors can challenge their disqualification and the striking off of their companies through legal remedies provided under Section 252 of the Act, 2013. Conclusion: The writ petitions were disposed of with several declarations and directions, including the constitutionality of the relevant sections, the non-retrospective application of Section 164(2), the invalidation of disqualifications based on defaults before 01.04.2014, and the reactivation of DINs. The court also clarified the applicability and interpretation of the provisos to Section 164(2) and Section 167(1)(a).
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