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2021 (8) TMI 660 - HC - Companies LawDisqualification of directors - directors failed to file financial statements or annual returns for a continuous period of three years - Section 164(2) of Companies Act - HELD THAT - Under Section 164(2) of the new legislation i.e., Act 18 of 2013, no such distinction between a private company or a public company is made and as per the said provision goes to show that no person who is or has been a director of a company , fails to file financial statements or annual returns for any continuous period of three financial years, will not be eligible for appointment as a director of a company. As already noted, the said provision, came into force with effect from 01.04.2014. Coming to the facts on hand, the 2nd respondent has disqualified the petitioners under Section 164(2)(a) of the Act 18 of 2013, for not filing financial statements or annual returns, for period prior to 01.04.2014. The action of the 2nd respondent runs contrary to the circular issued by the Ministry of the Corporate Affairs, and he has given the provisions of Act 18 of 2013, retrospective effect, which is impermissible. Section 164(2)(a) of the Act is a deeming provision and the disqualification envisaged under the said provision comes into force automatically by operation of law on default and Legislature did not provide for issuance of any prior notice, but the respondents notified disqualification even before it incurred, and deactivated DINs, which is illegal arbitrary and against provisions contained in Section 164(2)(a) of the Act. Deactivation of DINs - HELD THAT - Clauses (a) to (f) of Rule 11, provides for the circumstances under which the DIN can be cancelled or deactivated. The said grounds, are different from the ground envisaged under Section 164(2)(a) of the Act. Therefore, for the alleged violation under Section 164 of the Act, DINs cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules. This Court having considered the said submissions is of the considered view that the new amending law also contemplates levying of ₹ 100/- per each day of default and which permits the regularizing the delay of the petitioners. Therefore, this Court is not inclined to accept the said contention of the learned Assistant Solicitor General for the respondents - the deactivation of the DINs of the petitioners for alleged violations under Section 164 of the Act, cannot be sustained. The impugned orders in the writ petitions to the extent of disqualifying the petitioners under Section 164(2)(a) of the Act and deactivation of their DINs, are set aside, and the 2nd respondent is directed to activate the DINs of the petitioners, enabling them to function as Directors other than in strike off companies - Petition allowed.
Issues Involved:
1. Disqualification of directors under Section 164(2) of the Companies Act, 2013. 2. Deactivation of Director Identification Numbers (DINs). 3. Applicability of retrospective effect to Section 164(2)(a) of the Companies Act, 2013. 4. Violation of principles of natural justice. 5. Availability of alternative remedy under Section 252 of the Companies Act, 2013. Issue-Wise Detailed Analysis: 1. Disqualification of Directors under Section 164(2) of the Companies Act, 2013: The petitioners, directors of private companies, were disqualified under Section 164(2) of the Companies Act, 2013, for failing to file financial statements or annual returns for three continuous years. The court noted that Section 164(2)(a) came into force on 01.04.2014 and disqualification should be calculated from this date. The court emphasized that the analogous provision under the Companies Act, 1956, only applied to public companies, not private ones. Therefore, the disqualification of directors for periods before 01.04.2014 was deemed illegal. 2. Deactivation of Director Identification Numbers (DINs): The petitioners contended that their DINs, granted for a lifetime under Rule 10(6) of the Companies (Appointment and Qualification of Directors) Rules, 2014, were deactivated without proper grounds. The court agreed, stating that Rule 11 of the Rules lists specific grounds for cancellation or deactivation of DINs, which do not include disqualification under Section 164 of the Act. Therefore, the deactivation of DINs for the alleged violations was found to be unsustainable. 3. Applicability of Retrospective Effect to Section 164(2)(a) of the Companies Act, 2013: The court referred to General Circular No.08/14 dated 4.4.2014, which clarified that financial statements for periods before 01.04.2014 should be governed by the Companies Act, 1956, and those after by the Companies Act, 2013. The court held that applying Section 164(2)(a) retrospectively was impermissible and contrary to the circular. The judgment in COMMISSIONER OF INCOME TAX (CENTRAL)-I, NEW DELHI v. VATIKA TOWNSHIP PRIVATE LIMITED was cited, emphasizing that legislation is presumed to be prospective unless clearly stated otherwise. 4. Violation of Principles of Natural Justice: The petitioners argued that they were not given notices before their disqualification, violating principles of natural justice. The court noted that Section 164(2)(a) is a deeming provision that does not require prior notice or hearing. The court concurred with judgments from the High Courts of Karnataka and Gujarat, which held that the provision operates by law based on specified circumstances and does not violate natural justice principles. 5. Availability of Alternative Remedy under Section 252 of the Companies Act, 2013: The respondents argued that the petitioners had an alternative remedy under Section 252 of the Act. However, the court clarified that Section 252 pertains to appeals against the dissolution of companies, not the disqualification of directors or deactivation of DINs. Therefore, Section 252 was not an alternative remedy for the petitioners' grievances. Conclusion: The court set aside the impugned orders disqualifying the petitioners under Section 164(2)(a) and deactivating their DINs. The court directed the respondents to activate the DINs, enabling the petitioners to function as directors in companies other than those struck off. The court also clarified that prospective action could be taken for violations post-01.04.2014 and that petitioners could seek alternative remedies under Section 252 for company-related grievances.
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