AI Drafter 
TaxTMI 
TaxTMI 
2021 (6) TMI 800
X X X X Extracts X X X X
X X X X Extracts X X X X
....39365/2018, 39371/2018, 41734/2018, 10315/2019, 10441/2019, 10720/2019, 10862/2019, 10866/2019, 11273/2019, 11401/2019, 12058/2019, 12059/2019, 12061/2019, 12070/2019, 12146/2019, 15712/2019, 15717/2019, 15728/2019, 27693/2019, 10559/2020, 10937/2020, 12313/2020, 12332/2020, 12335/2020, 12833/2020, 15407/2020, 15674/2020, 16587/2020, 16648/2020, 17243/2020, 19179/2020, 19220/2020, 19239/2020, 19455/2020, 19570/2020, 19774/2020, 20268/2020, 3725/2021, 15344/2019, 31949/2017, 33126/2017, 34847/2017, 35810/2017, 36410/2017, 8074/2018, 9513/2018, 9818/2018, 10932/2018, 12998/2018, 18319/2018, 20135/2018, 20348/2018, 23327/2018, 24984/2018, 31541/2018, 32916/2018, 36842/2018, 41201/2018, 41664/2018, 664/2019, 1569/2019, 1583/2019, 1619/2019, 1620/2019, 1898/2019, 1909/2019, 3242/2019, 3730/2019, 5622/2019, 5698/2019, 5999/2019, 6306/2019, 6315/2019, 6321/2019, 6678/2019, 7292/2019, 7317/2019, 7682/2019, 7789/2019, 7847/2019, 7962/2019, 8193/2019, 8443/2019, 8645/2019, 8997/2019, 9317/2019, 9338/2019, 9369/2019, 9550/2019, 10051/2019, 11823/2019, 12032/2019, 12097/2019, 12191/2019, 12422/2019, 12531/2019, 12581/2019, 12628/2019, 12632/2019, 12644/2019, 12648/2019, 12685/2019, 12706/2019,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bill. The Central Government accepted in general the recommendations of the Standing Committee and also considered the suggestions received from various stakeholders. In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating the recommendations of the Standing Committee and suggestions of the stakeholders. The revised Bill, namely, the Companies Bill, 2011 made provisions for E-Governance, Corporate Social Responsibility and Enhanced Accountability on the part of Companies. The Companies Act, 2013 was given assent by the President of India on 29.08.2013. 4. Section 274 of the repealed Companies Act, 1956 laid down certain disqualifications for being appointed as Directors of Companies. Persons of unsound mind, Undischarged insolvent and persons convicted for offences involving moral turpitude and sentenced for imprisonment for not less than six months, were disqualified. Directors of Public Limited Companies which have not filed Annual returns for any c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no company secretary, by the director of the company. Provided further that the Central Government may prescribe abridged form of annual return for One Person Company, small company and such other class or classes of companies as may be prescribed. (2) The annual return, filed by a listed company or, by a company having such paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice in the prescribed form, stating that the annual return discloses the facts correctly and adequately and that the company has complied with all the provisions of this Act. (3) Every company shall place a copy of the annual return on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board's report. (4) Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law. (2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. [(3) Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2): Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed: Provided further that the Central Government may provide for the consolidation of acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted, 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 not be vacated by the director in case of orders referred to in clauses (e) and (f)- (i) for thirty days from the date of conviction or order of disqualification; (ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or (iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.] (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 e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provisions in this regard are evidently, exceptionally and excessively arbitrary and would be and should be hit by Article 14 of the Constitution. 9. When the consequences of disqualifying are so grave and civil in nature, then even if the disqualification is by operation of law, principles of natural justice should be complied with. The failure to file Annual Returns / Financial Statements can be due to reasons beyond the control of Directors - like pandemics, lockdowns, non-availability of or ban on internet services etc. Or it may be in spite of the earnest efforts taken by the Directors. Therefore, before effecting disqualification, the affected Directors should be extended an opportunity of hearing. The Act, 2013 does not contemplate even a post-decisional hearing for rendering the Directors disqualified. 10. In the context of absence of notice before disqualifying a Director, it was argued, Section 455(4) mandates that if a Company has not filed Annual Returns or Financial Statements for a period of two financial years consecutively, the Registrar shall issue a notice to that Company and enter the name of such Company in the register maintained for dormant companies. It....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tood disqualified by operation of law and upon fulfillment of the criteria mentioned in Section 164(2)(a) read with section 167(1)(a). Section 164(2)(a) of the Companies Act, 2013 cannot be read in isolation and will have to be read along with section 167(1)(a) of the Companies Act. In view of section 167 (3) of the Act, 2013, where all the Directors of a company vacate their offices under section 167(1), the promoter shall appoint the required number of Directors who shall hold Office till the Directors are appointed by the company in general meeting. 16. The respondents stated that the provisions of Sections 164 and 167 are explicit. 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, shall be ineligible to be reappointed as a Director of that Company or appointed as Director in any other Company, for a period of five years. The disqualification is by operation of law. The Act does not envisage any adjudicatory process or hearing to be provided to the errant Companies or Directors in default. The disqualification of Directors is not by any executive action of the res....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... F. Whether the action of the respondents in deactivating the DINs of the petitioners, is justified ? G. What is the impact of striking off of a defaulted company, on the disqualified Directors ? 20. In support of the contentions of the petitioners that Sections 164 and 167 offend Articles 14 and 19 of the Constitution, Sri. Navod Prasannan Pattali, learned counsel for the petitioners, argued that the ground of disqualification for reappointment in a defaulting Company under Section 164(2) or for appointment in other Companies for a period of five years, is not directly attributable to the Directors, but the consequences are very serious and are excessively disproportionate to the default. Hence Section 164(2) is violative of Article 14 of the Constitution. By making Directors of a defaulting Company ineligible for appointment in other companies which are not in default, the fundamental right of the Directors under Article 19 is offended. 21. Relying on the judgment of the Hon'ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan and others v. Union of India and others [(2020) 7 MLJ 641], the learned counsel argued that the determination of disqualificatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an mind. Sri. Mohan Pulickkal further pointed out that Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 also give rise to a presumption of requirement of a pre-decisional hearing in the matter. Explaining the facts in W.P. (C) No.8193/2019, Mr.Mohan Pulickkal, the counsel for the petitioners pointed out that the petitioners are the only Directors in the Company Color Harmony Decor Private Limited, which has allegedly defaulted in filing statutory returns. Their disqualification under Section 164(2) in the defaulted Company will arise only as and when they are reappointed. The petitioners cannot therefore be treated as disqualified Directors as on date. 26. Sri.Sukumar Nainan Oommen and Sri. Sherry Samuel Oommen, counsel representing the petitioners in some of the writ petitions, relied on the judgment of the Hon'ble Apex Court in The State of Jharkhand and others v. Brahmaputra Metallics Ltd and others [2021 (1) SCJ 131] and argued that a decision taken in an arbitrary manner contradicts the principle of legitimate expectation. An authority is under a legal obligation to exercise the power reasonably and in good faith to effectuate the purpos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....circumstances specified therein. Temporary disqualification of Directors of Companies cannot be a reason for suspension or deactivation of DIN. 31. Sri. Mohan Pulickkal, learned counsel appearing for the petitioners, urged that cancellation or surrender or deactivation of DIN and DSC by the Registrar of Companies is illegal as it can be effected only for the reasons and under the circumstances set out in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and the Registrar of Companies has no authority or power to deactivate DIN or DSC. Such deactivation will disable the petitioners from making up the default, which would go against the intent and purpose of the statute. 32. The learned Assistant Solicitor General Sri. P.Vijayakumar representing the Union of India and other respondents pointed out that failure to file Financial Statements / Annual Returns is considered as a grave offence even under Section 92, and the officers concerned are liable for imprisonment. The Annual Returns are statutorily required to be kept and maintained in the registered office of a Company, in view of Section 94. Annual General Meeting is to be held every year as p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....med as excessive or disproportionate. The learned Central Government Counsel Mr. Dayasindhu Srihari argued that non-issuance of notice under Section 455(4) is of no consequence as the said provision is intended to apply in a diverse context and for a different purpose. The learned Central Government Counsel pointed out that even a dormant Company is mandated by law, to file Annual Returns. 36. Heard learned counsel appearing for the petitioners and the learned Assistant Solicitor General of India and Central Government Counsel appearing for the respondents. A. Constitutionality of Section 164 and Section 167 Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations fall under Entry 43, List I, Schedule VII of the Constitution of India. Therefore the legislative competence of the Union Parliament is beyond doubt. The question therefore is whether Sections 164 or 167 offend any of the provisions in Part III of the Constitution. As rightly pointed out by the Central Government Counsel, the petitioners do not have a fundamental right to be Directors of any company incorporated. The right to be a Director of an inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially. 40. An inadvertent or unintended exceptional failure in filing a Financial Statement or Annual Return, does not result in automatic disqualification of Directors. It is only when a company fails to file Statements / Returns for a consecutive period of three long years that the disqualification entails. In fact, Companies can file their annual returns within a period of sixty days from the date on which the annual general meeting is held, in view of Section 92. Similarly, under Section 137, Financial Statements can be filed within 30 days of the Annual General Meeting. In effect the petitioners as well the Companies they represent may get more than three years to avoid the adverse consequences arising from Section 164 and Section 167. 41. The argument of the petitioners is that there may be circumstances like pandemic, prolonged Lockdowns, shutting down of internet facilities etc. which may be the reasons for failure to file Annual Returns / Financial Statements. But the disqualification of Directors consequent to non-filing would arise only at the end of three ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ondone the disqualification of Directors on the failure of their Companies to file Annual Returns / Financial Statements for a consecutive period of three years, for any reason. No authority is empowered under law to condone or waive disqualification resulting from violation of Section 164(2). 46. Principles of natural justice are important procedural safeguards against arbitrary exercise of power by executive or quasi judicial authorities. However a statute can exclude the requirement of principles of natural justice expressly or by necessary implication. Whether the statute excludes the principles of audi alteram partem, would depend upon the language of the statutory provisions and the scheme of the statute. 47. On the issue of exceptions to the rule of principles of natural justice, the Hon'ble Apex Court in Union of India v. W.N Chadha [1993 Supp (4) SCC 260] held that the rule of audi alteram partem is not attracted unless the impugned order is shown to have deprived a person of his liberty or property and the rule cannot be applied to make the law lifeless, absurd, stultifying and self defeating or plainly contrary to common sense and this rule may be jettisoned in exc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompanies Act, 1956 but it would not result in vacating the office under Section 283. Under the Act,1956 a Director of a defaulting company could not have been appointed as Director of another company for five years. He could, however, have been re-appointed as Director in the defaulting company. 53. There was no provision for disqualification of Directors of defaulting private Companies under the Act,1956. Such disqualification of Directors of private Companies was brought into force for the first time by the Act, 2013 with effect from 01.04.2014. Since the disqualification of Directors of defaulting private Companies is brought about for the first time, the provision Section 164(2) must be given only prospective operation and the continuous default period of three years should commence from or after 01.04.2014. This would be especially so because up to 31.03.2014 the provisions of Section 274(1)(g) of the Act,1956 were governing the field. 54. In Yashodhara Shroff (supra), the Hon'ble High Court of Karnataka held that a new law imposing a disqualification which is more severe, cannot be applied to facts which have not fructified so as to result in the concluded or completed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... than the Company which is in default under that subsection. The said proviso also was brought into force with effect from 07.05.2018. 58. The effect of the two provisos is that though a Director of a defaulting Company vacates his office of Director in all other Companies, he continues to be in office in the defaulting Company and any new Directors appointed in any such defaulting Companies, can hold office for a period of six months in spite of the default committed by the Company. The amendments inserting the provisos to Section 164(2) and 167(1)(a) are intended to enable the defaulting Companies to file Financial Statements / Annual Returns in respect of the defaulted years and thus avert striking off of the Company from the Register of Companies. This court does not find any illegality or unconstitutionality in the inserted provisos. 59. Still, question arises as to whether the provisos will have effect only with effect from 07.05.2018 on which date the amendments were brought into force or whether they will relate back to periods anterior to 07.05.2018. In some of these writ petitions (for instance WP(C) No.13940/2019) the disqualification was effected from 01.11.2015. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome vacant ......., other than the company which is in default under that sub-Section" will have retrospective operation, and the words "in all the companies" will have only prospective operation. E. Whether notice under Section 455(4) a sine qua non Section 455 of the Companies Act, 2013 falls in Chapter XXXIX titled "Miscellaneous". Section 455 reads as follows: "455. Dormant company - (1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. Explanation.-For the purposes of this section,- (i) "inactive company" means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years; (ii) "significant accounting transaction" means any transaction other than- (a) payment of f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the Registrar to issue notice to such Companies before entering the names of such Companies in the register of dormant Companies. A wholistic reading of Section 455 would reveal that the notice under Section 455(4) is intended to ascertain whether a Company which has not filed Financial Statements / Annual Returns for two consecutive financial years, is in fact a dormant Company without any significant financial transaction or activity. 65. Every company which has not filed Financial Statements / Annual Returns for two years cannot be invariably treated as a dormant Company. Companies which are active and having significant financial transactions may fail to file Financial Statements/Annual Returns for two consecutive years. Such companies cannot be treated as dormant Companies for that reason, for the purpose of being included in the Register of dormant Companies. It is evident from Section 455 that the provision is intended for an altogether different purpose. Section 455 cannot be construed as a provision to issue notice to defaulting Companies before their Directors become amenable to disqualification under Section 164(2). This court therefore hold that a notice under Sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of Directors) Rules, 2014 reads as follows: "11. Cancellation or surrender or Deactivation of DIN - (1) 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 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esulting from Section 164(2). 71. On an analysis of Rules 9 to 11 of the Rules, 2014 the Hon'ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan (supra) has also held that DIN of Directors of a defaulting Company cannot be cancelled or deactivated solely on the basis of disqualification of Directors under Section 164(2). For all the afore reasons, this court hold that the DIN of the petitioners allotted under Rule 10 of the Companies (Appointments and Qualifications of Directors) Rules, 2014, are not liable to be deactivated or cancelled solely for the reason that the petitioners stand disqualified for appointment / reappointment as Directors of Companies by operation of Section 164(2). G. Striking off and Disqualification 72. Section 248 of the Companies Act, 2013 empowers the Registrar of Companies to strike off the name of a Company from the Register of Companies if the Company is not carrying on any business or operation for a period of immediately preceding two financial years and has not made any application within such period for obtaining the status of a dormant Company. Name of defaulting Companies in which some of the petitioners are Directors, have ....