2022 (2) TMI 1020 - HC - Companies Law

Disqualification of Directors - cessation of office as directors - non-filing balance sheets and annual returns for a continuous period of three years from the year 2014-15 - Section 164 (2) of Companies Act - HELD THAT - To leave the responsibility of filing balance sheet and annual returns on an accountant of company is not only irresponsible but amounts to wilful negligence. It is difficult to accept that, the petitioners are diligent enough in filing Income Tax and GST returns but not Balance Sheets and Annual Returns. The illness of the petitioner No.2 cannot be a reason for not filing return for a continuous period of three years. No proof of evidence of such illness has been disclosed in the petition. It is essentially to deter conduct of this nature that Section 164 (2) and 167 (1)(a) have been introduced and applied under the Companies Act, 2013. Hence even on facts the petitioners have not made out any case for relief. Whether the petitioners were entitled to any prior notice before disqualification under Section 164 (2)? - HELD THAT - It has been held in the case of NARESH KUMAR PODDAR VERSUS UNION OF INDIA, THROUGH SECRETARY, MINISTRY OF CORPORATE AFFAIRS AND ANOTHER 2021 (1) TMI 258 - CALCUTTA HIGH COURT by a Co-ordinate Bench at Paragraph 25 thereof that since the disqualification under Section 164 (2) and 167 (1)(a) is automatic, by operation of law and leaving no discretion on the authorities, the question of application of principle of natural justice particularly prior hearing does not and cannot arise. In GAUTAM MEHRA VERSUS UNION OF INDIA 2021 (1) TMI 350 - CALCUTTA HIGH COURT , Co-ordinate Bench has also held at Paragraph 92 and 93 that Section 164 (2) and 167 (1) (a), do not call for any prior notice or hearing. The object and purpose of Section 164(2) and 167(1) is indeed laudable. It is aimed at ensuring good governance and maintenance of high standards of probity and protection of the interest of Shareholders. Transparency in the activities of Companies is very vital for ensuring an enduring business atmosphere in an economy - This Court is of the view that the object and purposes of Section 164 and 167, as amended is to ensure probity and the highest standard of governance in Companies both public and private. A failure to file balance sheet and the annual returns for three consecutive years amounts to deliberate and wilful negligence. The public at large dealing with such companies cannot be put to the uncertainty, whim and fancy of recalcitrant directors. After all the requirements and compliances mandated under the Companies Act, are not only for the benefit of the shareholders of a particular company but also for the public at large, which rely upon such compliances, in assessing the conduct of and in deciding their relations with such companies. This Court is also of the view that the provisions of the 2013 Act have an overriding effect on the Companies (Appointment and Qualifications of Director) rules of 2014. The said rules can, therefore, not have any manner of application or confer in right on the petitioners, insofar as their disqualification as directors - On the power of the ROC to deactivate the DIN of the petitioners it would be necessary to go into whether the provisos to the two Section 164(2) and 167(1), introduced subsequently by amendment. It is, therefore, held that deactivation of the DIN of the petitioners is not automatic - the DIN of the petitioners shall be revived subject to the company having filed DR-9 within prescribed or extended time. The said DIN shall not be applied to entitle the petitioners to act as directors in any other company. Petition allowed.

Summary

Issues Involved:
1. Denial of benefit under the "Company’s Fresh Start Scheme of 2020".
2. Lack of prior hearing before disqualification, violating principles of Natural Justice.
3. Authority of the Registrar of Companies (ROC) to deactivate Director Identification Numbers (DIN).

Detailed Analysis:

1. Denial of Benefit under the "Company’s Fresh Start Scheme of 2020":
The petitioners argued that they were not allowed to avail the benefits of the “Company’s Fresh Start Scheme of 2020” despite applying by letter dated 11th November 2020. The respondents countered that the scheme was valid only until 31st December 2020, and a subsequent circular dated 15th January 2021 clarified that the scheme was no longer applicable. The court found the petitioners' argument unconvincing, noting that the scheme's expiration was clear and well-documented.

2. Lack of Prior Hearing Before Disqualification:
The petitioners contended that they were not afforded a prior hearing before their disqualification, thus violating the principles of Natural Justice. However, the court referred to previous judgments, including Naresh Kumar Poddar and Gautam Mehra, which held that disqualification under Section 164(2) and 167(1)(a) of the Companies Act, 2013, is automatic and does not require prior notice or hearing. The court emphasized that the language and purpose of these provisions are clear, providing for automatic consequences without exceptions, and thus, the principles of Natural Justice do not apply.

3. Authority of the ROC to Deactivate DIN:
The petitioners challenged the ROC's authority to deactivate their DINs, arguing that such deactivation is not automatic. The court cited the Yashodhara Shroff decision, which clarified that while directors of a defaulting company must vacate their positions in other companies, they can continue in the defaulting company. Therefore, the deactivation of DIN is not automatic and must be reconsidered. The court held that the DINs of the petitioners should be revived, provided the company filed Form DIR-9 within the prescribed or extended time. However, these DINs cannot be used to act as directors in any other company.

Conclusion:
The court dismissed the petitioners' arguments regarding the Fresh Start Scheme and the need for prior hearing. It upheld the automatic nature of disqualification under Sections 164(2) and 167(1)(a) of the Companies Act, 2013, emphasizing the provisions' intent to ensure good governance and protect shareholders' interests. However, it ruled in favor of the petitioners on the issue of DIN deactivation, stating that such deactivation is not automatic and must be reconsidered, subject to compliance with filing requirements. The writ petition was allowed to this limited extent, with no order as to costs.