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IN THE HIGH COURT OF KERALA AT ERNAKULAM
N.NAGARESH, J.
Zacharia Maramkandathil Mohan – Appellant
Versus
Union Of India – Respondent
[W.P.(C) Nos.21628/2020, 21393/2018, 24426/2018, 40504/2018, 9651/2019, 15713/2019, 27686/2019, 10939/2020, 11896/2020, 11900/2020, 12827/2020, 14895/2020, 17218/2020, 17225/2020, 19830/2020, 19924/2020, 19996/2020, 20220/2020, 20229/2020, 20253/2020, 20312/2020, 20421/2020, 27379/2020, 28116/2020, 9841/2019, 39369/2018, 19228/2020, 19249/2020, 42106/2018, 14993/2018, 15928/2018, 16065/2018, 16083/2018, 16085/2018, 23143/2018, 26401/2018, 30284/2018, 30296/2018, 30374/2018, 32719/2018, 38728/2018, 39345/2018, 39365/2018, 39371/2018, 41734/2018, 10315/2019, 10441/2019, 10720/2019, 10862/2019, 10866/2019, 11273/2019, 11401/2019, 12058/2019, 12059/2019, 12061/2019, 12070/2019, 12146/2019, 15712/2019, 15717/2019, 15728/2019, 27693/2019, 10559/2020, 10937/2020, 12313/2020, 12332/2020, 12335/2020, 12833/2020, 15407/2020, 15674/2020, 16587/2020, 16648/2020, 17243/2020, 19179/2020, 19220/2020, 19239/2020, 19455/2020, 19570/2020, 19774/2020, 20268/2020, 3725/2021, 15344/2019, 31949/2017, 33126/2017, 34847/2017, 35810/2017, 36410/2017, 8074/2018, 9513/2018, 9818/2018, 10932/2018, 12998/2018, 18319/2018, 20135/2018, 20348/2018, 23327/2018, 24984/2018, 31541/2018, 32916/2018, 36842/2018, 41201/2018, 41664/2018, 664/2019, 1569/2019, 1583/2019, 1619/2019, 1620/2019, 1898/2019, 1909/2019, 3242/2019, 3730/2019, 5622/2019, 5698/2019, 5999/2019, 6306/2019, 6315/2019, 6321/2019, 6678/2019, 7292/2019, 7317/2019, 7682/2019, 7789/2019, 7847/2019, 7962/2019, 8193/2019, 8443/2019, 8645/2019, 8997/2019, 9317/2019, 9338/2019, 9369/2019, 9550/2019, 10051/2019, 11823/2019, 12032/2019, 12097/2019, 12191/2019, 12422/2019, 12531/2019, 12581/2019, 12628/2019, 12632/2019, 12644/2019, 12648/2019, 12685/2019, 12706/2019, 12798/2019, 12853/2019, 13224/2019, 13245/2019, 13313/2019, 13330/2019, 13356/2019, 13613/2019, 13940/2019, 14062/2019, 14106/2019, 14195/2019, 14257/2019, 14617/2019, 14727/2019, 15055/2019, 15063/2019, 15146/2019, 15248/2019, 15667/2019, 15674/2019, 15721/2019, 16036/2019, 16156/2019, 16230/2019, 16235/2019, 16248/2019, 16424/2019, 16512/2019, 16858/2019, 17194/2019, 17220/2019, 17364/2019, 17984/2019, 18316/2019, 18395/2019, 18405/2019, 18584/2019, 18729/2019, 18760/2019, 18971/2019, 19127/2019, 19224/2019, 19390/2019, 19516/2019, 19933/2019, 20422/2019, 21127/2019, 21616/2019, 21620/2019, 21875/2019, 22535/2019, 23010/2019, 23780/2019, 27696/2019, 28590/2019, 30533/2019, 567/2020, 6885/2020, 7524/2020, 10270/2020, 13826/2020, 15130/2020, 19406/2020, 19711/2020, 20032/2020, 20033/2020, 20248/2020, 21194/2020, 21432/2020, 21558/2020, 25131/2020, 25538/2020, 28774/2020, 29010/2020, 3136/2021, 3658/2021, 4674/2021, 5134/2021 and 6338/2021]
Decided on : 16-06-2021
Companies (Appointments and Qualifications of Directors) Rules, 2014 – Rule 10 – Constitution of India, 1950 – Article 14 or Article 19, 226 – Companies Act, 2013 – Sections 164, 167, 92 – Companies Bill, 2009 – Companies Act, 1956 – Section 252, 274, 455 – Disqualification of Director – Strike off – In all these writ petitions, the challenge is against Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 and the disqualification thrust upon the petitioners for acting as Directors of Companies, pursuant to Sections 164 and 167. – Petitioners are persons who are disqualified pursuant to Section 164(2) for failure of their respective Companies to file Financial Statements/Annual Returns. – Petitioners therefore challenge Sections 164 and 167 of the Act, 2013 and actions of the respondents pursuant thereto on the following counts. –Whether Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 are ultra vires the Constitution of India, being violative of Article 14 or 19 – Whether the Principles of Natural Justice should be read into Section 164(2) in view of the nature and severity of consequences arising from its operation – Whether Section 164(2) is retrospective in its operation – Constitutionality and consequences of the first proviso to Section 164(2) and the proviso to Section 167(1)(a), inserted by Companies (Amendment) Act, 2017 with effect from 07.05.2018. – Whether notice under Section 455(4) need be necessarily issued on a defaulting Company, before Section 164(2)(a) to become operational – Whether the action of the respondents in deactivating the DINs of the petitioners, is justified – What is the impact of striking off of a defaulted company, on the disqualified Directors
Finding of the court: 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 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 – 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 – Petitioner and their Companies in such cases have a remedy for challenging striking off, under Section 252 of Act, 2013 before the National Company Law Tribunal (NCLT). –Where disqualification of petitioners is based on any period of default prior to 01.04.2014, such disqualifications are bad in law and are hence set aside. – The provisos inserted below Section 164(2) and Section 167(1)(a) of the Act, 2013 by the Companies (Amendment) Act, 2017 with effect from 07.05.2018 are constitutionally valid and the same being clarificatory in nature, would apply retrospectively – However, the words “in all the companies” appearing in the proviso to Section 167(1)(a) will have only prospective operation. – Notice under Section 455(4) of the Companies Act, 2013 is not a sine qua non for applying the provisions of Section 164(2) or 167 to the Directors of any Defaulting Company. – Director Identification Numbers (DINs) 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). – Consequently, there will be a direction to the respondents to re-activate the Director Identification Numbers (DINs) of the petitioners forthwith. – However, it is made clear that the respondents will be at liberty to cancel or deactivate the DINs of the petitioners for any reasons laid down in Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. – Where the names of any Companies stand struck off, the petitioners in respect of such Companies are at liberty to invoke Section 252 of the Companies Act, 2013 to challenge striking off the names of their Companies from the Register of Companies and to resort to legal remedies available to them, to challenge their disqualification for holding the office of Director.
Result: Writ Petitions Disposed of
JUDGMENT :
In all these writ petitions, the challenge is against Sections 164(2)(a) and 167(1)(a) of the Companies Act, 2013 and the disqualification thrust upon the petitioners for acting as Directors of Companies, pursuant to Sections 164 and 167. Common questions of law arise for consideration in all these writ petitions and hence the writ petitions are heard together and disposed of by a common judgment.
2. The Companies Act, 1956 was enacted with the objective to consolidate and amend the law relating to the companies and certain other associations. The said Act has been in force for about fifty-five years and was amended several times. In view of changes in the national and international economic environment and expansion and growth of economy, the Central Government decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international economic environment and further accelerate the expansion and growth of economy. And for this purpose, the Companies Bill, 2009 was introduced on 3rd August, 2009 in the Lok Sabha. The said Bill was referred to the Parliamentary Standing Committee on Finance for examination and the Committee gave its Report on the 31st August, 2010.
3. Subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill. The Central Government accepted in general the recommendations of the Standing Committee and also considered the suggestions received from various stakeholders. In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating the recommendations of the Standing 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 litigations. Before dwelling upon the issues raised in these writ petitions, it would be necessary to advert to the following provisions in the Act, 2013.
6. Section 92 of the Act, 2013 deals with preparation and filing of Annual Returns by Companies:
(a) its registered office, principal business activities, particulars of its holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) [Omitted]
(d) its members and debenture-holders along with changes therein since the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previ
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