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2019 (11) TMI 319 - HC - Companies LawDisqualification of Directors - defaulting directors - Use of DSC and DIN no by the disqualified director - Interpretation of statute - provisions of Section 164(2) and Section 167(1)(a) of the Companies Act, 2013 - default on the part of concerned companies in filing the annual returns and financial statements for the financial years 2014-2016. Whether the provisions of Section 164(2)(a) are retrospective? - HELD THAT:- A plain reading of Clause (a) of Section 167 (1) of the Act indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act. The proviso to Clause (a) of Section 167(1) of the Act was introduced with effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018 Indisputably, the plain language of Section 164(2) read with Section 167(1)(a) of the Act leads to an absurd situation as discussed earlier. In this view, the rule of literal interpretation cannot be applied for interpreting the provisions of Section 167(1)(a) of the Act. There is no dispute that the provisions of Section 164(2) of the Act must be applied prospectively - The Karnataka High Court, Gujarat High Court and Madras High Court have also considered a similar challenge - All of the aforesaid Courts are unanimous in their opinion that the provisions of Section 164 apply prospectively. The petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company. Automatic vacancy of officer of director - Whether the consideration of the default committed in filing financial statements and annual returns for the financial years 2013-14 would amount to applying the provisions of Section 164(2) of the Act retrospectively? - HELD THAT:- The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to matters of procedure cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act. Whether a law is retrospective has to be viewed in the context whether it divests a person of accrued rights, or creates new obligations, or attaches a disability in respect of transactions or actions done in the past? - HELD THAT:- The penal consequences of not filing returns for three consecutive financial years would be attracted on section 164 of the Act coming into force. Section 164 of the Act came into force on 01.04.2014 and thus, the failure of a company/its directors to file annual returns (for three financial years) thereafter would result in the directors incurring the disqualification as specified under Section 164(2) of the Act. It is of little consequence that such defaults relate to filing annual returns that pertain to a period prior to 01.04.2014 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. Whether principles of natural justice are applicable is required to be considered in the context of the statutory provisions? - HELD THAT:- The principles of natural justice have been accepted as a part of procedural law, where it is necessary to supplement it. The question whether such principles are required to be read into any law must be considered in the context of the basic scheme of the statutory provisions - the contention that the impugned list is void as having been published without following the principles of natural justice, is rejected. Deactivation of the DIN of the defaulting directors - Held that:- 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. - None of the provisions of Rule 14 of the said Rules indicates that the DIN of directors incurring the disqualification under section 164(2) of the Act, is required to be deactivated. Conclusion: the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act. As discussed above, there is also much merit in the contention that the DIN and DSC of the petitioner could not be deactivated. Accordingly, the respondents are directed to reactivate the DIN and DSC of the petitioners. It is clarified that the petitioners would continue to be liable to pay penalties as prescribed under the Act. Petition disposed off.
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