TMI Blog2021 (6) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to protect creditors and the general public from mismanagement of Companies. Therefore the provisions Section 164 and Section 167 will fall within the exceptions under Article 19(6). Section 164 and the Principles of Natural Justice - HELD THAT:- In the case of non-filing of Annual Returns / Financial Statements by a company, the facts speak for themselves. No amount of explanation can alter the facts. As long as the statute does not provide for any exceptions in the matter of filing of Financial Statements / Annual Returns or in the matter of disqualification under Section 164(2), grant of opportunity of hearing would be nothing but an empty formality. The law imposes a strict liability on Directors - this court hold that the Companies Act, 2013 does not contemplate extension of opportunity of hearing to Directors of a Company while incurring disqualification under Section 164(2), and going by the scheme of the Act the principles of natural justice cannot be read into Section 164(2) or Section 167(1). Section 164(2) whether retrospective - HELD THAT:- There was no provision for disqualification of Directors of defaulting private Companies under the Act,1956. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable to disqualification under Section 164(2). This court therefore hold that a notice under Section 455(4) is not a sine qua non for applying the provisions of Section 164(2) or 167. Deactivation of DIN whether justified - HELD THAT:- On an analysis of Rules 9 to 11 of the Rules, 2014 the Hon ble High Court of Madras in Meethelaveetil Kaitheri Muralidharan [ 2020 (10) TMI 595 - MADRAS HIGH COURT ] 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). Striking off and Disqualification - HELD THAT:- 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 o ..... 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X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 continuous three financial years or which have failed to pay deposits or interest thereon on due dates or redeem debentures on due dates or pay dividends for one year or more, were also disqualified. 5. Section 164 of the Companies Act, 2013 (corresponding to Section 274 of the Act, 1956) made the disqualification on failure to file Annual returns, applicable to Directors of all Companies including Private Limited Companies. It is this sweeping change, which has given rise to these l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely 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 general meeting, with such fees or additional fees as may be prescribed[***]. (5) If a company fails to file its annual return under subsection (4), before the expiry of the period specified [therein], such company and its every officer who is in default shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm 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 accounts of companies in such manner as may be prescribed.] (4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3). (5) Without prejudice to sub-section (1), where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 defau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (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 genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 was contended that the notice under Section 455(4) should be treated as a mandatory requirement and without issuing a notice under Section 455(4), the disqualification prescribed under Section 164(2)(a) cannot come into effect. 11. The petitioners further urged that under Section 248, if 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, the Registrar has the power to remove the name of the Company from the Register of Companies. As Section 248 can be invoked against any Company, disqualifying the Directors without notice, is arbitrary. As the Directors have no remedy against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respondents. Therefore there is no question of issuing a prior notice or following the principles of natural justice. 17. The respondents stated that the provisions of section 92(4) as it stood prior to 2017 and subsequent to 2017 Amendment categorically states that annual returns/financial statements shall be filed within 60 days from the date of annual general meeting. So also, section 137(1) categorically stipulates that a financial statement shall be filed with the Registrar of Companies within 30 days of the respective Annual General meeting. What is stipulated as per sub-section (1) of Section 403 is also that the same have to be filed within the time specified in the relevant provision. 18. The respondents reiterated that since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 disqualification under Section 164(2) would not be necessarily devoid of challenge and hence compliance of natural justice cannot be dispensed with and it should be read into the provisions. The learned counsel pointed out that in the judgment in State Bank of Patiala and others v. S.K.Sharma [(1996) 3 SCC 364], the Hon ble Apex Court has held that while applying the principles of audi alteram partem, the court must always bear in mind the ultimate and overriding objective viz., to ensure a fair hearing and and to ensure that there is no failure of justice. 22. Based on the judgment of the Apex Court in S.L.Kapoor v. Jagmohan and others [(1980) 4 SCC 379], the learned counsel urged that the person proceeded against must know that he is being required to meet the alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel 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 purpose for which power stood conferred. Applying the above mentioned principles to these cases, the counsel urged that disqualifying Directors for alleged violation of section 164 of the Companies Act in other non-defaulting Companies, would go against the settled principles of Legitimate Expectation. 27. The counsel, placing reliance on the judgment in Narmada Bachao Andolan and others v. State of Madhya Pradesh and others [(2011) 7 SCC 639], urged that where the language of a statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or justice, presumably not intended, a construction may be put upon it which modifies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 per Section 96. Under Section 102, a Statement is to be annexed to the notice calling a general meeting of a Company. Financial Statements giving a true and fair view of the state of affairs of a Company is mandatory under Section 129. 33. These provisions are incorporated in the Act, 2013 in order to ensure transparency in corporate governance. When the Directors who are at the helm of affairs of a Company are aware of the statutory requirement of preparation and filing of Annual Returns and Financial Statements, and the gravity and consequences of non-filing, then, failure of such Directors to ensure in three consecutive years that the Returns and Statements are duly filed by the Company, should be taken seriously and such Directors can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incorporated Company is not an absolute statutory right. 37. The contention of the petitioners is that the consequences arising from the operation of Sections 164 and 167 of the Act, 2013 are serious and grossly disproportionate and hence the provisions are arbitrary, offending Article 14. It is well settled that if a constitutional infirmity is found on the touchstone of Article 14, the legislation is manifestly arbitrary . Arbitrariness in legislation is also a facet of unreasonableness. At the same time, the Hon ble Apex Court has held in Dr. Subramanian Swamy v. Director, Central Bureau of Investigation [(2005) 2 SCC 317] that a court considering the validity of a legislation must be mindful that a legislation does not become u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 years. Any of the eventualities pointed out by the petitioners can not last for a continuous period of three years. In the circumstances, this court is not inclined to accept the argument of the petitioners that Sections 164 and 167 are arbitrary, offending the right of the petitioners under Article 14. 42. The disqualification of Directors of a defaulting company for appointment as Directors in other companies, offends Article 19 of the Constitution, it was urged on behalf of the petitioners. The purpose of disqualification of defaulting Directors in other Companies is to make the Directors answerable to the corporate sector. The purpose is to save the corporate community from the consequences of mismanagement. It is intended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exceptional circumstances where compulsive necessity so demands. 48. In the case of non-filing of Annual Returns / Financial Statements by a company, the facts speak for themselves. No amount of explanation can alter the facts. As long as the statute does not provide for any exceptions in the matter of filing of Financial Statements / Annual Returns or in the matter of disqualification under Section 164(2), grant of opportunity of hearing would be nothing but an empty formality. The law imposes a strict liability on Directors. Furthermore, as held by the Hon ble Karnataka High Court in Yashodhara Shroff (supra), the ineligibility of Directors under Section 164 is in the nature of suspension and is temporary, for a perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peration 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 event i.e., when the time to apply it is not ripe as on the date of the enforcement of the new law. It could be applied only after the commencement of the new law, but not by taking into consideration any period prior to the enforcement of the law. This is because when the material period of three continuous financial years is to be reckoned, no period prior to 01.04.2014 can be taken into consideration as and when such a period and commenced the new law with different consequences were not envisaged. This is different from applying the new law to an event which is a past, concluded one prior to the enforcement of the new law as the same could be taken into consideration. In such a case, the law is being applied retro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In such cases, whether the proviso to Section 167(1)(a) inserted with effect from 07.05.2018 can be made applicable ? If it can be made applicable in such cases, then such petitioners would not vacate the office of the Directors in the defaulting Companies, but would vacate Directorship in all other Companies in which they are Directors. Whether proviso to Section 167(1)(a) has retrospective effect, is the question. 60. Section 167(1)(a) provides that the office of the Director shall become vacant in case he incurs any disqualification specified in Section 164 of the Act. The proviso applies to disqualification under Section 164(2) also. The purpose of Section 167(1)(a) is to bring in a higher degree of responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant 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 fees by a company to the Registrar; (b) payments made by it to fulfil the requirements of this Act or any other law; (c) allotment of shares to fulfil the requirements of this Act; and (d) payments for maintenance of its office and records. (2) The Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in such form as may be prescribed to that effect. (3) The Registrar shall maintain a register of dormant companies in such form as may be prescribed. (4) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Section 455(4) is not a sine qua non for applying the provisions of Section 164(2) or 167. F. Deactivation of DIN whether justified 66. The argument of the petitioners against deactivation of DINs is that the Companies (Appointment and Qualification of Directors) Rules, 2014 do not empower the Registrar of Companies to deactivate DINs. Rule 14(1) mandates that every Director shall inform the company concerned about his/her disqualification under 164(2) by filing Form DIR-8 before he/she is appointed or reappointed, respectively as a Director of any other company or by the defaulting company. Under Rule 14(2) the company is required to file Form DIR-9 with the Registrar immediately upon commission of default in complying with Section 164(2)(a) or (b) by pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or any DIN in such case, the Central Government shall verify e-records. [(2) The Central Government or Regional Director (Northern Region), or any officer authorised by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC [or the web service DIR- 3 - KYC-WEB] within stipulated time in accordance with Rule 12A. (3) The de-activated DIN shall be re-activated only after e-form DIR-3-KYC [or the web service DIR-3-KYC-WEB] is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 been struck off by the Registrar of Companies and the petitioners have been disqualified for being appointed as Directors in other Companies. 73. Such petitioners apprehend that if they take recourse to legal proceedings for setting aside their disqualification incurred under Section 164(2), such proceedings are likely to go against them if the authorities / legal fora take a stand that since the names of the defaulting Companies itself are struck off, such petitioners / Directors cannot be restored with their Directorship and hence the proceedings are of no consequence. 74. The petitioner and their Companies in such cases have a remedy for challenging striking off, under Section 252 of the Act, 2013 before the National Company Law Tribunal (NCLT). Striking off of Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X
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