TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 319
X X X X Extracts X X X X
X X X X Extracts X X X X
....l 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 file its annual returns. It is stated that Cor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 opportunity to the inactive companies "to get their companies declared as 'dormant company' under Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nies. 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 is further submitted that the said defaulting directors were also disqualified because part of the defaults was post 01.04.2014. For the bloc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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 disqualified to act as directors of the companies, which had not defaulted in filing their annual returns and financial statements for a period of three consecutive years. 24. Fourth, that the defaults under Section 164(2)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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. 30. Clause (g) of Section 274(1) of the Companies Act, 1956, which was in force prior to 01.04.2014, also contained similar provisions for disqualifying a director of a company that had failed to file the requisite returns for a consecutive period of three years. However,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 retrospectively, unless such a construction appears clear from the language of the enactment or otherwise necessary by implication. It is also equally trite that a statute is not retrospective merely because it affects existing rights or because a part of the requisites for its action is drawn from a time antecede....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ver, 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 to retrospective application of Section 164(2) of the Act. 43. It is necessary to bear in mind that there is no dispute that the Companies Act, 1956, as well as the Act (Companies Act, 2013) expressly oblige a company to file its financial statements and its annual returns within the stipulated period. In terms of proviso to Section 96(1) of the Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h 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 concerned companies (and vicariously the petitioners) were obliged to file the financial statements for the financial year 2013-14 after 01.04.2014. As noticed above, the failure to do so would be in violation of Section 137(2) of the Act and this Court finds no reason why such defaults should not be considered for the purposes of Section 164 of the Act. Merely, be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espectful 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 retrospective application of Section 164 of the Act and the contentions advanced by the petitioners in this regard, are unmerited. 53. The impugned list of disqualified directors published on 15.09.2017 contained names of 74,920 individuals who had been disqualified to act as a director on account of failure of the concerned companies to file their annual returns for the financi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tor 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 disqualification period as specified in the impugned list. Since neither the petitioners nor the respondents have argued that the defaults committed prior to 01.04.2014 can be considered for imposing the disqualification under Section 164 of the Act; the second and the third list, published on 03.10.2017, cannot be sustained. The same are, accordingly, set aside. Whether a prior notice....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cision 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 supplement it. The question whether such principles are required to be read into any law must be considered in the context of the basic scheme of the statutory provisions. 61. In Maneka Gandhi v. Union of India and another : (1978) 1 SCC 248, the Supreme Court had explained that the exceptions to the Rule of audi alteram partem are really not exceptions to procedural fairness in the true sense but in the cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 legislature has not by express provision excluded the right to be heard...." 63. In Swadeshi Cotton Mills v. Union of India : (1981) 1 SCC 664, the Supreme Court of India referred to the earlier decisions in Maneka Gandhi v. Union of India (supra), State of Orissa v. Dr. Bina Pani Dei : AIR 1967 SC 1269 and A.K. Kraipak v. Union of India (supra) and held as under:- "31. The rules of natural justice can operate only in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ointed, 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 fair administrative procedure in the decision making process". It is difficult to understand as to how such principles would assist in the administrative procedure where an authority is not required to take any qualitative decision. The question whether a person fulfils the stipulated qualifications leaves little room for debate. As observed above, the administrative authorities are not required to take any qualitative decision in this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nefficient. 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 director of a company before the ineligibility to be reappointed as a director of a company in default or to be appointed in any other company on account of default of a company in which he is a director, for a period of five years from the date of default of the company is rightly not envisaged under Section 164(2) of the Act. Even in the absence of a prior hearing the section is valid and not in violation of Article 14 of the Constitution." 71. A sim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lature 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 company but was also a director of other companies that were not in default, he would be disqualified from being reappointed in defaulting company or for being appointed in any company other than the non-defaulting companies in which he was already a director. But he could be re-appointed in those non-adefaulting companies where he had been appointed as a director prior to incurring the disqualification under section 164(2) of the Act. According to her, the expression ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1). 77. A plain reading of Clause (a) of Section 167 (1) of the Act indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act. The proviso to Clause (a) of Section 167(1) of the Act was introduced with effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018. 78. It was contended by the petitioners that Clause (a) of Section 167(1) as it stood prior to introduction of the proviso c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onment 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 or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; (g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or (h) he has not complied with sub-section (3) of section 152. (2) No person who is or has been a director of a company which- (a) has not filed financial statements or annual returns for any continuous period of three financial years; or (b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 has incurred the disqualification under sub-section (2) of section 164 of the Act is not eligible for being reappointed as a director of the company that has defaulted in terms of clause (a) and (b) of subs-section (2) of section 164 of the Act. He is also disqualified for being appointed to any other company for a period of five years. In terms of Section 164, a person who has incurred the disqualification is not eligible for appointment as a director. The disqualification under Sub-Section (2) of Section 164 is applicable only to a person who is or was a director. Such disqualification thus, operates on his reappointment in the defaulting company or for an appointment in any other company. A plain reading of Sub-Section (2) of Section 164 indicates that h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. 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 company. Any person who is or has been a director of a company, which commits the defaults as set out in clauses (a) and (b) of Sub-Section (2) of Section 164 of the Act, incurs the disqualification for being appointed/reappointed as a director. If the provisions of Section 167(1)(a) of the Act are applied in such a case, all directors of such a defaulting company would demit their office as directors immediately on incurring the disqualification under section 164(2) of the Act. In addition, such directors would also cease to be directors of any other company in which they are directors. This results in an absurd situation where a defaulting company can never appoint a director. This is so because as soon as the person - who is otherwise eligible for being appointed as a director and has not incurred any disqualifi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, prior to enactment of the proviso to section 164(2) of the Act. 90. This also leads to the question as to why it was necessary to introduce the proviso to Section 164 (2) of the Act. It is obvious that such a proviso was also necessary if the provisions of Section 167(1)(a) were to be extended to result in vacation of office occupied by persons who had incurred the disqualification under Section 164(2) of the Act. In absence of such a provision, the incoming directors- who are otherwise eligible for being appointed as a directors and had not incurred any disqualification either under Sub-Section (1) or under Sub-Section (2) of Section 164 of the Act - would demit office in all other non-defaulting companies on being appointed on the board of a company that had already committed defaults under clauses (a) and (b) of sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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". This Court respectfully concurs with this view. 96. There is compelling reason for limiting the scope of Section 167(1)(a) for the disqualification incurred under Section 164(1) of the Act. As noticed above, the disqualifications under Section 164(1) of the Act are directly attributable to the individuals incurring such disqualifications. These include an individual being declared insolvent, of being unsound mind, and being convicted of an offence involving moral turpitude. Clearly, such persons cannot continue to hold the office of a director on incurring such disqualifications. It would be irrational to await for the reappointment of a director for Section 164 to trigger in respect of companies in which such individuals stand appointed as directors. Thus, the Parliament in its wisdom has enacted clause (a) of section 167(1) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ividual 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 Companies. Section 158 of the Act makes it obligatory for a director to indicate his DIN while furnishing any return or information or particulars as required under the Act. 102. It is at once clear that the provisions pertaining to DIN are only to ensure that any person acting as a director has a unique identity to identify him. Plainly, this is for purposes of administering the Act in an efficient manner. He is not required to give up this identification number only because he is temporarily disqualified for being appointed as a director. 103. The Central Government had notified the Companies (Directors Identification Numbers) Rules 2006. The said rules came into force on 01.11.2006. It is relevant to note that the said rules did not provide for deactivation of DIN of any individual irrespective of whether he was a director or not. On 15.03.2013 the Central G....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 means; (c) of the death of the concerned individual; (d) the concerned individual has been declared as a person of unsound mind by a competent Court; (e) if the concerned individual has been adjudicated an insolvent: Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned individual; (f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN: Provided that before deactivation of any DIN in such case, the Central Government shall verify e-records. Explanation.- For the purposes of clause (b) - (i) the term "wrongful manner" means if the DIN is obtained on the strength of documents which are....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 Act. In the present case, the respondents have sought to cancel/deactivate the DIN of directors disqualified under Section 164 (2) of the Act. This has been done to enforce the provisions of Section 167 (1) of the Act. Clearly, this is not supported by any statutory provision. This Court is of the view that the Central Government having framed the rules specifying the conditions in which a DIN may be cancelled, cannot cancel the same on any other ground and without reference to such rules. 110. Similarly, there is also no provision supporting the respondents' action of cancelling the DSC of various directors. The said action is therefore unsustainable. 111. In view of the above, this Court finds no infirmity with the impugned list to the extent it includes the names of the petitioners as directors disqualified under Section 164(2) of the Act. This Court also rejects the contention that the impugned list is void as having been drawn up in violation of the principles of natural justice. 112....