2021 (12) TMI 487 - HC - Companies Law

Disqualification of the petitioners as Directors - Section 164(2)(b) of the Companies Act, 2013 - HELD THAT - As per Section 74(1)(b) of the Act, the Company shall repay, within three years from the commencement of the Act or on or before expiry of the period for which the deposits were accepted, whichever is earlier. The said provision has to be read in context and in conjunction with Section 74(2), which clearly provides that the Tribunal may, on an application made by the Company, after considering the financial condition of the Company, the amount of deposit or part thereof and the interest payable thereon and such other matters, allow further time as considered reasonable to the Company to repay the deposit. In the event of renewal in compliance with the said sub-section, it could not be said that the Company or, for that matter the petitioners, were guilty of any offence within the ambit of Section 164(2)(b) of the Act. The term deposits , as defined in Section 2(31) of the Act, envisages the same to include any receipt of money by way of deposit or loan or in any other form by a Company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India - Sections 73 and 74 of the Act, on the other hand, prohibit acceptance of deposits from the public. Section 74, read in conjunction with Section 73, would have included the money taken by the Company unless, as discussed above, the exemptions were applicable to the withdrawals. In view of the exemption under the 1975 Rules, more specifically Rules 2(b)(ix) and (xi) of the same, no liability within the contemplation of Sections 164 and 167 could have been imposed on the Company and/or the petitioners - the disqualifications envisaged under Section 164 and Section 167 of the Act were not applicable to the petitioners and, as such, the decision disqualifying the petitioners' DIN and the consequential vacation of office were illegal and bad in the eye of law. Petition allowed.

Summary

Issues:
Disqualification of Directors under Section 164(2)(b) of the Companies Act, 2013; Notice prior to disqualification; Interpretation of Section 74 of the Act; Conversion of Company to a private limited company; Applicability of Companies (Acceptance and Deposits) Rules, 2014; Retrospective operation of rules; Liability of Directors post-conversion; Exemptions under rules for deposits; Effect of criminal discharge on disqualification; Repayment of deposits under Section 74; Definition of "deposits" under the Act.

Detailed Analysis:

1. Disqualification of Directors under Section 164(2)(b): The petitioners, as Joint Managing Directors, challenged their disqualification under Section 164(2)(b) of the Companies Act, 2013, arguing that no prior notice was given to them. The court held that individual notice to directors is not a requirement under Section 164, as notice to the Company and Full-Time Director suffices.

2. Interpretation of Section 74 of the Act: The petitioners contended that deposits were not unpaid as they were renewed, citing Section 74(1)(b). The court noted that the Company's conversion to a private limited company did not absolve liabilities incurred previously. The court emphasized that the petitioners, being Directors, could not escape liability for defaults committed by the Company.

3. Applicability of Companies (Acceptance and Deposits) Rules, 2014: The petitioners argued for retrospective application of the 2014 Rules, claiming exemptions under Rule 2(1)(c)(viii) and (xiii). However, the court held that the Rules had prospective operation from April 1, 2014, and the petitioners were entitled to similar exemptions under the 1975 Rules.

4. Effect of criminal discharge on disqualification: The respondents contended that the criminal discharge post-ROC complaint did not impact the disqualification decision. The court agreed, stating that the standard of proof in criminal actions differs from disqualification proceedings.

5. Repayment of deposits under Section 74: The court clarified the provisions of Section 74, emphasizing the Company's obligation to repay deposits within the specified period. Renewal of deposits did not absolve the Company or Directors from liability if defaults were proven.

6. Definition of "deposits" under the Act: Section 2(31) defines "deposits" broadly, encompassing various forms of money receipts by a Company. Sections 73 and 74 restrict acceptance of deposits from the public, subject to prescribed exemptions.

7. Conclusion: The court allowed the writ petition, setting aside the disqualification decision and directing reactivation of the petitioners' DINs. The judgment highlighted the statutory obligations of Directors, liability for Company defaults, and the limited scope of exemptions under the law.