Court upholds disqualification under Section 164(2), rejects Section 167(1)(a) retroactivity

The court upheld the inclusion of petitioners in the list of disqualified directors under Section 164(2) but rejected the applicability of Section 167(1)(a) for disqualifications incurred under Section 164(2) before 07.05.2018. The court directed the reactivation of DIN and DSC of the petitioners and clarified that the petitioners would continue to be liable for penalties under the Act. The petitions were disposed of accordingly.

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Issues Involved:
1. Retrospective application of Section 164(2) of the Companies Act, 2013.
2. Violation of principles of natural justice.
3. Interpretation of Section 164(2) regarding disqualification of directors.
4. Application of Section 167(1)(a) concerning vacation of office by disqualified directors.
5. Deactivation of Director Identification Number (DIN) and Digital Signature Certificate (DSC).

Detailed Analysis:

1. Retrospective Application of Section 164(2) of the Companies Act, 2013:
The court addressed whether Section 164(2) operates retrospectively. It was argued that considering defaults in filing financial statements for the financial year ending 31.03.2014 and prior years for imposing disqualification under Section 164(2) amounts to retrospective application. The court noted that Section 164(2) disqualifies directors for defaults in filing financial statements for three consecutive years. The court clarified that the defaults for the financial year ending 31.03.2014 could be considered since the default in holding the AGM and filing returns occurred after Section 164 came into force on 01.04.2014. The court disagreed with the Karnataka, Gujarat, and Madras High Courts, which held that defaults prior to 01.04.2014 could not be considered. The court concluded that Section 164(2) operates prospectively but includes defaults that occurred after its enactment, even if they pertain to earlier financial years.

2. Violation of Principles of Natural Justice:
The petitioners contended that the impugned list of disqualified directors was void as it was published without affording them an opportunity to be heard, violating principles of natural justice. The court held that Section 164(2) merely sets out conditions for disqualification without requiring any decision-making process or discretion by the authorities. Therefore, the rule of audi alteram partem (right to be heard) was inapplicable. The court emphasized that the principles of natural justice are meant to supplement the law to ensure procedural fairness, but they are not applicable when no qualitative decision is required. The court rejected the contention that the impugned list was void due to the violation of natural justice principles.

3. Interpretation of Section 164(2) Regarding Disqualification of Directors:
The petitioners argued that they should not be disqualified from acting as directors of companies that had not defaulted. The court clarified that Section 164(2) disqualifies a director from being reappointed in the defaulting company and from being appointed in any other company. The court rejected the interpretation that "other companies" referred only to non-defaulting companies in which the director was not already serving. The court held that the expression "other company" includes all companies other than the defaulting company.

4. Application of Section 167(1)(a) Concerning Vacation of Office by Disqualified Directors:
The court examined whether directors who incur disqualification under Section 164(2) would vacate their office in all companies under Section 167(1)(a). The court noted that Section 167(1)(a) leads to an absurd situation where all directors of a defaulting company would demit office immediately, making it impossible for the company to appoint new directors. The court concurred with the Bombay High Court's view in Kaynet Finance Limited that Section 167(1)(a) should be read to apply only to disqualifications under Section 164(1). The court held that directors who incurred disqualification under Section 164(2) before 07.05.2018 would not demit their office in other companies. However, after the statutory amendments with effect from 07.05.2018, directors incurring disqualification under Section 164(2) would vacate their office in all companies other than the defaulting company.

5. Deactivation of Director Identification Number (DIN) and Digital Signature Certificate (DSC):
The court addressed the deactivation of DIN and DSC of disqualified directors. The court noted that the provisions pertaining to DIN ensure unique identification for directors and are not meant to be deactivated due to temporary disqualification. The court found no statutory provision supporting the deactivation of DIN and DSC for directors disqualified under Section 164(2). The court directed the respondents to reactivate the DIN and DSC of the petitioners.

Conclusion:
The court upheld the inclusion of petitioners in the list of disqualified directors under Section 164(2) but rejected the applicability of Section 167(1)(a) for disqualifications incurred under Section 164(2) before 07.05.2018. The court directed the reactivation of DIN and DSC of the petitioners and clarified that the petitioners would continue to be liable for penalties under the Act. The petitions were disposed of accordingly.

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