TMI Blog2022 (2) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of NARESH KUMAR PODDAR VERSUS UNION OF INDIA, THROUGH SECRETARY, MINISTRY OF CORPORATE AFFAIRS AND ANOTHER [ 2021 (1) TMI 258 - CALCUTTA HIGH COURT] by a Co-ordinate Bench at Paragraph 25 thereof that since the disqualification under Section 164 (2) and 167 (1)(a) is automatic, by operation of law and leaving no discretion on the authorities, the question of application of principle of natural justice particularly prior hearing does not and cannot arise. In GAUTAM MEHRA VERSUS UNION OF INDIA [ 2021 (1) TMI 350 - CALCUTTA HIGH COURT] , Co-ordinate Bench has also held at Paragraph 92 and 93 that Section 164 (2) and 167 (1) (a), do not call for any prior notice or hearing. The object and purpose of Section 164(2) and 167(1) is indeed laudable. It is aimed at ensuring good governance and maintenance of high standards of probity and protection of the interest of Shareholders. Transparency in the activities of Companies is very vital for ensuring an enduring business atmosphere in an economy - This Court is of the view that the object and purposes of Section 164 and 167, as amended is to ensure probity and the highest standard of governance in Companies both public and private. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioners were not afforded a prior hearing before the disqualification as a directors and were hence denied principles of Natural Justice. (iii) The Registrar of Companies is not authorized to deactivate their Director Identification Numbers (DIN) of the and that such activation of DIN pursuant to the disqualification is not automatic. 2. A large number of decisions have been cited by Mr. Rajarshi Dutta, Learned counsel for the petitioner, Viz. M. K. Meethelaveetil Kaitheri Muralidharan Vs. Union of India, Represented by its Secretary, Ministry of Corporation Affairs and Another of a Division Bench of Madras High court reported in 2020 SCC OnLine Madras 2958; Jai Shankar Agrahari Vs. Union of India reported in 2020 SCC OnLine Allahabad 24 and Imraj Ali Molla Vs. Union of India Ors. reported in 2020 SCC OnLine Calcutta 669. 3. Counsel for the respondents Mr. Avinash Kankani and Mr. Siddhartha Lahiri argued that the petitioners have not claimed that they are directors of any other companies hence the effects of Section 167 (1)(a) cannot prejudice the petitioners. It is argued that the excuses given by the petitioners for non-filing of balance sheet and annual returns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition. It is essentially to deter conduct of this nature that Section 164 (2) and 167 (1)(a) have been introduced and applied under the Companies Act, 2013. Hence even on facts the petitioners have not made out any case for relief. 7. Let us now examine as to whether the petitioners were entitled to any prior notice before disqualification under Section 164 (2). It has been held in the case of Naresh Kumar Poddar (supra) by a Co-ordinate Bench at Paragraph 25 thereof that since the disqualification under Section 164 (2) and 167 (1)(a) is automatic, by operation of law and leaving no discretion on the authorities, the question of application of principle of natural justice particularly prior hearing does not and cannot arise. In Gautam Mehra (supra), Co-ordinate Bench has also held at Paragraph 92 and 93 that Section 164 (2) and 167 (1) (a), do not call for any prior notice or hearing. The question of applying principle of natural justice, therefore, cannot arise. 8. The language object and purpose of the aforesaid two provisions of the Act of 2013 are clear and explicit and provide for automatic consequences. There are no exceptions. There is no scope of condonation or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, i.e., the need to hear a director who has been disqualified under Section 164(2) of the Act, is envisaged under Section 164(2) of the Act? The Hon'ble Supreme Court has propounded the notion of post-decisional hearing, if, for certain reasons, a pre-decisional hearing cannot be envisaged. The leading cases in this regard are Maneka Gandhi v. Union of India [(1978) 1 SCC 248 : AIR 1978 SC 597] and Swadeshi Cotton Mills v. Union of India [(1981) 1 SCC 664 : AIR 1981 SC 818]. 122. Learned Senior Counsel Dr. Aditya Sondhi placed reliance on D.K. Yadav v. J.M.A. Industries Ltd. (supra) to contend that the Hon'ble Supreme Court has observed, where a private employer terminated an employee under Certified Standing Orders, due to absence from duty without or beyond the period of sanctioned leave for more than eight days, it is a case of automatic termination which is in violation of principles of natural justice and a duty to act in just, fair and reasonable manner, must be read into Standing Orders. That termination under the Standing Orders without holding any domestic enquiry or affording any opportunity to the workman was held to be violative of principles of natura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der by exercise of discretion. No order disqualifying a director of a defaulting company need be made. It is not by an administrative process but by a legislative intent and by operation of law. 125. Reliance has also been placed on another decision of the Hon'ble Supreme Court in the case of C.B. Goutam v. Union of India [(1993) 1 SCC 78], wherein the constitutional validity of Chapter XX-C of the Income Tax Act, 1961 was questioned. Section 269-UD of the said Act permitted compulsory purchase by the Central Government of immoveable property. The said provision did not contain an opportunity to be heard before an order for compulsorily purchase of property by the Central Government was made. Although, Chapter XX-C did not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase was made under Section 269-UD of the said Act, by quoting Judge Learned Hand of the United States of America, it was observed, not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of Chapter XX-C to make a fortress out of the dictionary . The Hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumentary and other evidence in its possession, that the persons in charge of the six industrial undertakings, had, by creation of encumbrances on the assets of the said industrial undertakings, brought about a situation which had affected and was likely to further affect the production of articles manufactured or produced in the said industrial undertakings and that immediate action was necessary to prevent such a situation. The company assailed the said order on the ground that compliance of principle of audi alter partem was in-built in Section 18-AA(1) of the said Act and its non-observance had vitiated the order. The Hon ble Supreme Court by a majority judgment held that the provision did not exclude audi alteram partem rule and observed that it was not reasonably possible to construe Section 18-AA(1) of the said Act as universally excluding either expressly or by an inevitable intendment, the application of audi alteram partem rule of natural justice at the pre-taking-over stage, regardless of the facts and circumstances of the particular case. However, in the said case, Hon'ble Chinnappa Reddy, J., dissented by observing that the exclusion of natural justice, where such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the object and reasons of having a provision in the nature of Section 164(2) of the Act, in my view, even a post-decisional hearing, is not contemplated. Hence, in my view the need to provide or read the requirement of a post-disqualification hearing under Section 164(2) of the Act also does not arise. 131. The reasons for the same are not far to see. In the circumstances, it is held that Section 164 of the Act applies by operation of law on the basis of circumstances stated therein. The said provision does not contemplate any hearing, either pre or post-disqualification hearing. In fact, no decision in the nature, of administrative or quasi-judicial decision is envisaged. It is by operation of law on the occurrence of the circumstances mentioned in Section 164(2) of the Act the publication of the list of disqualified directors is only a ministerial Act and not by-an administrative process involving the making of a decision on the facts, by application of law or by exercise of discretion; it is neither an adjudicatory process. The disqualification is by operation of law on an emerging and coming into existence of a set of facts. There is no legal infirmity in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment are as follows:- 15. The Statement of Objects and Reasons for enactment of section 274(1)(g) reads a under: The Government introduced a comprehensive Companies Bill, 1997 in Rajya Sabha on August 14, 1997, and the same was referred to standing committee of Parliament for examination and report thereon. The process of examination, however, is not yet over and is till to take some more time. The passing of this Bill is thus likely to be delayed further. It is however considered desirable by the Government that some more important changes in the Companies Act, 1956, are brought out in order to provide immediately certain measures for good corporate governance and for protection of investors. These measures are as follows (xiv) to provide that in case of a public company which does not file annual accounts and annual returns continuously for the last three years, the directors of such companies will be debarred from becoming the director of other public companies for five years. Similarly, in the case of any public company which fails to repay its depositors on maturity of deposit amount/debentures, dividend and interest on deposits/debentures on due dates. The whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce rate of filing statutory documents; and (v) infusing good corporate governance in the regulations of corporate affairs and to protect the interest of the investors. 17. The vires of section 274(1)(g) of the Companies Act came to be considered by the Division Bench of Bombay High Court in the case of Snowcem India Ltd. v. Union of India, [2005] 124 Comp Cas 161 : [2005] 60 SCL 50, and the Division Bench of the High Court has upheld the vires of section 274(1)(g) of the Companies Act by holding that: (1) The Statement of Objects and Reasons for enactment of section 274(1)(g) is for better corporate governance and protection of investment of the depositors. Such amendment would ensure transparency in the functioning of the company and would lead to the protection of investment and investors for better corporate governance. According to the wisdom of the Legislature, this can be achieved by enhancing penalty/punishment for contribution so as to ensure better compliance with the provision of the Act; (2) Article 21 of the Constitution is not at all attracted; (3) Section 274(1)(g) of the Act does not violate the directors' fundamental rights guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and protection of the investors. Section 274(1)(g), is reproduced hereinabove and the statement of objects and reason is also reproduced hereinabove. The primary object of enactment of section 274(1)(g) is better corporate governance as well as protection of investment of the depositors. The intention and purpose of the above amendment is to disqualify the errant directors and to protect the investors from mismanagement. The amendment becomes absolutely imperative to protect large number of investors, particularly small and poor investors who had invested their life time savings with such companies and in majority of the cases neither the principal amount nor the interest is paid back. It is an admitted position that so far as petitioner No. 1 company is concerned, the said company is unable to redeem the debentures which fell due on September 30, 2003. Thus, it cannot be said that section 274(1)(g) has no nexus to the objects sought to be achieved, namely good corporate governance and protection of investors. 27. So far as the submission on behalf of the petitioners that a person may be a director in many companies and some companies may be profit making company and some com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the field of economic regulation than in other areas where fundamental human rights are involved The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry; that exact wisdom and nice adaption of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts, cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Co., [1950] 94 L. Ed. 381 , be converted into tribunals for relief from such crudities and inequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any but also for the public at large, which rely upon such compliances, in assessing the conduct of and in deciding their relations with such companies. 16. This Court is also of the view that the provisions of the 2013 Act have an overriding effect on the Companies (Appointment and Qualifications of Director) rules of 2014. The said rules can, therefore, not have any manner of application or confer in right on the petitioners, insofar as their disqualification as directors. 17. On the power of the ROC to deactivate the DIN of the petitioners it would be necessary to go into whether the provisos to the two Section 164(2) and 167(1), introduced subsequently by amendment. The issue has been discussed at length in the Yashodhara decision (supra). This Court cites with agreement and approval the said views taken at paragraphs 195 to 200 of the said decision. 195. I find considerable force in the argument of petitioners counsel as, on 01.11.2016, when the petitioners were disqualified, while they had to vacate the office of the director, it necessarily referred to the defaulting company under Section 164(2) of the Act. But, realizing the fact that if all the directors in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Section (2) of Section 164, the office of the director shall become vacant , other than the company which is in default under that sub-Section being clarificatory in nature has retrospective operation, while the words in all the companies being introduced for the first time by way of proviso, pursuant to Amendment Act, 2017, has prospective operation and the proviso would apply only to those directors who sustain a disqualification pursuant to 07.05.2018. While saying so, the doctrine of severability as applicable to interpretation of statutes is applied. 198. In view of the fact that under the proviso to Section 167(1) (a) of the Act, the director of a defaulting company continues to hold the office of Director despite disqualification, his DIN cannot be cancelled. On the issue of cancellation of DIN, reference was made to Companies (Appointment and Qualification of Directors) Rules, 2014. Under Rule 14, the consequences of disqualification of directors under Section 164(2) of the Act are mentioned. That every director shall inform to the company concerned about his disqualification under sub-Section (2) of Section 164 of the Act in Form DIR-8 before he is appointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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