TaxTMI 
TaxTMI 
2019 (11) TMI 319
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....ies in filing the annual returns and financial statements for the financial years 2014-2016. The said list was published on 15.09.2017 and is hereafter referred to as the 'impugned list'. The petitioners also challenge the list of disqualified directors published subsequently for defaults pertaining to the financial years 2012-2014 and 2013-2015. The petitioners impugn the same to the extent that it includes their name. The petitioners further pray that the respondents be directed to allow the petitioners to use their Digital Signature Certificates (DSC) and Director Identification Number (DIN). 2. The petitioners in the present batch of petitions were directors in various companies. By way of the impugned list, the petitioners have been disqualified from being appointed / reappointed as directors for a period of five years under Section 164(2)(a) of the Act. Further, the names of some of the companies, in which the petitioners were holding the office of directors, have been struck off from the Register of Companies. In WP. (C) 3658 of 2019, the petitioners have been disqualified as directors on account of failure on the part of a company (Logic Eastern India Private Limited) to....
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....ts (CAR). (ii) Thereafter, on 15.05.2008, petitioner no.1 and 2 were appointed as directors in the company Aryan Express Holding Pvt. Ltd. (iii) On 01.09.2009, the petitioners were named as directors in the company M/s. Aryan Cargo & Express Logistics Pvt. Ltd. (iv) On 19.03.2010, the petitioners were also appointed as directors in the company Cargo Logistics Pvt. Ltd. 9. It is stated that the company, M/s. Aryan Cargo Express Pvt. Ltd. commenced its business in March, 2010. It is further stated that financial statements and annual returns of the aforesaid company were completed and uploaded on the website of Registrar of Companies (ROC) upto the financial year 2012-13, but the petitioners failed to submit the aforesaid statements for the subsequent years. 10. In the year 2014, respondent no.1 issued a circular (General Circular No. 34/2014), whereby it floated a scheme called Company Law Settlement Scheme, 2014. The said Scheme was floated to provide an opportunity to the defaulting companies to file their (belated) financial statements and annual returns for the consecutive period of three financial years. The said Scheme also offered an opportuni....
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....ice dated 15.05.2018 to petitioner no.1 reiterating its intention to remove the name of the aforesaid company from the Register of Companies. On 18.06.2018, petitioner no.1 sent a reply to the aforesaid notice stating that efforts had been made to re-launch the operations of the said company. 16. On 15.09.2017, respondent no.1 published the impugned list of disqualified directors, disqualifying 74,920 directors under Section 164 read with Section 167 of the Companies Act, 2013 on-account of non-filing of Annual Returns for block of three consecutive years 2014-16, comprising of financial years 2013-14, 2014-15 and 201516. Consequently, the DINs of the aforesaid disqualified directors were blocked and details of these directors regarding their disqualification for the period from 01-11-2016 to 31-10-2021, were updated. 17. It is submitted by the respondents that the aforesaid list published on 15.09.2017 did not take into account the defaults committed in filing the annual returns for the preceding block of three financial years - financial years 2011-12, 2012-13 and 2013-14 (FYs 2012-14) and financial years 2012-13, 2013-14 and 2014-15 (FYs 2013-2015), respectively. 18. It....
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....eir disqualification as directors and such omission is in violation of principles of natural justice. It is submitted on behalf of the petitioners that the notice issued to the petitioners under Section 248(1) of the Act cannot be construed as a show cause notice, as a company's name is open to be struck off for failure to carry on business for a period of two financial years, but for incurring a disqualification under Section 164(2) of the Act, the company must default for a minimum period of three financial years. 22. Second, it is contended that the provisions of Section 164 of the Act, being penal in nature, could not be applied retrospectively. It is submitted that the Companies Act, 2013 (the Act) came into force on 01.04.2014 but the petitioners were disqualified as directors for committing defaults for the financial years preceding the first financial year commencing on 01.04.2014. It is further submitted that in terms of the General Circular No. 08/2014 dated 04.04.2014, the provisions of the Companies Act, 1956 would govern the financial years preceding 01.04.2014. 23. Third, that on a plain interpretation of Section 164(2)(a) of the Act, the petitioners cannot be d....
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....e? 28. The first and foremost question to be addressed is whether the provisions of Section 164(2) of the Act operate retrospectively. This controversy arises in the context of the submissions advanced on behalf of the petitioners that considering the defaults in filing financial statements and annual returns for the financial year ending 31.3.2014 (FY 2013-14) and prior years for the purposes of imposing the disqualification under Section 164(2) of the Act, tantamount to applying the said provisions retrospectively. This, according to the petitioners, is impermissible. 29. Section 164(2) of the Act disqualifies a director from being reappointed in a company for a period of five years, if the company has (a) not filed financial statements or annual returns for any continuous period of three financial years; or (b) 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. In addition, a director of such a company is also disqualified from being appointed in any other company for a period of five years. ....
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....164 apply prospectively. In Yashodhara Shroff (supra), the Karnataka High Court had observed as under:- "When for the first time under the 2013 Act the disqualification of a director of a private company is stipulated under the Act in the form of Section 164(2), the said provision must be given only a prospective operation." 35. In Gaurang Balvantlal Shah (supra), the Gujarat High Court had observed as under:- "Such provision of disqualification for the director of a company - public or private company, has been incorporated for the first time in Section 164(2) of the Act of 2013. Such being the case, the said provision has to be construed as having prospective effect. If retrospective effect is given to it, that would destroy, alter and affect the right of the Directors of private company existing under the Act of 1956." 36. The essential question to be addressed is whether the consideration of the default committed in filing financial statements and annual returns for the financial years 2013-14 would amount to applying the provisions of Section 164(2) of the Act retrospectively. It is well settled that no statute shall be construed to apply retrospectivel....
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....her than those specified in List II of the Seventh Schedule to the Constitution of India. In those matters, the State Legislatures exercise the legislative powers. Subject to the rigors of Article 20(1) of the Constitution of India, there is no restriction on the Parliament or any State Legislature to enact any law with retrospective effect. However, it is also settled that no law shall be read as applicable retrospectively unless it is expressly enacted or necessarily implied. A retroactive law impairs vested rights acquired under the existing laws. It seeks to reopens past transactions and affects accrued rights. It is for this reason that retrospective application of a law is not readily inferred. 41. The question whether a law is retrospective has to be viewed in the context whether it divests a person of accrued rights, or creates new obligations, or attaches a disability in respect of transactions or actions done in the past. 42. It is apposite to bear the aforesaid in mind while examining the issue whether consideration of the defaults in filing financial statements and returns pertaining to financial year 2013-14, for the purposes of Section 164(2) of the Act, amounts....
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....ing defaults in respect of three financial years as contemplated under Section 164(2) of the Act. Plainly, a director cannot be heard to contend that he had acquired a vested right not to be penalised for this default since it pertains to filing returns for a financial year that had closed prior to Section 164 of the Act coming into force. The date on which such default occurred is after the date on which Section 164 of the Act had become effective. This Court finds it difficult to understand as to which right of the petitioners has been impaired by considering such default for the purposes of Section 164 of the Act. 46. The penal consequences of not filing returns for three consecutive financial years would be attracted on section 164 of the Act coming into force. Section 164 of the Act came into force on 01.04.2014 and thus, the failure of a company/its directors to file annual returns (for three financial years) thereafter would result in the directors incurring the disqualification as specified under Section 164(2) of the Act. It is of little consequence that such defaults relate to filing annual returns that pertain to a period prior to 01.04.2014. Undisputedly, the concern....
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....retrospective "because a part of the requisites for its action is drawn for a time antecedent of its passing". 50. A fortiori, in this case the respondents are not seeking to draw on any default or event, which had occurred or an action which was required to be taken, prior to Section 164 of the Act coming into force. 51. In view of the above, this Court is in respectful disagreement with the view of the Karnataka High Court, Madras High Court and Gujarat High Court in Yashodhara Shroff v. Union of India; Bhagavan Das Dhananjaya Das v. Union of India and Ors. and Gaurang Balvantlal Shah v. Union of India (supra) inasmuch as the said Courts have held that the defaults for the financial year ending 31.03.2014 cannot be considered for determining whether a director had incurred the disqualification under Section 164(2) of the Act. 52. Concededly, Section 164(2) of the Act operates prospectively. However, such prospective operation would entail taking into account failure to file the financial statements pertaining to the financial year ending 31.03.2014 on or before 30.10.2014. This Court is of the view that the taking into account such default does not amount to a retrospect....
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....into force) would trigger the consequences of Section 164(2) of the Act since the said default was committed after the Section 164 of the Act had come into force. No such contention was advanced, perhaps, because it would be inconsistent with respect to the period for which disqualification is stated to have been incurred. Clearly the respondents cannot contend that a director who has been disqualified to act as such on account of defaults committed for the financial years ending 31.03.2012, 31.03.2013 and 31.03.2014 can be held to be responsible for any defaults for a period of five years thereafter since, according to them, he would have been disqualified to act as a director after incurring the disqualification under section 164(2) of the Act. As mentioned in the third list, such persons would suffer the disqualification for the period 01.11.2014 to 31.12.2019. All the names included in the third list, except names of 786 persons, are common with the names in the first list. 55. In the aforesaid context, Ms Shiva Laxmi, learned counsel appearing for the respondents, after seeking instructions, conceded that the second and third list was inconsistent in respect of disqualifica....
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....ss to secure justice and to prevent miscarriage of justice. The principles are extended even to those who have to take administrative decision and who are not necessarily discharging judicial or quasi-judicial functions. They are a kind of code of fair administrative procedure. In this context, procedure is not a matter of secondary importance as it is only by procedural fairness shown in the decision making that decision becomes acceptable. In its proper sense, thus, natural justice would mean the natural sense of what is right and wrong." 59. The Supreme Court further referred to the views of Professor D.J. Gallian and had observed as under:- "It, thus, cannot be denied that principles of natural justice are grounded in procedural fairness which ensures taking of correct decision and procedural fairness is fundamentally an instrumental good, in the sense that procedure should be designed to ensure accurate or appropriate outcomes. In fact, procedural fairness is valuable in both instrumental and non-instrumental terms." 60. It is clear from the above that the principles of natural justice have been accepted as a part of procedural law, where it is necessary to supp....
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....read consistently with the principles of natural justice, the courts should do so. But if a statutory provision either specifically or by necessary implication excludes the application of any rules of natural justice then the court cannot ignore the mandate of the legislature or the statutory authority and read into the concerned provision the principles of natural justice." So also the right to be heard cannot be presumed when in the circumstances of the case, there is paramount need for secrecy or when a decision will have to be taken in emergency or when promptness of action is called for where delay would defeat the very purpose or where it is expected that the person affected would take an obstructive attitude. To a limited extent it may be necessary to revoke or to impound a passport without notice if there is real apprehension that the holder of the passport may leave the country if he becomes aware of any intention on the part of the passport authority or the Government to revoke or impound the passport. But that by itself would not justify denial of an opportunity to the holder of the passport to state his case before a final order is passed. It cannot be disputed that the....
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.... the aforesaid in mind, this Court may now proceed to examine the statutory provisions and the applicability of the audi alteram partem rule. Section 164 (2) of the Act merely sets out the conditions, which if not complied with would disqualify an individual a person from being reappointed or appointed as a director. To put it in a converse manner, the said sections sets out a qualifying criterion for directors to be appointed or re-appointed, in negative terms. This provision does not entail any decision-making process on the part of the Authorities administering the Act. No Authority is required to exercise any discretion or take any judicial or quasi-judicial decision regarding disqualification of a director. The Authority is also not required to pass any order disqualifying an individual. Clearly, in these circumstances, the rule of audi alteram partem would be inapplicable. As noticed above, such rules are meant to supplement the law to ensure procedural fairness. Such principles are also to be followed while taking administrative decisions to ensure fairness in action. In Dharampal Satyapal Ltd (supra), Dr A.K. Sikri, J had observed that such principles "are a kind of code of....
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....ot applicable given the nature of the provisions of Section 164(2) of the Act. However, even if it is assumed that disqualifying a director entails an administrative decision, there is a qualitative decision required to be taken by the authorities, the rule of affording a prior hearing cannot be readily inferred as a part of Section 164(2) of the Act. This is so because the same would have the effect of obstructing and rendering the provision inefficient. 70. In Yashodhara Shroff v. Union of India (supra), the Karnataka High Court rejected the contention that the rule of audi alteram partem is applicable in the context of Section 164(2) of the Act. The Court had observed as under:- "127. Thus, when the ineligibility for being appointed as a director of the defaulting company or in all the companies is for a period of five years from the date of the default is by operation of law, there is no necessity to give a prior hearing or comply with the provisions of audi alteram partem before such consequences visit a director of such a company. The ineligibility is in the nature of suspension of a director for a period of five years. Therefore, in my view, the need to hear the ....
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....s of companies that are not in default. It was contended by Ms Sahaitya that in terms of Section 164(2) of the Act, a director of a defaulting company would not be eligible for being reappointed in that company or being appointed in any other company for a period of five years. She submitted that the word 'appointed' and 're-appointed' cannot be read as synonyms. She stated that since two separate expressions - 'appointed' and 'reappointed' - have been used by the legislature in the same statutory provision, the same must be given different meanings. On the strength of the aforesaid principle, she contended that a person who has incurred the disqualification under Section 164(2) of the Act, cannot be appointed in any other company but can be re-appointed. She contended that in this view, there was no impediment for a director to be re-appointed in a company that had not committed any default as specified in clauses (a) and (b) of Section 164(2) of the Act. She contended that a director of a defaulting company is disqualified from being appointed in any company in which he was not serving as a director at the material time. In other words, if a person was a director of a defaulting ....
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.... months: Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court; (g) he is removed in pursuance of the provisions of this Act; (h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary 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 sub-section (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....
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....a person is disqualified for being appointed as a director. The said Section reads as under:- 164. Disqualifications for appointment of director.- (1) A person shall not be eligible for appointment as a director of a company, if - (a) he is of unsound mind and stands so declared by a competent court; (b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence: Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company; (e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force; (f) he has not paid any calls in respect of any shares of the company held by him, whether alone ....
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....has been convicted of an offence with related party transactions under Section 188 of the Act; (h) or he has not complied with the provisions of Sub-Section 3 or he has not secured a Director Identification Number (DIN) as required in terms of Section 152(3) of the Act. 81. As is apparent from the above, the conditions as set out in subsection (1) of Section 164, which disqualify a person from being appointed as a Director are directly attributable to him/her. In contrast to the above, the provisions of sub-section (2) of Section 164 of the Act stipulates the defaults committed by a defaulting company, which results in the directors of that company incurring the disqualification being vicariously responsible for such defaults. It is possible that a particular director may not be, in fact, directly responsible for such defaults; nonetheless, he is disqualified to act as a director on account of being responsible for the affairs of the defaulting company by virtue of his holding the office of a director. 82. A person who has incurred the disqualification under section 164 (1) of the Act is not eligible for being appointed as a director of any company. Any person who ha....
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....ibutable to the individual and not to all directors of a company. In other words, a person who was disqualified from being appointed as a director on account of being (a) of an unsound mind; (b) an undischarged insolvent; (c) an applicant for being adjudicated as an insolvent; (d) convicted of an offence involving moral turpitude and sentenced for imprisonment for not less than six months; (e) disqualifying for being appointed as a director by an order passed by any Court; (f) a defaulter on account of not paying calls in respect of any shares of any company held by him; (g) convicted of an offence with respect to related party transactions under Section 188 of the Act; or (h) not compliant with the provisions of section 152(3) of the Act. 86. The problem, essentially, arises in implementing the provisions of Section 167(1) (a) in respect of directors who have incurred disqualification under Section 164(2) of the Act. This is so because the disqualification incurred in Sub-Section (2) are not directly on account of reasons attributable to an individual director but on account of defaults committed by a co....
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....or to 07.05.2018. It is important to examine the interplay of these sections in order to understand the statutory scheme. The proviso to Section 167 (a) as introduced by the Companies (Amendment) Act, 2018 with effect from 07.05.2018, also cannot be read in isolation and without reference to the proviso to Section 164 (2), which was introduced by the same amending enactment. 89. The proviso to section 164 (2) provides that any person who has been appointed as a director of a company which is in default of clauses (a) or (b) of Sub-Section (2) of Section 164 of the Act would not incur the disqualification for a period of six months. Clearly, this proviso is not clarificatory. It is a substantive provision to enable a company to appoint directors (other than those who had incurred any disqualification) to enable them to cure the defaults. The legislature has provided a window of six months for curing the defaults and to enable the incoming directors appointed on the board of the defaulting companies to avoid disqualification under Section 164 (2) of the Act. There is no possibility to read such a window of six months in Section 164 (2) of the Act prior to 07.05.2018; that is, prio....
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....provisions cannot be readily inferred to apply retrospectively. 94. In view of the above, the scheme of Section 164 of the Act read with Section 167(1)(a) of the Act, for the period prior to 07.05.2018, must be determined on the basis of the plain language of the said provisions as in force prior to 07.05.2018. The legislative scheme of those provisions stand materially amended by introduction of the provisions with effect from 07.05.2018. 95. Indisputably, the plain language of Section 164(2) read with Section 167(1)(a) of the Act leads to an absurd situation as discussed earlier. In this view, the rule of literal interpretation cannot be applied for interpreting the provisions of Section 167(1)(a) of the Act. In Kaynet Finance Limited v. Verona Capital Limited (supra), the Bombay High court had resolved this issue by reading down the provisions of Section 167 (1) (a) to apply to cases of disqualification falling under Section 164(1) of the Act and not 164(2) of the Act. In other words, Clause (a) of Section 167 (1) has been read as, "he incurs any of the disqualification specified in Section 164 (1)" instead of "he incurs any of the disqualification specified in Section 164....
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....N. The said Section is set out below: - "153. Application for allotment of Director Identification Number.- Every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number to the Central Government in such form and manner and along with such fees as may be prescribed." 100. It is apparent from the above that the application for a DIN is required to be made by any person who intends to be appointed as a director. There is no impediment for a person who has been temporarily disqualified from acting as a director, to apply for a DIN. 101. In terms of Section 154 of the Act, the Central Government is required to allot a DIN to any applicant within a period of one month from receipt of the application under Section 153 of the Act. Section 155 expressly proscribes an individual from having more than one DIN. No individual who has been allotted a DIN can apply for or possess any other DIN. Section 156 of the Act requires a director to inform his DIN to the company(ies) in which he is a director. Section 157 of the Act obliges a company to inform the DIN of its directors to the Registrar of Compani....
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....105. The Central Government also notified the Companies (Appointment and Qualification of Directors) Rules, 2014 which superseded the earlier Rules framed under the Companies Act, 1956. These Rules also included certain rules pertaining to the Directors Identification Number and included certain provisions similar to those provided in Companies (Directors Identification Number) Rules, 2006. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 is relevant and is set out below:- 11. Cancellation or surrender or Deactivation of DIN.- The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received 11 alongwith fee as specified in Companies (Registration Offices and Fees) Rules, 2014 from any person, cancel or deactivate the DIN in case - (a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number; (b) the DIN was obtained in a wrongful manner or by fraudulent mean....
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....) or (b) of section 164(2) of the Act, is required to file Form DIR-9 furnishing the names and addresses of all its directors, with the Registrar of Companies. Sub-rule (5) also contemplates filing of an application for removal of the disqualification of directors. None of the provisions of Rule 14 of the said Rules indicates that the DIN of directors incurring the disqualification under section 164(2) of the Act, is required to be deactivated. 108. It is important to note that whereas a DIN is necessary for a person to act as a director; it is not necessary that a person who has a DIN be appointed as a director. Section 164(2) only provides for temporary disqualification for a period of five years for a person to be appointed/re-appointed as a director. Thus, it is not necessary that the DIN of such person to be deactivated. 109. It is also material to note that sub-section (2) of section 167of the Act provides for a punishment for any person who functions as a director knowing that his office has become vacant on account of his disqualification as specified in Section 167(1) of the Act. Thus, Section 167 includes a mechanism for enforcing the rigors of Section 167(1) of the....