2021 (1) TMI 317 - HC - Companies Law

Writ petition allowed for director disqualification due to annual return default under Companies Act

The court found the writ petition maintainable due to the inefficacy of civil remedies in cases of default in filing annual returns by Directors of a ... Disqualification to act as the Directors/office bearers of respondent - seeking restraint on respondent from functioning as Directors of respondent - whether the writ petition is maintainable, whether the Directors of the Yogam have defaulted in filing annual returns and whether there is an automatic disqualification of the Directors of the Yogam for re-appointment as the Directors of the Yogam? - HELD THAT:- Section 164(2) makes it clear 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 shall be eligible to be reappointed as Directors of that company for a period of five years from the date on which the said company fails to do so. Section 167 mandates that the office of a Director shall become vacant in case a Director incurs any of the disqualifications specified in Section 164 - The Companies Act, 2013 does not provide for any administrative procedure for disqualification of Directors by operation of Section 164(2). Respondents 3 to 7 also admit that no application to declare that the office has been vacated, can be entertained by the Company Court. According to respondents 3 to 7, the remedy available is through civil court. The disqualification for reappointment prescribed by Section 164(2) of the Companies Act, 2013 is for a period of five years. As initiation of civil proceedings and final culmination of the proceedings after appeals provided under the Code of Civil Procedure, 1908, ordinarily takes more than five years, this Court finds that civil remedy is not an efficacious alternate remedy and consequently a writ petition under Article 226 of the Constitution of India will be maintainable in appropriate cases. Whether the Directors of the 3rd respondent-Yogam have defaulted in filing annual returns and are disqualified to hold office by operation of Section 164(2) of the Companies Act? - HELD THAT:- Section 164(2)(a) makes it clear that a Director of a company which has not filed financial statements or annual returns for any continuous period of three financial years shall not be eligible to be reappointed 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. Section 167(1)(a) mandates that the office of a Director shall become vacant in case he incurs any of the disqualifications specified in Section 164. It is evident from the said provisions that disqualification of such Directors occurs by operation of law and is automatic and an administrative decision is not required in that regard. Whether any of the Directors of the 3rd respondent-Yogam have incurred the disqualification due to non-filing of annual returns/financial statements for a continuous period of three years? - HELD THAT:- It is evident from the pleadings that the annual returns of the Yogam from the year 2006-'07 to 2016-'17 were filed paying the penalty imposed by the Non-trading Company Registrar, Kerala only after 24.09.2020. The amended provisions of the Companies Act came into force with effect from 12.09.2013. Therefore, if financial statements/annual returns for the years 2013-'14, 2014-'15 and 2015-'16 were not filed, such of the Directors who were in office during the period will be disqualified for reappointment as Directors in the Yogam for the next five years. Whether respondents 4 to 7 in the writ petition are liable to be declared as having incurred the disqualification under Section 164(2) of the Companies Act, 2013, by this Court? - HELD THAT:- There is no positive assertion anywhere in the writ petition that respondents 4 to 7 were Directors of the Company during the three consecutive years since 2013-'14, except in the case of the 4th respondent - Disqualification of Directors for reappointment or appointment in any Company is a serious matter affecting rights of Directors to hold office of the Director not only in the defaulted company but also in other companies. Therefore, it will not be advisable and would indeed be improper to declare that respondents 4 to 7 are disqualified for reappointment in the Yogam, in view of Section 164(2) of the Companies Act, 2013 in the absence of sufficient pleadings. Furthermore, there are other Directors of the Yogam also, as is evident from the cause title shown in Ext.P4 complaint, who are not parties to this writ petition, who may also be disqualified for reappointment as Directors in the Yogam. In the circumstances, this Court finds that it will not be appropriate to declare that respondents 4 to 7 are disqualified to be reappointed as Directors of Yogam, in this writ petition. The petitioner has approached the 2 nd respondent filing Ext.P4 petition seeking to remove the disqualified Directors of the Yogam, including respondents 4 to 7, in the light of Section 164(2) of the Companies Act, 2013 - the writ petition is disposed of directing the 2nd respondent to consider and take a decision on Ext.P4 petition submitted by the writ petitioner, within a period of three months. Issues Involved:1. Maintainability of the writ petition.2. Default in filing annual returns by the Directors of the Yogam.3. Automatic disqualification of the Directors under Section 164(2) of the Companies Act, 2013.Detailed Analysis:1. Maintainability of the Writ Petition:The court considered whether the writ petition under Article 226 of the Constitution of India is maintainable. The petitioner argued that civil remedies are not efficacious due to the time-consuming nature of civil proceedings, which typically exceed the five-year disqualification period under Section 164(2). The court found that given the inefficacy of civil remedies, a writ petition is maintainable in appropriate cases.2. Default in Filing Annual Returns:The petitioner alleged that the Yogam did not file annual returns from 2006 onwards, leading to the disqualification of its Directors under Section 164(2) of the Companies Act, 2013. The respondents countered that they had attempted to file annual returns, but delays were caused by the unavailability of records and ongoing litigations. The court examined the evidence, including letters and orders from various authorities, and found that while some attempts were made to file returns, there were no effective steps taken to file annual returns/financial statements from 2013-14 to 2015-16. Consequently, the Directors who held office during this period would be disqualified for reappointment for the next five years.3. Automatic Disqualification of the Directors:The court examined Sections 152(3), 152(4), 164, and 167 of the Companies Act, 2013. Section 164(2) disqualifies a Director of a company that has not filed financial statements or annual returns for three consecutive years from being reappointed for five years. Section 167 mandates that the office of a Director becomes vacant upon incurring any disqualification under Section 164. The court noted that disqualification under Section 164(2) is automatic and does not require an administrative decision.4. Specific Disqualification of Respondents 4 to 7:The court found insufficient pleadings to declare respondents 4 to 7 disqualified under Section 164(2), except for the 4th respondent, who was presumed to have been the General Secretary during the relevant period. The court emphasized that disqualification affects the rights of Directors to hold office not only in the defaulted company but also in other companies. Therefore, it would be improper to declare disqualification without sufficient pleadings and without including all potentially disqualified Directors as parties to the petition.Conclusion:The court disposed of the writ petition by directing the 2nd respondent-Inspector General of Registration to consider and decide on the petitioner’s Ext.P4 representation within three months. The petitioner and the Directors of the Yogam likely to be affected by the decision were to be given an opportunity of hearing before a final decision. The parties were also allowed to produce additional documents and make further pleadings if desired.