ROC cannot deactivate DIN of disqualified directors – HC
28. Act, 2013 is made applicable to all companies incorporated under previous Company Law as under Act, 2013, and, certain other companies also as is evident from Section 1(4), which reads as under :
“1(4) The provisions of this Act shall apply to-
(a) companies incorporated under this Act or under any previous company law;
(b) insurance companies, except insofar as the said provisions are inconsistent with the provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);
(c) banking companies, except insofar as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949 (10 of 1949);
(d) companies engaged in the generation or supply of electricity, except insofar as the said provisions are inconsistent with the provisions of the Electricity Act, 2003 (36 of 2003);
(e) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act; and
(f) such body corporate, incorporated by any Act for the time being in force, as the Central Government may, by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.”
29. The terms “Board of Directors” or “Board” and “Director” are defined in Sections 2(10) and 2(34) and read as under :
“2(10) “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.
2(34) “director” means a director appointed to the Board of a company.”
30. Chapter XI of Act, 2013 deals with appointment and qualifications of ‘Directors’ and contains Sections 149 to 172. Section 153 to 159 deal with issue of Director Identification Number (i.e. DIN). Section 153 provides that every individual, intending to be appointed as director of a company, shall make an application for allotment of DIN to the Central Government in such form and manner and along with such fees as may be prescribed. Section 154 makes it obligatory upon Central Government to allot DIN within one month from receipt of application under Section 153 to the person applying for the same. Section 155 prohibits more than one DIN to any individual and says that no individual who has already been allotted DIN under Section 154, shall apply for, obtain or possess another DIN. Vide Section 156, every existing Director is under obligation to intimate his DIN to the company or all the companies wherein he is a director, after receipt of DIN from Central Government. Similarly, Section 157 makes it obligatory upon Company to inform ROC of the Directors of companies. Obligation to indicate DIN is provided under Section 158. It says that every person or company, while furnishing any return, information or particulars, as are required to be furnished under Act, 2013, shall mention DIN in such return, information or particulars, in case such return, information or particulars related to the Director or contain any reference of any Director.
31. Section 164 of Act, 2013 talks of disqualifications for appointment of Director. It came to be enforced from 01.04.2014 and has been amended twice, inasmuch as, a proviso was added to sub-section 2 of Section 164, vide Section 52(i) of Act 1 of 2018, w.e.f. 07.05.2018. Existing proviso to sub- section 3 of Section 164 was substituted by Section 52 (iii) of Act 1 of 2018, which also came into force on 07.05.2018. Section 164 as it stood on and after 07.05.2018, after amendment vide Act 1 of 2018, 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 thesentence:
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 interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.
Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.
(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.”
(Provisions shown in bold were amended by Act 1 of 2018 w.e.f. 07.05.2018)
32. Broadly Section 164 of Act, 2013 is not only similar to Section 274 of Act, 1956 but a bit wider. Disqualification added in Section 274 (1) by insertion of Clause (g) has been continued in Section 164 though framed in slightly different language and is on the Statute as sub-section (2) of Section 164 of Act, 2013.
33. Under Act, 2013 liability to file Annual Return is provided vide Section 92. It says that every Company shall prepare a return (described in Section 92 as “Annual Return”) in the prescribed form containing particulars as detailed in Sub-section 1 of Section 92, as they stood on the close of Financial Year. Such Annual Return shall be signed by Director and the Company Secretary. Where there is no Company Secretary, it shall be signed by a Company Secretary in practice. Sub-section (4) of Section 92 makes it obligatory for every Company to file Annual Return with ROC within sixty days from the date on which Annual General Meeting (hereinafter referred to as ‘AGM’) is held or where no AGM is held in any year within sixty days from the date on which AGM should have been held together with the statement specifying the reasons for not holding the AGM. We find it appropriate to reproduce Sub-section (4) of Section 92 of Act, 2013 as under :
“92(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 general meeting, with such fees or additional fess as may be prescribed.”
34. Earlier with regard to payment of fees or additional fees it was provided that it could have been paid within time as specified under Section 403 but it has been amended by Act 1 of 2018 w.e.f. 07.05.2018 and now Sub-section (4) says that payment of fees or additional fees shall be as may be prescribed. Therefore, we have quoted Sub-section (4) of Section 92 as it stands after amendment made by Act 1 of 2018 w.e.f. 07.05.2018.
35. Sub-section 5 of Section 92 of Act, 2013 contemplates failure on the part of a Company to file its Annual Return under Sub-section (4) and says that it is an offence punishable with fine and every officer of the Company, who is in default is liable to be punished with imprisonment as well as fine as provided therein. We may produce sub-section (5) of Section 92 of Act, 2013 as under :
“92 (5). If a company fails to file its annual return under sub- section (4), before the expiry of the period specified under Section 403 with additional fees, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakhs rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”
36. Section 96 of Act, 2013 provides for Annual General Meeting (AGM) and says that in each year, in addition to any other meeting, a general meeting as its Annual General Meeting shall be held by Company and there shall not be a gap of more than fifteen months between two Annual General Meetings of the Company.
37. Section 137 of Act, 2013 provides for filing of Financial Statements by a Company with ROC. Here also non-compliance of filing of Financial Statements under sub-section(1) or (2), has been declared to be an offence punishable with fine for the Company, and, Managing Director and Chief Financial Officer of the Company or Director of the Company are punishable with fine and imprisonment or both. Section 137 of Act, 2013 has also undergone certain minor amendments by Act 1 of 2018 w.e.f. 09.02.2018 and 07.05.2018, hence we reproduce Section 137 of Act, 2013 as amended with effect from 07.05.2018 as under:
“137.Copy of financial statement to be filed with Registrar.(1) A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed.
Provided that where the financial statements under sub- section (1) are not adopted at annual general meeting or adjourned annual general meeting, such unadopted financial statements along with the required documents under sub-section (1) shall be filed with the Registrar within thirty days of the date of annual general meeting and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned annual general meeting for that purpose:
Provided further that financial statements adopted in the adjourned annual general meeting shall be filed with the Registrar within thirty days of the date of such adjourned annual general meeting with such fees or such additional fees as may be prescribed:
Provided also that a One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within one hundred eighty days from the closure of the financial year:
Provided also that a company shall, along with its financial statements to be filed with the Registrar, attach the accounts of its subsidiary or subsidiaries which have been incorporated outside India and which have not established their place of business in India.
Provided also that in the case of a subsidiary which has been incorporated outside India (herein referred to as “foreign subsidiary”), which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the requirements of the fourth proviso shall be met if the holding Indian company files such unaudited financial statement along with a declaration to this effect and where such financial statement is in a language other than English, along with a translated copy of the financial statement in English.
(2) Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under sub-section (1), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed.
(3) If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the period specified, the company shall be punishable with fine of one thousand rupees for every day during which the failure continues but which shall not be more than ten lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be punishable with imprisonment for a terms which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.”
38. Section 403 of Act, 2013 talks of fees for filing any document required to be filed under Act, 2013 with ROC and for the purpose of present dispute we do not find it relevant, so skipping said provision.
39. However, aforesaid provisions make it clear that filing of Annual Returns and Financial Statements are obligatory, non-compliance thereof is punitive and penal is nature. Therefore, Legislature has found it expedient to include violation of said provisions as one of the disqualification of a person to be a Director of such Company.
40. Section 167 of Act, 2013 which came into force on 01.04.2014 provides for contingencies when office of director shall become vacant. Here also a proviso was inserted in clause (a) of sub-section 1 of Section 167 vide Section 54 (i) of Act 1 of 2018 w.e.f. 07.05.2018 and existing proviso after clause (f) of Section 167 was substituted by aforesaid amendment act. The amended Section 167, reads as under :
“167. Vacation of office of director.-(1) The office of a director shall become vacant in case-
(a) he incurs any of the disqualifications specified in Section 164:
Provided that where he incurs disqualification under sub- section (2) of Section 164, the office of the director shall become vacant in all the 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 hold 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 cotravention 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 of 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 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, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).”
(Provisions shown in bold were amended by Act 1 of 2018 w.e.f. 07.05.2018)
41. Before proceeding further we find it appropriate to refer one more provision i.e. Section 470 of Act, 2013 which has been enforced w.e.f. 12.09.2013. It provides that if any difficulty arises in giving effect to the provisions of Act, 2013, Central Government may, by order published in Official Gazette, make such provision, not inconsistent with the provisions of this Act, as appear to it to be necessary or expedient for removing difficulty. It also provides that no order under sub-section (1) of Section 470 shall be made after expiry of a period of five years from the date of commencement of Section 1 of Act, 2013. Section 470 of Act, 2013 is reproduced as under :
“470. Power to remove difficulties.-(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions, not inconsistent with the provisions of this Act, as appear to it to be necessary or expedient for removing the difficulty:
Provided that no such order shall be made after the expiry of a period of five years from the date of commencement of Section 1 of this Act.
(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House of Parliament.”
42. Section 1 of Act, 2013 came into force at once i.e. 30.08.2013 when it was published in the Gazette of India(Extra-ordinary) after receiving assent of the President on 29.08.2013. Therefore, Central Government may issue orders referable to Section 470 (1) of Act, 2013 for five years i.e. upto 29.08.2018.
43. Now we proceed to consider rival submissions advanced in these writ petitions.
44. The First Question, up for consideration is, “What shall be the financial years, which can be considered for the purpose of disqualification under Section 164 (2) of Act, 2013, which came into force on 01.04.2014”
45. “Financial Year” has been defined under Section 2(41) of Act, 2013 and it also came into force w.e.f. 01.04.2014. It reads as under :
“2(41) “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up :
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:
Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause”
46. A perusal of Section 2(41) of Act, 2013 shows that for a provision, which came into force on 01.04.2014, ‘Financial Year’ which ended on 31.03.2014 will not be relevant, inasmuch as, disqualification under Section 164(2)(a) of Act, 2013 is failure of submission of Financial Statements or Annual Returns for any continuous period of three Financial Years and this provision, which is adverse and penal in nature, cannot be made applicable to a Financial Year which had already lapsed and when there was no such condition attracting any disqualification on an event as provided under Section 164(2) (a) of Act, 2013.
47. In taking above view, we need to look into the question, whether Section 164 (2) of Act, 2013 is retrospective or prospective or any other argument for the reason that a plain reading, in our view, leaves no manner of doubt that ‘Financial Year’ in which Section 164 of Act, 2013 has been enforced has to be excluded; A provision which has been enforced w.e.f. 01.04.2014 and talks of three Financial years, if read with Section 2 (41) of Act, 2013 clearly shows that such ‘Financial Year’ must commence from 1st April of the concerned year and Financial Year which has ended on 31st March, will not be covered. Probably this was also realized by Central Government, inasmuch as, a General Circular No.08/14 dated 04.04.2014 was issued by Ministry of Corporate Affairs and the relevant extract of said Circular reads as under :
“Although the position in this behalf is quite clear, to make things absolutely clear it is hereby notified that the financial statements (and documents required to be attached thereto), auditors report and Board’s report in respect of financial years that commenced earlier that 1st April shall be governed by the relevant provisions/schedules/rules of the Companies Act, 1956 and that in respect of financial years commencing on or after 1st April, 2014, the provisions of the new Act shall apply.”
48. The above Circular also shows that ‘Financial Year’ commencing from 1st April after enforcement of Section 164 of Act, 2013 will be relevant and hence, it would cover Financial Year 2014-15 and thereafter. Therefore, for the purpose of Section 164 (2) (a) of Act, 2013, in our view, three Financial Years relevant for attracting Section 164 (2) (a) of Act, 2013, would commence from Financial Year 2014-15 and onwards and not prior thereto.
49. We find that considering a similar issue, Gujarat High Court in Gaurang Balvantlal Shah Vs. Union of India, 2019 GLH (1) 444; Madras High Court in Bhagavan Das Dhananjaya Das Vs. Union of India and Anr., (2018)6 MLJ 704; Karnataka High Court in Yashodhara Shroff vs. Union of India, (2019)155 SCL 299; and Telangana High Court in Venkata Ramana Tadiparthi vs. Union of India (Writ Petition No.5422 of 2019) decided on 18.07.2019, have also taken same view. We also find that a Division Bench of this Court (at Lucknow Bench) in Mohd. Tariq Siddiqui and others Vs. Union of India and others (Misc Bench No.16173 of 2019 and other connected matters) decided on 15.10.2019 has followed the view taken by Gujarat High Court in Gaurang Balvantlal Shah (supra) and has also said in para 6 of the judgment that besides Madras High Court similar view has been taken by Madhya Pradesh High Court also. Since Division Bench of this Court has also followed the view taken by Gujarat High Court, we also find no reason to take a different view in the matter.
50. We, therefore, answer the question by observing that for attracting mischief of Section 164(2) (a) of Act, 2013, the ‘Financial Year’ would commence from 2014-15 and not prior thereto.
51. Learned Additional Solicitor General of India, however, placed reliance on a single Judge judgment of Delhi High Court in Mukut Pathak (supra) wherein Court has disagreed with the view taken by Karnataka High Court, Gujarat High Court and Madras High Court in the judgments in Yashodhara Shroff (supra), Gaurang Balvantlal Shah (supra) and Bhagwan Das Dhananjaya Das (supra), respectively, and said that mere fact that ‘Financial Year’ 2013-14 ended on 31.03.2014, will make no difference for the reason that Annual General Meeting (AGM) would be required to be held within next six months of that Financial Year and thereafter annual returns or annual financial statements are to be submitted within 60 days of holding of meeting of AGM or on the last date on which such meeting ought to have been held. Hence, non submission of financial returns/annual returns of Financial Year 2013-14 will also apply and covered within the ambit of Section 164(2)(a) of Act, 2013. In paras 51 and 52 of judgment learned Single Judge of Delhi High Court has said as under :
“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 retrospective application of Section 164 of the Act and the contentions advanced by the petitioners in this regard, are unmerited.”
52. Since Division Bench of this Court at Lucknow Bench has already taken a view concurring with decisions of Gujarat, Madras and Madhya Pradesh High Courts holding that to attract Section 164(2)(a), it is the Financial Statement/Annual Return of Financial Year 2014-15 and onwards which is relevant and not earlier thereto, which means that a different view to the view taken by Delhi High Court has been expressed by this Court. Hence, we find no reason not to accept and respectfully follow the view taken by Division Bench of this Court, hence we reject contention of learned Additional Solicitor General of India advanced on the foundation of judgment in Mukut Pathak (supra) passed by Delhi High Court.
53. The Second Question is “Whether Section 164 (2) of Act, 2013 is arbitrary and discriminatory, hence violative of Articles 14 and 19 (1)(g) of the Constitution of India or not”
54. As we have already noticed, Section 164 (2) of Act, 2013 broadly is similar as Section 274 (1) of Act, 1956. The two conditions of disqualification namely, non filing of Annual Returns and Financial Statements and non return of deposit and non payment of dividends etc in due time, were inserted in Section 274 (1) by inserting Clause (g) in Act, 1956 w.e.f. 13.12.2000. The object and purpose of insertion of Clause (g) of Section 274 (1) of Act, 1956, as stated by Legislature, was that it intended to disqualify errant Directors, protect investors from mismanagement, ensure compliance and filing of Annual Accounts and Annual Returns which are the means of disclosure to all Stake Holders; increase compliance rate of filing statutory document and to infuse good corporate governance in regulation of corporate affairs. Section 274 (1) (g) was applicable to public companies but Section 164 of Act, 2013 has been made applicable to private companies also. What is true and valid for public companies, if intention of Legislature is to make provisions of good corporate governance, we find no reason not to apply the same when provision is extended to private companies also, particularly when one of the objective is to ensure strict compliance of obligatory provisions of the Statute with regard to submission of documents to ROC.
55. We also do not find as to how the above provision is violative of Article 19 (1) (g) of the Constitution, inasmuch as, there is no embargo in carrying on business, profession etc. A limited prohibition is applied that too in respect of a tainted Director, who has failed to comply with statutory obligatory provisions of Act. Simultaneously, we find that a broad distinction has been made in respect of a person who has acted as a Director and complied with requirement of statutory obligations faithfully and effectively, vis-a-vis such person who though appointed as Director, but has failed to observe statutory provisions of Act. Therefore, a tainted Director stands in a different class than one who has regularly complied with statutory provisions, therefore, Article 14 of the Constitution, in our view, does not apply. There is a valid classification between a tainted and untained Director and it also has a reasonable nexus with the object sought to be achieved i.e. to make compliance of statutory provisions more stringent and providing stringent provisions so that the people may not have any liberty to disobey provisions without facing any consequences.
56. Legislature has maintained a distinction between Directors who stand disqualified, suffering one or more disqualifications under Section 274 (1) (a) to (f) and the disqualifications provided by insertion of Clause (g) in sub- section (1) of Section 274 of Act, 1956. It is submitted that default of Company in filing requisite document with ROC or non payment of deposit, dividends etc within prescribed time is a fault on the part of Company and for that purpose a Director cannot be made responsible, but we cannot ignore the fact that Company is a juristic personality. It has no physical existence and therefore, it is managed by Board of Directors, who are individual natural persons. The disobedience on the part of Company or incapacity in payment of certain dues as described in Section 274 (1)(g) (B) of Act, 1956 is bound to occur only when natural persons responsible for its management have failed to manage it effectively and properly. Defiance and default will also occur on the part of Company when persons responsible for management would fail in compliance of statutory duties. Therefore, while holding the Company responsible and to face consequences of such violation, Legislature has found it appropriate to hold the person responsible for its management i.e. Director to suffer certain consequences, which cannot be said to be unreasonable or per se arbitrary or irrational.
57. The provisions of Section 274 (1) (g) of Act, 1956 were considered on the anvil of Articles 14 and 19 (1) (g) of Constitution of India by Bombay High Court in Snowcem India Ltd (supra) and Gujarat High Court in Saurashtra Cement Ltd. (supra) and same was upheld. Section 164 (2) of Act, 2013 broadly contains similar provision and no argument has been advanced before us so as to make out a distinction in the logic and rationality given for upholding Section 274 (1) (g) of Act, 1956, earlier in above judgments so as not to apply to Section Section 164 (2) of Act, 2013. We also do not find any per se illegality, irrationality, arbitrariness or lack of intelligible classification, hence, we find no force in the submission that Section 164 (2) of Act, 2013 is ultra vires. This question, therefore, is answered against petitioners.
58. The Third Question is “Whether principles of natural justice are applicable before holding a Director disqualified under Section 164(2) or holding that Office of Director has become vacant under Section 167(1) (a)”
59. From perusal of provisions quoted above there is no scope of doubt that as soon as disqualifications stated therein are incurred, Director concerned shall stand disqualified by operation of law and/or Office of Director shall become vacant by operation of law, under Section 164 and 167, respectively, as the case may be. Therefore, to attract the consequences, if eventuality which attracts disqualification or vacation of Office of Director has occurred, being automatic, it cannot be said that principles of natural justice are required to be applied at that stage and must be observed. In fact no authority under Act, 2013 has been required to make such a declaration. Instead Statute itself makes declaration. The effect and consequence of attracting disqualification is automatic. It requires no order or declaration by any authority. The list issued by ROC of such unqualified Directors is only a ministerial act.
60. Every provision which excludes principles of natural justice cannot be said to be per se arbitrary. It depends upon the facts and circumstances, nature of Statutes, object, purpose and other relevant factors to examine whether compliance of principles of natural justice is necessary or not. In the present case, what is contemplated in Section 164(2) (a) is certain statutory duty which if failed by a Director concerned, the disqualification would stand attracted. Similar is the position in respect of Section 167(1) (a), hence, we find no reason to hold that principles of natural justice must be read in Sections 164(2) (a) and 167(1) (a) before attracting consequences.
61. However, the matter is not so simple and will not end here. There is another facet under which aforesaid provisions have to be examined.
62. Disqualification under Section 164(2) (a) of Act 2013 would operate only when there is a failure of non filing Financial Statements or Financial Returns for a continuous period of three Financial Years. Hence, question of fact which would arise in every case, whether there is any such failure or not and that too for the period as contemplated in the aforesaid provision. Similarly to attract Section 164 (2) (b) of Act, 2013 it has to be shown that there is failure on the part of company in payment of dividends, deposits, interests etc. This is again a question of fact. Unless these facts are shown to exist or have occurred, it cannot be doubted that disqualification under Section 164 (2) of Act, 2013, shall not be attracted.
63. In all these writ petitions, we have found that basic facts with regard to alleged disqualification are not pleaded in the writ petitions or missing in the writ petitions. Even in the counter affidavits, wherever the same have been filed, respondents have also not taken care to disclose the facts establishing existence of eventualities to have occurred so as to attract Section 164 (2) and 167(1)(a) of Act, 2013.
64. In all these writ petitions, as argued by learned Additional Solicitor General of India, disqualification is failure of Directors in ensuring filing of Annual Returns in three consecutive Financial Years. Which are these Financial Years for which the alleged failure has occurred and how it has been discerned, nothing has been disclosed either in the list published by ROC or disclosed in the counter affidavits.
65. In W.P.-I, counter affidavit is completely silent on this aspect. We find similar flaw in the pleadings in writ petitions wherever counter affidavit has been filed. In many matters respondents have not filed counter affidavit at all, despite time having been granted.
66. In other words, we have no hesitation in observing that pleadings on the part of both parties are extremely poor. ROC has published a list of disqualified Directors without giving details of disqualification incurred by those Directors. This has also not been disclosed to this Court in the counter affidavits filed by respondents. Petitioners, unfortunately, have also not pleaded as to what disqualification they have suffered.
67. During course of arguments it was sought to be explained that since petitioners were not disclosed as to what disqualifications they have suffered by ROC, hence, they have not indulged in conjectures on this aspect and it was responsibility and onus of respondents to disclose as to what disqualification is suffered by petitioners-Directors so as to attract Section 164 (2) of Act, 2013 and the consequences provided in Section 167 of Act, 2013.
68. Chart of various petitions would show that petitioners are Directors in more than one Companies except a few one where petitioner is Director in single company. For example, in Writ Petition No.15270 of 2018 petitioner-2 Jaspal Singh is Director in only one Company i.e. Newwaves India Estate Management Services Pvt Ltd. In all these writ petitions one of the Company in which petitioners are Directors, has been struck off under Section 248 of Act, 2013.
69. Section 248 of Act, 2013 confers power upon ROC, where it has reasonable cause to believe that a company has failed to commence its business within one year of its incorporation or is not carrying on any business or operation for a period of two immediately preceding Financial Years and has not made any application within such period for obtaining status of a dormant company under Section 455, to serve notice upon Company and all its Directors giving them opportunity to make representation to striking off name of such company from the register of companies and publish notice in the official gazette. Section 248 of Act, 2013 reads as under :
“248. Power of Registrar to remove name of company from register of companies.-(1) Where the Registrar has reasonable cause to believe that-
(a) a company has failed to commence its business within one year of its incorporation, or
(b) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay within a period of one hundred and eighty days from the date of incorporation of a company and a declaration under sub-section (1) of Section 11 to this effect has not been filed within one hundred and eighty days of its incorporation; or
(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under Section 455,
he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.
(2) Without prejudice to the provisions of sub-section (1), a company may, after extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the ground specified in sub- section (1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner;
Provided that in the case of a company regulated under a special Act, approval of the regulatory body constituted or established under that Act shall also be obtained and enclosed with the application.
(3) Nothing is sub-section (2) shall apply to a company registered under Section 8.
(4) A notice issued under sub-section (1) or sub-section (2) shall be published in the prescribed manner and also in the Offical Gazette for the information of the general public.
(5) At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Offical Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.
(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company:
Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.
(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.
(8) Nothing in this section shall affect the power of the Tribunal to wind up a company the name of which has been struck off from the register of companies.”
70. Section 248 of Act, 2013, therefore, does not talk of disqualification, which a Director would suffer so as to incur disqualification under Section 164 (2) read with Section 167 of Act, 2013. Thus the mere fact of striking off of a Company by itself can not prejudice a Director for the purpose of Sections 164 (2) and 167 (1) of Act, 2013.
71. Non application of mind on the part of ROC is writ large from the fact that some petitioners are Directors in Companies which are Limited Liability Partnership (LLP). For example, petitioner-1 Dr. Niraj Agrawal in Writ Petition no.34503 of 2018 is Director in Vashishtha Vatsalya Real Estates LLP. Similarly, petitioner-Kuldeep Singh in Writ Petition No.1189 of 2019 is Director in Omnis Lifecare LLP and Omnis Engineering LLP. In Writ Petition No.12494 of 2019, petitioner-Manjeet Singh is Director in Vedic Media Creations Pvt Ltd which was incorporated on 23.10.2013 and already struck off while other Company is a LLP i.e. Manita City Motors LLP. Learned Additional Solicitor General of India admitted that provisions of Act, 2013 are not applicable to companies which are LLP since, LLP is governed by Limited Liability Partnership Act, 2008 (hereinafter referred to as ‘Act, 2008′) and therefore, is beyond the purview of Act, 2013. Still in a mechanical manner, order of disqualification and consequences provided in Section 167 (1) (a) of Act, 2013 in respect of petitioners have been notified by ROC in all the companies including LLP. It cannot be doubted that when petitioners’ entitlement or capacity to function as Director is disabled or restricted or restrained by referring to Section 164 (2) read with Section 167(1) (a) of Act, 2013, they are greatly prejudiced as they cannot function as Directors of such company having been declared disqualified. This also prejudices the management of Company and all stake holders are bound to suffer adversely.
72. As we have already said that if conditions precedent to attract Section 164 (2) of Act, 2013 is established to exist, consequences are by operation of law but the condition precedent is that the condition of disqualification actually exists and for this purpose, in our view, a bare minimum requirement of notice to such Directors would be necessary to verify, whether such condition exists or not.
73. We could have examined all these writ petitions individually, provided respondents would have given and disclosed details of disqualification suffered by petitioners-Directors necessary to attract Section 164 (2) read with Section 167 (1) (a) of Act, 2013, but unfortunately that has not been done. On the contrary, argument is that three consecutive Financial Years would commence from Financial Year 2013-14. This stand of respondents clearly shows that what is not permissible to attract Section 164(2) (a) of Act, 2013 has been considered, applied and followed by ROC in publishing orders disqualifying petitioners and suspending their DIN and DSC. We have already held that to attract Section 164 (2) (a) of Act, 2013, Financial Year would commence from 2014-15 and not 2013-14. However, what has been pleaded in the counter affidavit of W.P.-I, if applied in all other cases, apparently it can be said that for only two valid Financial Years there is failure in submission of Annual Statements etc and that being so, requirement under Section 164 (2) (a) of Act, 2013, is not satisfied and, hence, declaration of petitioners-Directors as disqualified to be Director of all companies, is erroneous.
74. Thus, we reiterate that the fact whether there is such failure as contemplated and provided by Section 164(2)(a) of Act, 2013 to attract disqualification thereunder and also to incur consequences provided under Section 167(1) (a) of Act, 2013, it has to be established, as a matter of fact, that there is such failure. For this purse, in our view, a notice would be necessary to find out whether the alleged disqualification which according to ROC has been incurred by any Director, is an undisputed fact or if disputed, opportunity to concerned person has to be given to establish otherwise.
75. We may also notice that if any Director, despite having incurred disqualification, continues to work as Director, such an act of Director has not been allowed to remain immune from any action, instead it is provided in Section 167 of Act, 2013 that any person, if continuing to function as Director though office of Director has become vacant on account of any disqualification specified under Section 167 (1) of Act, 2013, shall be punished with imprisonment for a term which shall be extended to one year or fine which shall not be less than Rs.1 lakh extendable upto Rs.5 lakhs or with both. Hence, a Director if knowing well that he has incurred disqualification, continued, he will incur further penalty. Therefore, it cannot be said that continuance of a person as Director though under law he has suffered disqualification and he knows it, and office of Director has become vacant, will remain unpunished but he has to suffer further penalty also. It is, however, true that even this consequence will arise only when basic facts of incurring disqualification are established. This has to be established by an Authority who is responsible for monitoring and ensuring compliance of various provisions of Statute. To this limited extent, in our view, a notice is necessary on the part of ROC to concerned Director, unless Director himself has informed about disqualification it has incurred and that will attract further consequences.
76. The issue of application of principles of natural justice for Sections 164 and 167 of Act, 2013, has been considered and negatived by Gujarat High Court in Gaurang Balvantlal Shah (supra), Delhi High Court in Mukut Pathak (supra), Karnataka High Court in Yashodhara Shroff (supra) and Telangana High Court in Venkata Ramana Tadiparthi (supra), while Madras High Court in Bhagavan Das Dhananjaya Das (supra) has taken a different view.
77. We have examined all the aforesaid authorities in depth and with great respect to the view taken in the aforesaid judgments, we find that a complete embargo on principles of natural justice would not be justified, particularly when to attract disqualification and consequences under aforesaid provisions, certain basic facts, whether exist or not, had to be established and for this purpose at least a notice to concerned person was necessary to be given by ROC. We, therefore, answer Question-3 accordingly.
78. The Fourth Question is “Whether there is any provision empowering Registrar of Companies to de-activate “DIN” of petitioners who were allotted DIN under Section 154 of Act, 2013”
79. We need not go into this aspect in detail for the reason that various High Courts have examined relevant statutory provisions on this aspect and have taken a common view that there is no provision which empowers ROC to de-activate DIN, only on the ground that a Director has incurred disqualification under Section 164(2) (a) or his Office has become vacant under Section 167(1) (a). In this regard relevant extract of the judgments of different High Courts may be reproduced as under :
(1) Delhi High Court’s judgment in Mukut Pathak (supra), paragraphs 106, 108, 109 and 110:
“106. Neither any of the provisions of the Companies Act nor the Rules framed thereunder stipulate cancellation or deactivation of DIN on account of a director suffering a disqualification under Section 164(2) of the Act. It is relevant to note that Rule 11 of the Company (Appointment and Qualification of Directors) Rules, 2014 was amended with effect from 05.07.2018 to provide for deactivation of DIN in the event of failure to file Form DIR-3-E- KYC within the period as stipulated under Rule 12A of the said Rules. The amendment so introduced also does not empower the Central Government to cancel or deactivate the DIN of disqualified directors.
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 167 of 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 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.”
(2) Gujarat High Court in Gaurang Balvantlal Shah (supra), Paragraphs 29 to 31:
“29. This takes the Court to the next question as to whether the respondents could have deactivated the DINs of the petitioners as a consequence of the impugned list In this regard, it would be appropriate to refer to the relevant provisions contained in the Act and the said Rules. Section 152 (3) provides that no person shall be appointed as a Director of a company, unless he has been allotted the Director Identification Number under Section 154, Section 153 requires every individual intending to be appointed as Director of a company to make an application for allotment of DIN to the Central Government in such form and manner as may be prescribed. Section 154 states that the Central Government shall within one month from the receipt of the application under Section 153 allot a DIN to an applicant in such manner as may be prescribed. Section 155 prohibits any individual, who has already been allotted a DIN under Section 154 from applying for or obtaining or possessing another DIN. Rules 9 and 10 of the said Rules of 2014 prescribe the procedure for making application for allotment and for the allotment of DIN, and further provide that the DIN allotted by the Central Government under the said Rules would be valid for the lifetime of the applicant and shall not be allotted to any other person.
30. Rule 11 provides for cancellation or surrender or deactivation of DIN. Accordingly, the Central Government or Regional Director or any authorized officer of Regional Director may, on being satisfied on verification of particulars of documentary proof attached with an application from any person, cancel or deactivate the DIN on any of the ground mentioned in Clause (a) to (f) thereof. The said Rule 11 does not contemplate any suo motu powers either with the Central Government or with the authorised officer or Regional Director to cancel or deactivate the DIN allotted to the Director, nor any of the clauses mentioned in the said Rule contemplates cancellation or deactivation of DIN of the Director of the “struck off company” or of the Director having become ineligible under Section 164 of the said Act. The reason appears to be that once an individual, who is intending to be the Director of a particular company is allotted DIN by the Central Government, such DIN would be valid for the lifetime of the applicant and on the basis of such DIN he could become Director in other companies also. Hence, if one of the companies in which he was Director is “struck off”, his DIN could not be cancelled or deactivated as that would run counter to the provisions contained in the Rule 11, which specifically provides for the circumstances under which the DIN could be cancelled or deactivated.
31. In that view of the matter, the Court is of the opinion that the action of the respondents in deactivating the DINs of the petitioners-Directors along with the publication of the impugned list of Directors of “struck off” companies under Section 248, also was not legally tenable. Of course, as per Rule 12 of the said Rules, the individual who has been allotted the FIN, in the event of any change in his particulars stated in Form DIR-3 has to intimate such change to the Central Government within the prescribed time in Form DIR-6, however, if that is not done, the DIN could not be cancelled or deactivated. The cancellation or deactivation of the DIN could be resorted to by the concerned respondents only as per the provisions contained in the said Rules.”
(3) Telangana High Court in Venkata Ramana Tadiparthi (supra), Paragraphs 28 and 30
“28. Clauses (a) to (f) of Rule 11, extracted above, provides for the circumstances under which the DIN can be cancelled or deactivated. The said grounds, are different from the ground envisaged under Section 164 (2) (a) of the Act. Therefore, for the alleged violation under Section 164 of the Act, DINs cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules.
30. In view of the above facts and circumstances and the judgment referred to supra, the deactivation of the DINs of the petitioners for alleged violations under Section 164 of the Act, cannot be sustained.”
80. This Court (Lucknow Bench) also in Mohd. Tariq Siddiqui (supra) been quoted in ex tensio, the view taken by Gujarat High Court and has allowed writ petition. Operative part of judgment in para 7 reads as under :
“7. In view of above, the writ petitions for challenge to the deactivation of the Director Identification Number are allowed. It was de-activated on account of dis-qualification in one company effecting Director Identification Number for the other companies. The opposite parties are directed to activate the Director Identification Number of use for other company. The opposite parties would however be at liberty to take legal action against the petitioners for any statutory default or non-compliance of the provisions of the Act of 2013. It would obviously be in accordance with the provisions of law.”
81. Question-4 is, therefore, answered in favour of petitioners. We hold that in absence of any provision to deactivate DIN of petitioners if they have incurred disqualification under Section 164 of Act, 2013, the action of respondents and in particular of ROC, in deactivating DIN of petitioners, cannot be sustained.
82. The above discussion leads to the consequence that all writ petitions have to be allowed partly and action of respondents in deactivating DIN of petitioners is to be quashed.
83. We accordingly allow writ petitions partly. We also quash the list published by ROC, declaring petitioners in all these writ petitions as disqualified to be Directors of companies and debarment of being Director for a period of five years.
84. ROC, now, shall be at liberty to give a notice to petitioners to verify and establish the facts whether disqualification alleged to have been suffered by petitioners- Directors so as to attract Section 164 (2) of Act, 2013, actually exist or not. After giving them opportunity and being satisfied that such disqualification has occured, it will proceed further in accordance with law.
85. Parties are left to bear their own costs.
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