High Court Upholds Validity of Companies Act Provisions; Orders Reactivation of DINs, Clarifies Director Disqualification.

The HC upheld the constitutionality of Sections 164(2) and 167(1) of the Companies Act, 2013, affirming they do not violate Articles 14 or 19 of the Constitution. It ruled Section 164(2) is not retrospective, disqualifying directors only for defaults from FY 2014-15 onwards. The court found the provisos to Sections 164(2) and 167(1)(a) valid, with prospective application for disqualifications. The deactivation of DINs based solely on Section 164(2) disqualification was deemed unjustified, ordering their reactivation. Striking off a company does not automatically disqualify its directors. The writ petitions were disposed of with declarations and directions regarding these provisions.

---

---

Issues Involved:
1. Constitutionality of Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013.
2. Application of Principles of Natural Justice to Section 164(2).
3. Retrospective application of Section 164(2).
4. Impact and constitutionality of the first proviso to Section 164(2) and the proviso to Section 167(1)(a).
5. Necessity of notice under Section 455(4) before applying Section 164(2)(a).
6. Justification for deactivation of Director Identification Numbers (DINs).
7. Impact of striking off a defaulted company on disqualified Directors.

Detailed Analysis:

A. Constitutionality of Section 164 and Section 167:
The court held that Sections 164(2) and 167(1) of the Companies Act, 2013 are not ultra vires Articles 14 or 19 of the Constitution of India. It affirmed that the legislative competence of the Union Parliament is beyond doubt and that the petitioners do not have a fundamental right to be Directors of any company. The provisions were found to be reasonable restrictions under Article 19(6) aimed at ensuring transparency in corporate governance and protecting the interests of stakeholders.

B. Section 164 and the Principles of Natural Justice:
The court ruled that the disqualification under Section 164(2) arises by operation of law and does not necessitate a hearing. The statute does not provide for condonation or waiver of disqualification, and the principles of natural justice cannot be read into these provisions. The court emphasized that the ineligibility is temporary and not perpetual, aligning with the scheme of the Act.

C. Section 164(2) whether retrospective:
The court held that Section 164(2) is not retrospective. Disqualification can only be based on defaults occurring in the financial year 2014-15 and subsequent years. The court noted that the Act, 2013 brought disqualification of Directors of private companies for the first time, and thus, the continuous default period should commence from or after 01.04.2014.

D. Impact of provisos to Section 164(2) & 167(1)(a):
The court found the provisos to Section 164(2) and Section 167(1)(a) constitutionally valid and clarificatory in nature, thus applicable retrospectively. However, the words "in all the companies" in the proviso to Section 167(1)(a) will have only prospective operation. This means Directors disqualified before 07.05.2018 will not vacate offices in other companies retrospectively.

E. Whether notice under Section 455(4) a sine qua non:
The court clarified that Section 455(4) is intended for a different purpose and is not a prerequisite for applying Section 164(2) or 167. The notice under Section 455(4) is to determine if a company is dormant and not for disqualification of Directors.

F. Deactivation of DIN whether justified:
The court held that the deactivation of DINs of Directors solely based on disqualification under Section 164(2) is not justified. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 does not empower the Registrar to deactivate DINs on this ground. The court directed the reactivation of DINs of the petitioners.

G. Striking off and Disqualification:
The court noted that striking off a company does not automatically disqualify its Directors. Directors can challenge their disqualification and the striking off of their companies through legal remedies provided under Section 252 of the Act, 2013.

Conclusion:
The writ petitions were disposed of with several declarations and directions, including the constitutionality of the relevant sections, the non-retrospective application of Section 164(2), the invalidation of disqualifications based on defaults before 01.04.2014, and the reactivation of DINs. The court also clarified the applicability and interpretation of the provisos to Section 164(2) and Section 167(1)(a).

---