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TMI Blog2020 (10) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... le 14(3) provides for resort to Section 2(60) of CA 2013 - it is evident that the statutory prescription is generic except with regard to the managing director and whole-time director and, consequently, insufficient to fix responsibility and attribute the default to a specific set of directors. As a corollary, an enquiry would be necessary. However, the scope of enquiry under Section 164(2) would vary from that under Section 164(1). In specific, the first question under Section 164(2) would be whether the company concerned has defaulted in fulfilling the obligations specified in Clauses (a) or (b). As regards Section 164(2)(a), the learned ASGI contended that this determination would be fairly straight forward. While this contention has some basis, such determination may not necessarily be devoid of challenge as would be evident from the following. As per the proviso to Section 96 (1) of CA 2013, the first annual general meeting (AGM) may be held by a company within nine months from the last date of the preceding financial year and the subsequent AGM s within six months from the last date of the preceding financial year. The time limit for filing the financial statements runs from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. C.V. Shailandhran in W.A. No.721 of 2020 For Respondents: Mr. R. Sankaranarayanan, ASG., assisted by Mr. S. Janarthanam, SPC for R1&R2 in all WAs COMMON JUDGMENT SENTHIL KUMAR RAMAMOORTHY J., This batch of writ appeals arise out of a common order dated 27.01.2020 whereby the separate writ petitions filed by each Appellant herein to quash the respective disqualification by the Registrar of Companies (the ROC) and for consequential reactivation of the Director Identification Number (DIN) or permission for appointment/reappointment as director were dismissed. 2. The Companies Act, 2013 (CA 2013) deals with disqualifications for appointment as a director in Section 164 which came into force on 01.04.2014. Section 164(1) thereof sets out eight grounds of disqualification that are individual director-specific and broadly corresponds to Section 274(1)(a)-(f) of the earlier Companies Act, 1956 (CA 1956). Section 164(2), which bears some resemblance to Section 274(1)(g) of CA 1956 but is wider in scope, on the other hand, deals with default by the company concerned in fulfilling its obligations and the attribution of such default to the directors, thereby resulting in their disqua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions by pointing out that disqualification of directors is provided for and dealt with in Section 164 of the CA 2013. Section 164(1) deals with disqualification for appointment as a director on account of factors such as a declaration that the person concerned is: of unsound mind; an undischarged insolvent; has applied to be adjudicated as an insolvent; has been convicted of an offence and sentenced in respect thereof to imprisonment for not less than six months, etc. He pointed out that Section 164(1) broadly corresponds to Section 274(1)(a)-(f) of the erstwhile CA 1956. However, Section 164(2) is wider than Section 274(1)(g) of CA 1956 and came into effect on 01.04.2014. Section 164(2) provides that no person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years or has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared within a maximum period of one year shall be re-appointed as a director of that company (the Defaulting Company) or appointed in any other compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification under Section 164(2) by filing Form DIR-8 before he/she is appointed or re-appointed, respectively, as a director of any other company or by the Defaulting Company. By referring to Rule 14(2), he submitted that the company is required to file Form DIR-9 with the ROC immediately upon the commission of a default in complying with Section 164(2)(a) or (b) by providing the names and addresses of all the directors of the company during the relevant financial years. If the company fails to file Form DIR-9 within a period of 30 days from the date of default, the disqualification under Section 164(2) would become applicable as stipulated in Rule 14(3). 9. Therefore, Mr.Aravind Pandian contended that the ROC enters the picture only if there is default by the company concerned to file Form DIR-9 within the stipulated 30 day period of default. Consequently, the action of the ROC in publishing the list of disqualified directors is without jurisdiction, in these cases, because neither the director concerned nor the company concerned had filed Form DIR 8 or 9, respectively. In support of this contention, he relied upon the judgment of the Gujarat High Court dated 18.12.2018 in Gaurang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, the DIN may be cancelled or surrendered or deactivated only in the following four individual director-specific situations, namely, if the individual concerned: dies; or has been declared to be unsound mind; or has been adjudicated an insolvent; or if the holder of the DIN applies to surrender the DIN on the basis that he/she has never been appointed as a director in any company and the said DIN was never used for filing a document with any authority. 12. Thus, he contended that Rule 11 does not empower the ROC to deactivate the DIN in the present circumstances. The deactivation of the DIN was considered by three High Courts, namely, the High Courts of Delhi, Gujarat and Karnataka. In Gourang Balvantlal Shah, the Gujarat High Court concluded that the DIN could not be cancelled or deactivated merely because one of the companies in which such person was a director had been struck off from the Registrar of Companies under Section 248 of CA 2013. In Yashodhara Shroff and Others v. Union of India, order dated 12.06.2019 (Yashodara Shroff), the Karnataka High Court concluded that Section 164(2) of CA 2013 applies prospectively and not retrospectively and, on that basis, directed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ran had been disqualified for a period of six years running from 01.11.2016 to 31.10.2022 which exceeds the statutory period of five years. 15. His next contention was that the ROC does not have the power to deactivate the DIN for reasons cited earlier by Mr.Aravind Pandian. He further submitted that the principles of natural justice were violated by not providing a prior notice to the directors who were declared as disqualified. His next contention was that the ROC does not have the power either to publish the list of disqualified directors or to deactivate the DIN. In support of this contention, he referred to the Companies [Registration Offices and Fees] Rules, 2014 and, in particular, to Rules 5 and 11 thereof. Rule 5 deals with the powers and duties of registrars. This Rule empowers registrars to exercise such powers and discharge such duties as are conferred on them by the CA 2013 or the rules made thereunder or delegated to them by the Central Government. However, neither under CA 2013 nor under any rules framed pursuant thereto, registrars are empowered to either publish a list of disqualified directors or to deactivate the DIN. Rule 11 of the aforesaid Rules deals specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders informed about the affairs of the company. In effect, his contention is that filing these financial statements and annual returns are of paramount importance inasmuch as constructive notice of the affairs of the company concerned is thereby provided to all stakeholders by filing and making available these critical documents in the public domain. According to him, Section 164(2) was introduced so as to ensure that this obligation is fulfilled by companies in public interest. 17. His second contention was that the grounds of disqualification under Section 164(1) of CA 2013 are personal to the director concerned and may require a verification of material facts and circumstances. Therefore, before it is determined that a director is disqualified under Section 164(1), a prior notice may be required so as to verify the relevant material facts. By contrast, Section 164(2) does not require such prior verification. In order to substantiate this contention, he pointed out that the financial statements and annual returns are required to be filed with the ROC by the company concerned. Therefore, the ROC is fully aware as to whether such financial statements and annual returns have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancelled or deactivated on any other ground. 18. By drawing reference to Rule 14 of the said Rule, he contended that Rule 14(2) makes it obligatory on the company concerned to file DIR 9 with the ROC along with the names and addresses of all the directors of the company during the relevant financial years. Therefore, the ROC would have all the relevant information to publish the list of disqualified directors and to deactivate the DIN of such directors. Consequently, the prior notice requirement would be an empty formality. 19. His next contention was that several opportunities were provided to defaulting companies and their directors by launching schemes to condone delay and for rectification. In this connection, he referred to the Company Law Settlement Scheme 2014 dated 12.08.2014 and to the Condonation of Delay Scheme 2018 dated 29.12.2017. By relying upon the aforesaid Schemes, he pointed out that defaulting companies and their directors had sufficient opportunity to rectify or cure these defects. Unfortunately, in spite of such opportunities, these companies and directors failed to take necessary action to ensure compliance. In these facts and circumstances, the publication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because it cannot be filed until the disqualification period ends. He finally submitted that CA 2013 and the rules framed thereunder do not contain any provision for adjudication in case of such disqualification. In effect, there is no remedy for disqualified directors either in respect of their disqualification or in respect of deactivation of DIN. 22. We considered the submissions of the learned senior counsel/learned counsel for the respective parties and examined the materials on record. 23. The first question that arises for consideration is whether a prior notice is required before disqualifying a director under Section 164(2) of CA 2013. In order to answer this question, it is necessary to examine the text of Section 164 of CA 2013. Section 164 is as under: "164. Disqualifications for appointment of director (1) A person shall not be eligible for appointment as a director of a company, if - (a) he is of unsound mind and stands so declared by a competent court; (b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a court of any offence, whether involving moral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(1) which, after the amendment with effect from 07.05.2018, is as under: 167. Vacation of office of director (1) The office of a director shall become vacant in case - (a) he incurs any of the disqualifications specified in section 164 (emphasis added); Provided that where he incurs disqualification under subsection (2) of Section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section. (b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board; (c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested; (d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184; (e) he becomes disqualified by an order of a court or the Tribunal; (f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific directors. This raises the question as to whether CA 2013 or the rules framed thereunder contain the criteria for such attribution of responsibility for default. The only guidance that Section 164(2) contains is that such disqualification could apply either to a current or former director of the Defaulting Company as is evident from the phrase "person who is or has been a director" in Section 164(2). We should, therefore, turn to the AQD Rules to ascertain whether it is possible, on that basis, to identify the directors who would incur disqualification under Section 164(2). Rule 14 of the AQD Rules is as under: "Rule 14: Disqualification of directors under sub-section (2) of section 164: (1) Every director shall inform to the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed. (2) Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime director; key managerial personnel; where there is no key managerial personnel, every specified director or every director if not so specified; or every director who is aware of the contravention by virtue of receipt of or participation in board proceedings or if the contravention has taken place with his consent or connivance. From the cases that emanated from Section 5 of CA 1956, which dealt with "an officer who is in default", it is evident that the application of Section 2(60) of CA 2013 to a set of specific directors, even in the context of Section 164(2), would not be devoid of dispute and contest. 28. When Section 164(2) of CA 2013 is read with Rule 14 of the AQD Rules, it appears that, if Form DIR-9 is filed, the Registrar of Companies could rely on the names and addresses of directors that were provided by the Defaulting Company. Such reliance may not, however, be bereft of controversy especially when neither statute nor rule sets out the criteria for the preparation of such list. In any event, in all the cases at hand, such a list was not provided because the Defaulting Company did not file DIR-9. In such case, Rule 14(3) provides for resort to Section 2(6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation period runs from 01.11.201631.10.2022. The following details are available in the disqualification list : ROC details; name and DIN of the director; the name and Company Identification Number (CIN) of the company; whether the company is active or struck-off; whether the director is disqualified; and the period of disqualification. The criteria on which the disqualified list of directors was prepared is unavailable and even the default period is conspicuously absent. From the limited information on record, by inferential reasoning, except in the appeal filed by Mr.Muralidharan, it appears that the financial years 2014-15 to 2016-17, i.e. a block of three consecutive financial years, were reckoned for this purpose. All these years relate to the period after the entry into force of Section 164 of CA 2013. Nevertheless, the matter does not rest there. Once such determination is made, the next question would be as to who were the directors of the company concerned during the relevant period. This is a much more complicated issue to determine in the absence of clear statutory stipulation. 30. The reasons why this question is complicated should be discussed now, and for this purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company whose financial year ends on 31st March can hold its AGM on or before 30th September of that year. The time limit for filing the annual returns runs from the date of AGM and the prescribed time limit is sixty days therefrom. Consequently, the annual return can be filed on or before 30th November of the relevant year. Thus, in order to determine as to who were the directors during the relevant time, once again, several options are available. By way of illustration, the plausible criteria to decide on attribution could be any of the following: (i) All directors who held office throughout the period from 01.04.2014 to 30.11.2017; (ii) All directors who held office throughout the period from 01.04.2014 to 31.03.2017; (iii) All directors who held office at any time during the period 01.04.2014 to 30.11.2017; (iv) All directors who held office at any time during the period 01.04.2014 to 31.03.2017; or (v) All directors who held office on 30.11.2018. In the second illustration above, if certain directors had resigned prior to 30.11.2017, they would have an arguable case to contend that they should not incur disqualification because they could have made good the defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ROC is entitled to deactivate the DIN. For this purpose, it is necessary to closely examine the relevant rules. Rules 9, 10 and 11 of the AQD Rules are as under: Rule-9: "9. Application for allotment of Director Identification Number:-- (1) Every individual, who is to be appointed as director of a company shall make an application electronically in Form DIR-3, to the Central Government for the allotment of a Director Identification Number (DIN) along with such fees as provided in the Companies (Registration Offices and Fees) Rules, 2014. (2) The Central Government shall provide an electronic system to facilitate submission of application for the allotment of DIN through the portal on the website of the Ministry of Corporate Affairs. (3) (a) The applicant shall download Form DIR-3 from the portal, fill in the required particulars sought there in and sign the form and after attaching copies of the following documents, scam and file the entire set of documents electronically-- (i) photograph; (ii) proof of identity; (iii) proof of residence; (iv) verification by the applicant for applying for allotment of DIN in Form DIR-4; and (v) specimen signature duly verified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Numbers allotted to individual(s) by the Central Government before the commencement of these rules shall be deemed to have been allotted to them under these rules. (6) The Director Identification Number so allotted under these rules is valid for the life-time of the applicant and shall not be allotted to any other person. Rule - 11. Cancellation or surrender or Deactivation of DIN:- The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received from any person, cancel or deactivate the DIN in case-- (a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number; (b)(b) the DIN was obtained in a wrongful manner or by fraudulent means; (c) of the death of the concerned individual; (d) the concerned individual has been declared as a person of unsound mind by a competent Court; (e) if the concerned individual has been adjudicated an insolvent: Provided that before cancellation or deactivation of DIN pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any A, in the above example, would be required to retain the DIN so as to make good the deficiency by filing the respective documents. Thus, apart from the fact that the AQD Rules do not empower the ROC to deactivate the DIN, we find that such deactivation would also be contrary to Section 164(2) read with 167(1) of CA 2013 inasmuch as the person concerned would continue to be a director of the Defaulting Company. 37. In light of the above analysis, we concur with the views of the Delhi High Court in Mukut Pathak, the Allahabad High Court in Jai Shankar Agrahari and the Gujarat High Court in Gaurang Balvantlal Shah to the effect that the ROC is not empowered to deactivate the DIN under the relevant rules. In Yashodhara Shroff, the Karnataka High Court upheld the constitutionality of Section 164(2) and proceeded to hold that a prior or post decisional hearing is not necessary. For reasons detailed in preceding paragraphs, we disagree with the view of the Karnataka High Court that prior notice is not required under Section 164(2) of CA 2013. 38. In the result, these appeals are allowed by setting aside the impugned order dated 27.01.2020. Consequently, the publication of the list o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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