Based on Recent Judgement of Delhi High Court
In the recent judgment of the Delhi High Court where the Hon’ble Court combined two separate writ petitions of 2018 i.e. Mukut Pathak & Ors v. Union of India & Anr. With Yogesh Khantwal v. Union of India & Anr – some important issues affecting Directors were discussed, after the Companies Act of 2013 came into force on 01.04.2014
Consequently, some amendments came into effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018.
On 15.09.2017 a list was released by Union of India disqualifying 74,290 directors under Section 164(1) read with Section 167(2) of the Companies Act. Section 164 provides for Disqualification of Directors. By way of this list, the petitioners in these petitions were disqualified from being appointed / reappointed as directors for a period of five years under Section 164(2)(a) of the Act on account of non-filing of Annual Returns for block of three consecutive years comprising of financial years 2013-14, 2014-15 and 2015-16. The petitioners in the present batch of petitions were directors in various companies. Consequently, the DINs of the aforesaid disqualified directors were blocked and details of these directors regarding their disqualification for the period from 01-11-2016 to 31-10-2021, were updated.
Application of 164(2) retrospective or prospective?
Section 164(2) of the Act 3 disqualifies a director from being reappointed in a company for a period of five years, if the company has (a) not filed financial statements or annual returns for any continuous period of three financial years. This was present in the old Companies Act 1956 as well (Section 274(1)(g)4 of the Companies Act, 1956, which was in force prior to 01.04.2014)) – the scope of this section is now increased to apply to not only public companies but also private limited companies. In the present case out of the 3 years of non compliance one of the year was 3 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 threefinancial 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.
Companies Act 1956 § 274, cl. 1, Sub cl. (g);
(1) Where a petition for winding up is filed before the Tribunal by any person other than the company, the
Tribunal shall, if satisfied that a prima facie case for winding up of the company is made out, by an order direct
the company to file its objections along with a statement of its affairs within thirty days of the order in such
form and in such manner as may be prescribed:
Provided that the Tribunal may allow a further period of thirty days in a situation of contingency or special
circumstances:
Provided further that the Tribunal may direct the petitioner to deposit such security for costs as it may consider
reasonable as a precondition to issue directions to the company.
- ending on 31.03.2013 i.e. before coming into effect of the new Act, hence the question before the court was whether to consider that non-compliance would amount to prospective or retrospective application.
- Differing from the view taken by the Gujarat[1], Karnataka[2] and Madras[3] High Courts the Delhi High Court ruled after applying principles of interpretation that “the statute which is in direct operation prospective, cannot be properly called a retrospective statute because a part of the requisites for that action is drawn from the time antecedents to its passing”[4]
- However, the Hon’ble Delhi HC reasoned that as per Section 137(1)[5] and Section 137(2)[6] the final accounts of the company are required to be filed within a period of thirty days from the holding of the Annual General Meeting (AGM). In cases where such meeting has not been held, the financial statements have to be filed within a period of thirty days from the last date of holding of such AGM.
Thus, even though the financial year ending 31.03.2014 had ended prior to Section 164 of the Act coming into force, the AGM in respect of that financial year was required to be held by 20.09.2014, that is, after the Section 164 of the Act had come into force. In the present case the Companies were in violation of this law and hence list 1 (where returns were not filed from 2013-14 onwards) would attract Disqualification of Directors under Section 164(2). List II and List III for years prior to 2013
[1] Bhagavan Das Dhananjaya Das v. Union of India and Ors.: W.P. Nos. 25455/2018 and other connected matters, decided on 03.08.2018
[2] Yashodhara Shroff v. Union of India: W.P. No. 52911/2017 and connected matters, decided on 12.06.2019
- ending on 31.03.2013 i.e. before coming into effect of the new Act, hence the question before the court was whether to consider that non-compliance would amount to prospective or retrospective application.
- Differing from the view taken by the Gujarat[1], Karnataka[2] and Madras[3] High Courts the Delhi High Court ruled after applying principles of interpretation that “the statute which is in direct operation prospective, cannot be properly called a retrospective statute because a part of the requisites for that action is drawn from the time antecedents to its passing”[4]
- However, the Hon’ble Delhi HC reasoned that as per Section 137(1)[5] and Section 137(2)[6] the final accounts of the company are required to be filed within a period of thirty days from the holding of the Annual General Meeting (AGM). In cases where such meeting has not been held, the financial statements have to be filed within a period of thirty days from the last date of holding of such AGM.
Thus, even though the financial year ending 31.03.2014 had ended prior to Section 164 of the Act coming into force, the AGM in respect of that financial year was required to be held by 20.09.2014, that is, after the Section 164 of the Act had come into force. In the present case the Companies were in violation of this law and hence list 1 (where returns were not filed from 2013-14 onwards) would attract Disqualification of Directors under Section 164(2). List II and List III for years prior to 2013
[1]Bhagavan Das Dhananjaya Das v. Union of India and Ors.: W.P. Nos. 25455/2018 and other connected matters, decided on 03.08.2018
[2]Yashodhara Shroff v. Union of India: W.P. No. 52911/2017 and connected matters, decided on 12.06.2019
[3]GaurangBalvantlal Shah v. Union of India: Manu/GJ/1278/2018)
[4] Queen v. The Inhabitants of St. Mary, Whitechapel: (1848) 12 QB 120
[5]Companies Act 2013 § 137, cl. 1
[6]Companies Act 2013 § 137, cl. 2
[1]Bhagavan Das Dhananjaya Das v. Union of India and Ors.: W.P. Nos. 25455/2018 and other connected matters, decided on 03.08.2018
[1]Yashodhara Shroff v. Union of India: W.P. No. 52911/2017 and connected matters, decided on 12.06.2019
[1]GaurangBalvantlal Shah v. Union of India: Manu/GJ/1278/2018)
[1] Queen v. The Inhabitants of St. Mary, Whitechapel: (1848) 12 QB 120
[1]Companies Act 2013 § 137, cl. 1
[1]Companies Act 2013 § 137, cl. 2
- were set aside as that would amount to giving retrospective effect to Section 164(2)
Violation of Audi Alteram Partum making the list of Disqualified Directors void
- Audi Alteram Partum is the principle of natural justice (PNJ) that the petitioners in the present case sought to argue. The petitioners contended that by not affording parties an opportunity to be heard the decision was liable to be struck down as it violated principles of natural justice
- Delhi HC ruled that in the present case of application of Section 164(2) no authority is required to exercise any discretion or take any judicial or quasi-judicial decision regarding disqualification of a director. The Authority is also not required to pass any order disqualifying an individual. Since it is an action of administrative nature violation of PNJ was held to be inapplicable
Disqualification in defaulting Company – Impact on continuing Directorship in other Companies
- The Court held that on a plain reading of Section 164(2) the legislative intent is not that a Director disqualified as per Section 164(2) from a defaulting company could be re-appointed in non-defaulting companies where he/she had been appointed as a director prior to incurring the disqualification under S 164(2) of the Act.
- The Court held that Section 164(2) clearly provides that no disqualified director shall be eligible to be reappointed as a director in ‘that company’ or appointed in any ‘other company.’ The term appointment would include ‘reappointment’ as well.
Whether the directors incurring a disqualification under section 164(2) of the Act, would demit their office as a director in all companies in terms of Section 167(1)(a) of the Act
- On the present issue the Delhi High Court read down the Section 167 (1) (a) of the Act. The Sectionreads that a Director would demit office if he incurs the disqualification under Section 164 of the Act. The Court limited the demitting of Office only to disqualifications as per conditions of Section 164(1) rather than Section 164(2) as Section 164(1) disqualify a person are directly attributable to the person where Section 164(2) is attracted due to the default of the company.
- The rationale provided by Bombay HC[1] was upheld where it was held that if Section 167(1)(a) was read to apply to such directors as were affected by disqualification of 164(2) it would lead to an absurd situation where no person could possibly act as a director of a defaulting company. This would be so because a director would demit his office as soon as he was appointed.
- The Court did so to avoid the consequential absurdity in the absence of proviso to Section 164(2) that came into effect from 07.05.2018 which provides for a window of six months for curing the defaults and to enable the incoming directors appointed on the board of the defaulting companies to avoid disqualification under Section 164 (2) of the Act.
- It thus cured the inefficacies pointed out above without doing a retrospective application of the Companies Act 2013 while remaining astute in its factual analysis
[1]Kaynet Finance Limited vs Verona Capital Limited: Appeal Lodging No. 318 of 2019 in Arbitration Petition No. 716 of 2019 and Notice of Motion Lodging No. 662 of 2019, decided on 09.07.2019
Whether the act of the respondents in deactivating the DIN of the directors is sustainable?
- It was held that neither any of the provisions of the Companies Act nor the Rules framed thereunder[1] stipulate cancellation or deactivation of DIN on account of a director suffering a disqualification under Section 164(2) of the Act
- Therefore, 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.
[1]Director Identification Number Rules, 2006,
Rule 8:Cancellation or Deactivation of DIN.- The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director, upon being satisfied on verification of particulars of proof attached with the application received from any person seeking cancellation or deactivation of DIN, in case –
(a) the DIN is found to be duplicate;
(b) the DIN was obtained by wrongful manner or fraudulent means;
(c) of the death of the concerned individual;
(d) the concerned individual has been declared as lunatic by the competent Court;
(e) if the concerned individual has been adjudicated an insolvent; then the allotted DIN shall be cancelled or deactivated by the Central Government or Regional Director (NR), Noida or any other officer authorised by the Regional Director (NR): Provided that before cancellation or deactivation of DIN under clause (b), an opportunity of being heard shall be given to the concerned individual.
Rule 11:Cancellation or surrender or Deactivation of DIN.- The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received 11alongwith fee as specified in Companies (Registration Offices and Fees) Rules, 2014 from any person, cancel or deactivate the DIN in case –
(a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
(b) the DIN was obtained in a wrongful manner or by fraudulent means;
(c) of the death of the concerned individual;
(d) the concerned individual has been declared as a person of unsound mind by a competent Court;
(e) if the concerned individual has been adjudicated an insolvent:
Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned individual;
(f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed 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 of any DIN in such case, the Central Government shall verify e-records???????.
Aliquam in tortor auctor cursus?
Nulla odio felis, placerat a augue sit amet, tempor semper ante. Morbi aliquam sed nisi eu tristique. Nullam sodales laoreet odio. Aliquam in tortor auctor, cursus magna vitae, ultrices est. Nulla odio felis, placerat a augue sit amet, tempor semper ante. Sed id lectus ipsum.