Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2021 Supreme(Del) 1870

IN THE HIGH COURT OF DELHI AT NEW DELHI
Prathiba M.Singh, J.
Anjali Bhargava & Anr. - Appellants
Versus
Union Of India & Anr. - Respondents
W.P. (C) No. 11264 of 2020; C.M. Appl No. 35094 of 2020
Decided On : 06-01-2021

Advocates appeared:
P.C. Yadav, Advocate, Sudha Ravi, Advocate, Priyanshu Upadhyay, Advocate, Shambhu, Advocate

The main legal point established is the interpretation of the proviso to Section 167(1)(a) and the application of CFSS-2020, providing opportunities for disqualified directors to challenge their disqualification and avail remedies under the scheme.

Headnote:
Directors - Companies Act, 2013 - Section 164, 167 - Mukut Pathak & Ors. v. Union of India & Ors., (2019) 265 DLT 506, Sandeep Agarwal & Anr. v. Union of India & Anr. [W.P.(C)5490/2020, decided on 2nd September, 2020], Radhika Byrne v. UOI & Anr. [W.P.(C) 5534/2020, decided on 28th December, 2020] - The court discussed the disqualification of directors under Section 164 and 167 of the Companies Act, 2013 and the deactivation of their DIN and DSC numbers. It analyzed the proviso to Section 167(1)(a) and the Companies Fresh Start Scheme, 2020 (CFSS-2020) to provide opportunities for disqualified directors of struck off companies and directors of active companies to challenge their disqualification and avail remedies under the scheme.
Fact of the Case:

The Petitioners, directors of two companies, were disqualified due to non-filing of balance-sheet and other returns with the Registrar of Companies. They sought reactivation of their DIN and DSC to avail of the Companies Fresh Start Scheme, 2020 (CFSS-2020).
Finding of the Court:

The court analyzed the legal aspects arising from the disqualification of directors under the Companies Act, 2013 and the applicability of CFSS-2020. It categorized directors into four groups and provided interpretations and implications of the proviso to Section 167(1)(a) and the CFSS-2020. The court directed reactivation of DINs and DSCs for disqualified directors of struck off companies and directors of active companies, allowing them to avail of the scheme.
Issues: The issues involved the disqualification of directors under the Companies Act, 2013, the applicability of the proviso to Section 167(1)(a), and the opportunities provided by CFSS-2020 for disqualified directors of struck off companies and directors of active companies.
Ratio Decidendi: The court held that the proviso to Section 167(1)(a) would not apply to directors disqualified prior to 7th May, 2018, allowing them to continue as directors in companies other than the defaulting company. It also interpreted CFSS-2020 to provide opportunities for disqualified directors to challenge their disqualification and avail remedies under the scheme.
Final Decision: The court disposed of the petition, directing reactivation of DINs and DSCs for disqualified directors of struck off companies and directors of active companies, enabling them to avail of the CFSS-2020.

JUDGMENT

Prathiba M. Singh, J. - This hearing has been done by video conferencing.

2. The Petitioners in this case are directors of two Companies - Bhargava Films Pvt. Ltd. and Talent Scanner Pvt. Ltd. The Petitioners were disqualified as directors in respect of Bhargava Films Pvt. Ltd. due to non-filing of balance-sheet and other returns with the Registrar of Companies (hereinafter, "ROC"). The said company was also struck off from the Register of Companies. The disqualification occurred on 1st November, 2016. The prayer of the Petitioners is that their Director Identification Number (hereinafter, "DIN") and Digital Signature Certificate (hereinafter, "DSC") be reactivated to permit them to avail of the Companies Fresh Start Scheme, 2020 (hereinafter, "CFSS-2020").

3. The legal aspects arising out of disqualification of directors under Section 164 and 167 of the Companies Act, 2013 and the deactivation of their DIN and DSC numbers have been dealt with in the following W.P.(C) 11264/2020 Page 2 of 8 judgements:

i. Mukut Pathak & Ors. v. Union of India & Ors., (2019) 265 DLT 506,

ii. Sandeep Agarwal & Anr. v. Union of India & Anr. [W.P.(C)5490/2020, decided on 2nd September, 2020] and

iii. Radhika Byrne v. UOI & Anr. [W.P.(C) 5534/2020, decided on 28th December, 2020].

4. There are four categories of Directors that are approaching Courts seeking setting aside of disqualification and activation of DIN/DSC numbers.

a) Directors who have been disqualified prior to 7th May 2018, qua other companies in addition to the defaulting company:

As per the proviso to Section 167 (1) (a) of the Companies Act, 2013, once a director is disqualified qua one company i.e., the defaulting company, the office of the said director would become vacant in all companies. The said proviso, has, however, come into effect only on 7th May, 2018. In Mukut Pathak (supra) it was held that this proviso cannot have retrospective effect and would only apply if the disqualification took place after 7th May 2018. Paragraph 98 of Mukut Pathak (supra) reads as under:

"98. In view of the above, 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."

Since there is no stay on the judgment in Mukut Pathak (supra), it continues to hold the field. Thus, in cases where directors have been disqualified prior to 7th May, 2018, the proviso to Section 167(1)(a) would not apply and the directors would continue to be directors in companies other than the defaulting company. The disqualification of such directors qua active companies would therefore be liable to be set aside and their DIN and DSC's reactivated.

b) Directors who have been disqualified post 7th May 2018, qua other 'active' companies:

As held in Mukut Pathak (supra), in all cases where the directors have been disqualified on or after 7th May, 2018, the proviso to Section 167 (1) (a) would apply and such directors would cease to be directors in all companies including the defaulting company. In March, 2020, in light of the COVID-19 pandemic, the Ministry of Corporate Affairs vide General Circular No. 12/2020 introduced CFSS-2020 to allow a fresh start for defaulting companies and directors of such companies. This Court, in Sandeep Agarwal (supra) has analyzed CFSS-2020 to conclude that the purpose of the scheme is to provide an opportunity for 'active' companies i.e., companies whose names have not been struck off, who may have defaulted in filing of documents, to put their affairs in order. The relevant portion of the judgment is extracted below:

"12. The salient features of the Scheme