TaxTMI 
TaxTMI 
2020 (10) TMI 595
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....rar of Companies (the ROC) and for consequential reactivation of the Director Identification Number (DIN) or permission for appointment/reappointment as director were dismissed. 2. The Companies Act, 2013 (CA 2013) deals with disqualifications for appointment as a director in Section 164 which came into force on 01.04.2014. Section 164(1) thereof sets out eight grounds of disqualification that are individual director-specific and broadly corresponds to Section 274(1)(a)-(f) of the earlier Companies Act, 1956 (CA 1956). Section 164(2), which bears some resemblance to Section 274(1)(g) of CA 1956 but is wider in scope, on the other hand, deals with default by the company concerned in fulfilling its obligations and the attribution of such default to the directors, thereby resulting in their disqualification. In these cases, we are concerned with Section 164(2)(a) which prescribes that a 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 is not eligible to be re-appointed as a director of the company or appointed as a director of any other company for five years from the date o....
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....and sentenced in respect thereof to imprisonment for not less than six months, etc. He pointed out that Section 164(1) broadly corresponds to Section 274(1)(a)-(f) of the erstwhile CA 1956. However, Section 164(2) is wider than Section 274(1)(g) of CA 1956 and came into effect on 01.04.2014. Section 164(2) provides 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 or has 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 within a maximum period of one year shall be re-appointed as a director of that company (the Defaulting Company) or appointed in any other company for a period of five years from the date of default. Throughout this judgment, the expression 'Defaulting Company' is used to describe the company whose default triggers the disqualification under Section 164(2) in contradistinction with other companies in which the director of the Defaulting Company may be a director. 7. With this background, he advanced his first contention, nam....
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....dresses of all the directors of the company during the relevant financial years. If the company fails to file Form DIR-9 within a period of 30 days from the date of default, the disqualification under Section 164(2) would become applicable as stipulated in Rule 14(3). 9. Therefore, Mr.Aravind Pandian contended that the ROC enters the picture only if there is default by the company concerned to file Form DIR-9 within the stipulated 30 day period of default. Consequently, the action of the ROC in publishing the list of disqualified directors is without jurisdiction, in these cases, because neither the director concerned nor the company concerned had filed Form DIR 8 or 9, respectively. In support of this contention, he relied upon the judgment of the Gujarat High Court dated 18.12.2018 in Gaurang Balvantlal Shah v. Union of India, 214 Com. Cas. 199 (2019) (Gaurang Balvantlal Shah) wherein the Court concluded that the disqualification under 164 (2) would take place automatically on the occurrence of any of the eventualities mentioned therein but the action of the ROC in publishing the list of disqualified directors is not justified and is not in consonance with the provisions of Sect....
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....e said DIN was never used for filing a document with any authority. 12. Thus, he contended that Rule 11 does not empower the ROC to deactivate the DIN in the present circumstances. The deactivation of the DIN was considered by three High Courts, namely, the High Courts of Delhi, Gujarat and Karnataka. In Gourang Balvantlal Shah, the Gujarat High Court concluded that the DIN could not be cancelled or deactivated merely because one of the companies in which such person was a director had been struck off from the Registrar of Companies under Section 248 of CA 2013. In Yashodhara Shroff and Others v. Union of India, order dated 12.06.2019 (Yashodara Shroff), the Karnataka High Court concluded that Section 164(2) of CA 2013 applies prospectively and not retrospectively and, on that basis, directed restoration of the DIN where the disqualification of directors was not valid. Similarly, the Delhi High Court in Mukut Pathak v. Union of India W.P.(C) No.9088 of 2018 (Mukut Pathak), by order dated 04.11.2019, concluded that there is no provision supporting the respondent's action of cancelling the DIN and the Digital Signature Certificate (DSC) and that the said action is unsustainable.....
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....ctors who were declared as disqualified. His next contention was that the ROC does not have the power either to publish the list of disqualified directors or to deactivate the DIN. In support of this contention, he referred to the Companies [Registration Offices and Fees] Rules, 2014 and, in particular, to Rules 5 and 11 thereof. Rule 5 deals with the powers and duties of registrars. This Rule empowers registrars to exercise such powers and discharge such duties as are conferred on them by the CA 2013 or the rules made thereunder or delegated to them by the Central Government. However, neither under CA 2013 nor under any rules framed pursuant thereto, registrars are empowered to either publish a list of disqualified directors or to deactivate the DIN. Rule 11 of the aforesaid Rules deals specifically with vacation of office or removal of directors. This Rule provides that in the event of vacation of office or removal of directors, the ROC shall verify the documents as to correctness of the contents before approving or invalidating Form DIR-12. Therefore, he submitted that the power to publish the list of disqualified directors and the power to deactivate DIN of such disqualified di....
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....ntroduced so as to ensure that this obligation is fulfilled by companies in public interest. 17. His second contention was that the grounds of disqualification under Section 164(1) of CA 2013 are personal to the director concerned and may require a verification of material facts and circumstances. Therefore, before it is determined that a director is disqualified under Section 164(1), a prior notice may be required so as to verify the relevant material facts. By contrast, Section 164(2) does not require such prior verification. In order to substantiate this contention, he pointed out that the financial statements and annual returns are required to be filed with the ROC by the company concerned. Therefore, the ROC is fully aware as to whether such financial statements and annual returns have been filed for the relevant period by the company concerned. If these documents are not filed, the disqualification under Section 164(2) is triggered ipso facto. Therefore, the issuance of prior notice becomes an empty formality. Even with regard to disqualification under Section 164(2)(b), he contended that the relevant information with regard to failure to repay deposits or to pay interest on....
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....qualified directors and to deactivate the DIN of such directors. Consequently, the prior notice requirement would be an empty formality. 19. His next contention was that several opportunities were provided to defaulting companies and their directors by launching schemes to condone delay and for rectification. In this connection, he referred to the Company Law Settlement Scheme 2014 dated 12.08.2014 and to the Condonation of Delay Scheme 2018 dated 29.12.2017. By relying upon the aforesaid Schemes, he pointed out that defaulting companies and their directors had sufficient opportunity to rectify or cure these defects. Unfortunately, in spite of such opportunities, these companies and directors failed to take necessary action to ensure compliance. In these facts and circumstances, the publication of the list of disqualified directors and, consequently, the deactivation of DIN was fully justified. On this issue, he emphasized out that the deactivation is automatic or self-operating. He also pointed out that there is a provision to be registered as a dormant company under Section 455 of CA 2013. Accordingly, if a company is not carrying on business, it is possible for such a company t....
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....learned senior counsel/learned counsel for the respective parties and examined the materials on record. 23. The first question that arises for consideration is whether a prior notice is required before disqualifying a director under Section 164(2) of CA 2013. In order to answer this question, it is necessary to examine the text of Section 164 of CA 2013. Section 164 is 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 co....
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.... companies, other than the company which is in default under that sub-section. (b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board; (c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested; (d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184; (e) he becomes disqualified by an order of a court or the Tribunal; (f) he is 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: 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 ....
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.... 164(2). We should, therefore, turn to the AQD Rules to ascertain whether it is possible, on that basis, to identify the directors who would incur disqualification under Section 164(2). Rule 14 of the AQD Rules is as under: "Rule 14: Disqualification of directors under sub-section (2) of section 164: (1) Every director shall inform to the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed. (2) Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years. (3) When a company fails to file the Form DIR-9, within a period of thirty days of the failure that would attract the disqualification under sub-section (2) of Section 164, officers of the company specified in clause (60) of section 2 of the Act shall be the officers in default. (4) Upon receipt of the Form ....
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....lt", it is evident that the application of Section 2(60) of CA 2013 to a set of specific directors, even in the context of Section 164(2), would not be devoid of dispute and contest. 28. When Section 164(2) of CA 2013 is read with Rule 14 of the AQD Rules, it appears that, if Form DIR-9 is filed, the Registrar of Companies could rely on the names and addresses of directors that were provided by the Defaulting Company. Such reliance may not, however, be bereft of controversy especially when neither statute nor rule sets out the criteria for the preparation of such list. In any event, in all the cases at hand, such a list was not provided because the Defaulting Company did not file DIR-9. In such case, Rule 14(3) provides for resort to Section 2(60) of CA 2013. As stated above, on perusal thereof, it is evident that the statutory prescription is generic except with regard to the managing director and whole-time director and, consequently, insufficient to fix responsibility and attribute the default to a specific set of directors. As a corollary, an enquiry would be necessary. However, the scope of enquiry under Section 164(2) would vary from that under Section 164(1). In specific, t....
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....lt period is conspicuously absent. From the limited information on record, by inferential reasoning, except in the appeal filed by Mr.Muralidharan, it appears that the financial years 2014-15 to 2016-17, i.e. a block of three consecutive financial years, were reckoned for this purpose. All these years relate to the period after the entry into force of Section 164 of CA 2013. Nevertheless, the matter does not rest there. Once such determination is made, the next question would be as to who were the directors of the company concerned during the relevant period. This is a much more complicated issue to determine in the absence of clear statutory stipulation. 30. The reasons why this question is complicated should be discussed now, and for this purpose, the same financial years 2014-15 to 2016-17 may be used as the test case. As discussed above, the AGM is required to be held within a period of six months from the date of completion of the relevant financial year. Thus, for the financial year 2014-15, on the assumption that the financial year ends on 31st March, such financial year would run from 01.04.2014 to 31.03.2015; the company concerned is entitled to hold the AGM on or before ....
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....available. By way of illustration, the plausible criteria to decide on attribution could be any of the following: (i) All directors who held office throughout the period from 01.04.2014 to 30.11.2017; (ii) All directors who held office throughout the period from 01.04.2014 to 31.03.2017; (iii) All directors who held office at any time during the period 01.04.2014 to 30.11.2017; (iv) All directors who held office at any time during the period 01.04.2014 to 31.03.2017; or (v) All directors who held office on 30.11.2018. In the second illustration above, if certain directors had resigned prior to 30.11.2017, they would have an arguable case to contend that they should not incur disqualification because they could have made good the default if they had continued in office until 30.11.2017. Similarly, in illustration (iii) above, the directors who were appointed after 31.03.2017 would also have a reasonable basis to contend that they should not be made liable for the default inasmuch as they assumed office after the conclusion of the three financial years in question. 33. The aforesaid illustrations exemplify as to why a prior enquiry would not be an empty formality and, on ....
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....mber (DIN) along with such fees as provided in the Companies (Registration Offices and Fees) Rules, 2014. (2) The Central Government shall provide an electronic system to facilitate submission of application for the allotment of DIN through the portal on the website of the Ministry of Corporate Affairs. (3) (a) The applicant shall download Form DIR-3 from the portal, fill in the required particulars sought there in and sign the form and after attaching copies of the following documents, scam and file the entire set of documents electronically-- (i) photograph; (ii) proof of identity; (iii) proof of residence; (iv) verification by the applicant for applying for allotment of DIN in Form DIR-4; and (v) specimen signature duly verified. (b) Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital Signature Certificate and shall be verified digitally by - (i) a chartered accountant in practice or a company secretary in practice or a cost accountant in practice; or (ii) a company secretary in full time employment of the company or by the managing director or director of the company in which the applicant is to be appointed ....
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....rn 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 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)(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 ....