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TMI Blog2021 (6) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 disqual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47/2017, 35810/2017, 36410/2017, 8074/2018, 9513/2018, 9818/2018, 10932/2018, 12998/2018, 18319/2018, 20135/2018, 20348/2018, 23327/2018, 24984/2018, 31541/2018, 32916/2018, 36842/2018, 41201/2018, 41664/2018, 664/2019, 1569/2019, 1583/2019, 1619/2019, 1620/2019, 1898/2019, 1909/2019, 3242/2019, 3730/2019, 5622/2019, 5698/2019, 5999/2019, 6306/2019, 6315/2019, 6321/2019, 6678/2019, 7292/2019, 7317/2019, 7682/2019, 7789/2019, 7847/2019, 7962/2019, 8193/2019, 8443/2019, 8645/2019, 8997/2019, 9317/2019, 9338/2019, 9369/2019, 9550/2019, 10051/2019, 11823/2019, 12032/2019, 12097/2019, 12191/2019, 12422/2019, 12531/2019, 12581/2019, 12628/2019, 12632/2019, 12644/2019, 12648/2019, 12685/2019, 12706/2019, 12798/2019, 12853/2019, 13224/2019, 13245/2019, 13313/2019, 13330/2019, 13356/2019, 13613/2019, 13940/2019, 14062/2019, 14106/2019, 14195/2019, 14257/2019, 14617/2019, 14727/2019, 15055/2019, 15063/2019, 15146/2019, 15248/2019, 15667/2019, 15674/2019, 15721/2019, 16036/2019, 16156/2019, 16230/2019, 16235/2019, 16248/2019, 16424/2019, 16512/2019, 16858/2019, 17194/2019, 17220/2019, 17364/2019, 17984/2019, 18316/2019, 18395/2019, 18405/2019, 18584/2019, 18729/2019, 18760/2019, 18971/2019, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggestions of the stakeholders. The revised Bill, namely, the Companies Bill, 2011 made provisions for E-Governance, Corporate Social Responsibility and Enhanced Accountability on the part of Companies. The Companies Act, 2013 was given assent by the President of India on 29.08.2013. 4. Section 274 of the repealed Companies Act, 1956 laid down certain disqualifications for being appointed as Directors of Companies. Persons of unsound mind, Undischarged insolvent and persons convicted for offences involving moral turpitude and sentenced for imprisonment for not less than six months, were disqualified. Directors of Public Limited Companies which have not filed Annual returns for any continuous three financial years or which have failed to pay deposits or interest thereon on due dates or redeem debentures on due dates or pay dividends for one year or more, were also disqualified. 5. Section 164 of the Companies Act, 2013 (corresponding to Section 274 of the Act, 1956) made the disqualification on failure to file Annual returns, applicable to Directors of all Companies including Private Limited Companies. It is this sweeping change, which has given rise to these litigations. Before dwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a copy of the annual return on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board's report. (4) Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed[***]. (5) If a company fails to file its annual return under subsection (4), before the expiry of the period specified [therein], such company and its every officer who is in default shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default. (6) If a company secretary in practice certifies the annual return otherwise than in conformity with the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its financial statement under sub-section (2): Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed: Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.] (4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3). (5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation. (6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or (h) he has not complied with sub-section (3) of section 152. (2) No person who is or has been a director of a company which- (a) has not filed financial statements or annual returns for any continuous period of three financial years; or (b) 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 and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.] * [Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.] (3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2): [Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or associate company, ceases to hold such office or other employment in that company. (2) If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. (3) Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting. (4) A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1). [ * inserted by the Companies (Amendment) Act, 2017, w.e.f. 07.05.2018 ] The first proviso to Section 164(2) and the provisos to Section 167(1)(a) were inserted subsequently by the Companies (Amendment) Act, 2017 with effect from 07.05.2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. It was contended that the notice under Section 455(4) should be treated as a mandatory requirement and without issuing a notice under Section 455(4), the disqualification prescribed under Section 164(2)(a) cannot come into effect. 11. The petitioners further urged that under Section 248, if a Company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company, the Registrar has the power to remove the name of the Company from the Register of Companies. As Section 248 can be invoked against any Company, disqualifying the Directors without notice, is arbitrary. As the Directors have no remedy against the disqualification under Section 164(2), except under Article 226 of the Constitution, principles of natural justice / audi alteram partem should necessarily be read into Section 164. 12. The petitioners argued that the Act, 2013 has only prospective operation. Therefore Sections 164(2) cannot be applied retrospectively. In other words, only the financial years post-01.04.2014 can be considered to decide whether there is consecutive three yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no question of issuing a prior notice or following the principles of natural justice. 17. The respondents stated that the provisions of section 92(4) as it stood prior to 2017 and subsequent to 2017 Amendment categorically states that annual returns/financial statements shall be filed within 60 days from the date of annual general meeting. So also, section 137(1) categorically stipulates that a financial statement shall be filed with the Registrar of Companies within 30 days of the respective Annual General meeting. What is stipulated as per sub-section (1) of Section 403 is also that the same have to be filed within the time specified in the relevant provision. 18. The respondents reiterated that since the provisions contemplate automatic vacating of office of the Director and the provisions of the law do not envisage any adjudicatory proceedings, there is no question of issuing show cause notice to the Directors before their incurring disqualification. The disqualification from the Directorship is well within the knowledge of the Company and its Board of Directors. Ignorance of law cannot be taken as a plea by the petitioners. Since the period of disqualification is fiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al justice cannot be dispensed with and it should be read into the provisions. The learned counsel pointed out that in the judgment in State Bank of Patiala and others v. S.K.Sharma [(1996) 3 SCC 364], the Hon ble Apex Court has held that while applying the principles of audi alteram partem, the court must always bear in mind the ultimate and overriding objective viz., to ensure a fair hearing and and to ensure that there is no failure of justice. 22. Based on the judgment of the Apex Court in S.L.Kapoor v. Jagmohan and others [(1980) 4 SCC 379], the learned counsel urged that the person proceeded against must know that he is being required to meet the allegations which might lead to a certain action being taken against him and the requirement of natural justice would be met only if that is made known to the person. 23. Sri. Shameem Ahmed, learned counsel appearing for petitioners relied on the judgment in Meethelaveetil Kaitheri Muralidharan and others v. Union of India and others [(2020) 7 MLJ 641] to urge that there can be divergent views on the exact period of default in filing Financial Statements and Annual Reports and hence principles of natural justice cannot be dispensed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t disqualifying Directors for alleged violation of section 164 of the Companies Act in other non-defaulting Companies, would go against the settled principles of Legitimate Expectation. 27. The counsel, placing reliance on the judgment in Narmada Bachao Andolan and others v. State of Madhya Pradesh and others [(2011) 7 SCC 639], urged that where the language of a statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or justice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. An interpretation having a social justice mandate is warranted under the circumstances of the case, contended the counsel. The court has to take a pragmatic view while interpreting Sections 164 and 167. Any interpretation which eludes or frustrates the recipient of justice is not to be followed. 28. Counsel for the petitioners Ms. Ramola Nayanpalli argued that the court has to interpret Sections 164 and 167 giving them a construction agreeable to reason and justice. The interpretation so giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tements giving a true and fair view of the state of affairs of a Company is mandatory under Section 129. 33. These provisions are incorporated in the Act, 2013 in order to ensure transparency in corporate governance. When the Directors who are at the helm of affairs of a Company are aware of the statutory requirement of preparation and filing of Annual Returns and Financial Statements, and the gravity and consequences of non-filing, then, failure of such Directors to ensure in three consecutive years that the Returns and Statements are duly filed by the Company, should be taken seriously and such Directors cannot be permitted to continue as Directors. The disqualification should be extended to other companies also where such irresponsible Directors are in office. Only such extreme steps would ensure prompt compliance of statutory requirements, which are intended to protect the interests of all stakeholders, contended the learned Assistant Solicitor General of India. 34. Sri. M.N. Manmadan, learned Central Government Counsel representing the Union of India and other respondents in W.P.(C) No.6321/2021, argued that the object of Sections 164 and 167 is to protect shareholders money. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 164 and 167 of the Act, 2013 are serious and grossly disproportionate and hence the provisions are arbitrary, offending Article 14. It is well settled that if a constitutional infirmity is found on the touchstone of Article 14, the legislation is manifestly arbitrary . Arbitrariness in legislation is also a facet of unreasonableness. At the same time, the Hon ble Apex Court has held in Dr. Subramanian Swamy v. Director, Central Bureau of Investigation [(2005) 2 SCC 317] that a court considering the validity of a legislation must be mindful that a legislation does not become unconstitutional merely because there is another view or because there is another method which may be considered to be as good or even more effective. The courts cannot substitute their views on what a policy is. 38. In this context, it has to be kept in mind that one of the important purposes for enacting the Act, 2013 is to bring transparency in corporate governance. Financial disclosure is a critical component of effective corporate governance. Filing of Financial Statements and Annual Returns by incorporated entities at regular and stipulated intervals, is crucial to ensure transparency. Section 166 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept the argument of the petitioners that Sections 164 and 167 are arbitrary, offending the right of the petitioners under Article 14. 42. 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). 43. The Hon ble High Court of Karnataka in Yashodhara Shroff v. Union of India [2019 SCC OnLine Kar 682] considered the constitutional validity of Sections 164 and 167 and held that the provisions are not ultra vires Article 14 and / or Article 19(1)(g) of the Constitution of India. For the reasons stated herein above, this Court concur with the judgment in Yashodhara Shroff (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Furthermore, as held by the Hon ble Karnataka High Court in Yashodhara Shroff (supra), the ineligibility of Directors under Section 164 is in the nature of suspension and is temporary, for a period of five years, and not perpetual. 49. For all the afore reasons, 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). C. Section 164(2) whether retrospective 50. The petitioners urged that since the Sections 164(2) and 167(1) were brought into statute book only with effect from 01.04.2014, the continuous three years period of default should commence only from 01.04.2014 and the relevant years should be 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior to the enforcement of the law. This is because when the material period of three continuous financial years is to be reckoned, no period prior to 01.04.2014 can be taken into consideration as and when such a period and commenced the new law with different consequences were not envisaged. This is different from applying the new law to an event which is a past, concluded one prior to the enforcement of the new law as the same could be taken into consideration. In such a case, the law is being applied retroactively and not retrospectively, which is permissible. 55. In view of the reasons stated above, 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. D. Impact of provisos to Section 164(2) 167(1)(a) 56. Two provisos were inserted below Subsection (2) of Section 164 of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from 07.05.2018. Prior to the insertion of the first proviso to Section 164(2), Director of a defaulting Company was ineligible t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the defaulting Companies, but would vacate Directorship in all other Companies in which they are Directors. Whether proviso to Section 167(1)(a) has retrospective effect, is the question. 60. Section 167(1)(a) provides that the office of the Director shall become vacant in case he incurs any disqualification specified in Section 164 of the Act. The proviso applies to disqualification under Section 164(2) also. The purpose of Section 167(1)(a) is to bring in a higher degree of responsibility in corporate governance. Proviso is intended to make Directors of defaulting companies to continue to hold office in the defaulting companies, but at the same time to vacate them from the office of Directors in all other Companies. Therefore the proviso should be construed as clarificatory in nature and should relate back. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect. (3) The Registrar shall maintain a register of dormant companies in such form as may be prescribed. (4) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies. (5) A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed. (6) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section. 62. The provision is primarily intended to apply to Companies formed and registered for a future project or to hold an asset or intellectual property and have no significant financial transaction and also to an inactive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company concerned about his/her disqualification under 164(2) by filing Form DIR-8 before he/she is appointed or reappointed, respectively as a Director of any other company or by the defaulting company. Under Rule 14(2) the company is required to file Form DIR-9 with the Registrar immediately upon commission of 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 the default, the disqualification under Section 164(2) would become applicable as provided in Rule 14(3). 67. The counsel for the petitioners argued that deactivation of DIN for the sole reason that a Director is temporarily disqualified to hold office, under Section 164(2), is impermissible. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the cancellation or surrender of or deactivation of DIN. The Rule enables deactivation or cancellation only under the circumstances specified therein. 68. The counsel for petitioners pointed out that the Hon ble High Court of Gujarat has considered the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC [or the web service DIR- 3 - KYC-WEB] within stipulated time in accordance with Rule 12A. (3) The de-activated DIN shall be re-activated only after e-form DIR-3-KYC [or the web service DIR-3-KYC-WEB] is filed along with fee as prescribed under Companies (Registration Offices and Fees) Rules, 2014.] Explanation . - For the purposes of clause (b)- (i) the term wrongful manner means if the DIN is obtained on the strength of documents which are not legally valid or incomplete documents are furnished or on suppression of material information or on the basis of wrong certification or by making misleading or false information or by misrepresentation; (ii) the term fraudulent means means if the DIN is obtained with an intent to deceive any other person or any authority including the Central Government. From the Rule 11, it is evident that the Rule does not empower any authority to cancel or deactivate DIN upon disqualification under Section 164(2). Cancellation or deactivation is contemplated only where the DIN is found to be duplicated or it was obtained in a wrongful manner or by fraudulent means or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the proceedings are of no consequence. 74. The petitioner and their Companies in such cases have a remedy for challenging striking off, under Section 252 of the Act, 2013 before the National Company Law Tribunal (NCLT). 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. 75. In the result, the writ petitions are disposed of with the following declarations and directions: 1. Section 164(2) and Section 167(1) of the Companies Act, 2013 are not ultra vires Article 14 or Article 19(1)(g) of the Constitution of India. 2. Disqualification of the petitioners under Section 164(2) of the Companies Act, 2013 is by operation of law and the petitioners are not entitled to any opportunity of hearing in the matter. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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