Court Rules on Applicability of Companies Act Section 164(2)

The Court ruled on the applicability of Section 164(2) of the Companies Act, 2013, determining that disqualification would commence from the financial year 2014-15 onwards. It upheld the constitutionality of the provision under Articles 14 and 19(1)(g) of the Constitution, finding it reasonable for ensuring good corporate governance. While principles of natural justice are not required before disqualification, the Court emphasized the need to establish the factual basis and provide notice to contest the disqualification. Regarding the deactivation of Director Identification Numbers (DINs), the Court found the action not legally supported. The writ petitions were partly allowed, quashing the disqualification and DIN deactivation, directing the ROC to provide notice for verification before further action.

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Issues Involved:
1. Applicability of Section 164(2) of the Companies Act, 2013.
2. Constitutionality of Section 164(2) under Articles 14 and 19(1)(g) of the Constitution.
3. Requirement of natural justice before disqualification.
4. Authority to deactivate Director Identification Number (DIN).

Detailed Analysis:

1. Applicability of Section 164(2) of the Companies Act, 2013:
The Court determined that for the purpose of Section 164(2)(a) of the Companies Act, 2013, the financial years relevant for attracting disqualification would commence from the financial year 2014-15 and onwards, not prior thereto. The financial year ending on 31.03.2014, which predates the enforcement of Section 164(2) on 01.04.2014, cannot be considered. This conclusion was supported by a General Circular No.08/14 dated 04.04.2014 issued by the Ministry of Corporate Affairs. The Court rejected the argument that the financial year 2013-14 should be included, as held by the Delhi High Court in Mukut Pathak.

2. Constitutionality of Section 164(2) under Articles 14 and 19(1)(g) of the Constitution:
The Court upheld the constitutionality of Section 164(2), finding it neither arbitrary nor discriminatory. The provision is similar to Section 274(1)(g) of the Companies Act, 1956, which had been upheld by various High Courts. The Court reasoned that disqualification for non-compliance with statutory obligations is a reasonable restriction and serves the purpose of ensuring good corporate governance. The classification between compliant and non-compliant directors was found to have a reasonable nexus with the objective sought to be achieved, thus not violating Articles 14 and 19(1)(g).

3. Requirement of natural justice before disqualification:
The Court held that principles of natural justice are not required before disqualification under Section 164(2) or before declaring the office of a director vacant under Section 167(1)(a), as the disqualification is automatic by operation of law. However, the Court emphasized that the factual basis for disqualification must be established. Therefore, a notice should be given to the concerned directors to verify the facts before disqualification is confirmed. This ensures that the directors have an opportunity to contest the disqualification if the facts are disputed.

4. Authority to deactivate Director Identification Number (DIN):
The Court found no statutory provision empowering the Registrar of Companies (ROC) to deactivate DINs solely on the ground of disqualification under Section 164(2). Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, which provides for the cancellation or deactivation of DINs, does not include disqualification under Section 164(2) as a ground. Various High Courts, including the Delhi High Court in Mukut Pathak, the Gujarat High Court in Gaurang Balvantlal Shah, and the Telangana High Court in Venkata Ramana Tadiparthi, have held similarly. The Court concluded that the action of deactivating DINs was not legally tenable.

Conclusion:
The Court allowed the writ petitions partly, quashing the ROC's list declaring the petitioners as disqualified and the deactivation of their DINs. The ROC was directed to issue notices to the petitioners to verify the facts of disqualification, providing them an opportunity to contest the disqualification before any further action is taken.

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