Opportunity of being heard to be given to directors before deactivation of their DINs

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HIGH COURT OF CALCUTTA

Imraj Ali Molla

v.

Union of India

SABYASACHI BHATTACHARYYA, J.

W.P. NOS. 268 AND 273 OF 2019

MARCH  18, 2020 

Section 164, read with section 154, of the Companies Act, 2013 – Directors – Disqualifications for appointment of – Whether an opportunity of hearing has to be given to directors prior to deactivation of their DINs, even in respect of defaulting company – Held, yes – Whether in absence of any such provision of deactivation of DIN in 2013 Act, mere disqualification under section 164(2)(a) cannot give rise to consequence of deactivating DIN, for which there is no provision in statute – Held, yes – Petitioners, were directors of several companies – They filed writ petition alleging that their Directors Identification Numbers (DINs) were deactivated by impugned action of Registrar of Companies (RoC) without following due process of law – Held, yes – Whether since DIN is allocated under section 154 and there is no provision in Act for deactivation of DIN of a director only on ground of such disqualification under section 164(2)(a) or section 167(1)(a), action of RoC in deactivating DIN of petitioners on ground of such violation of section 164(2)(a) of a particular company could not confer a right on RoC to deactivate such DIN – Held, yes – Whether impugned orders of RoC deactivating DINs of petitioner was to be set aside and RoC was directed to immediately reactivate and/or allocate new DIN numbers if their previous numbers had been allocated to some other directors – Held, yes [Paras 17, 18 and 19]

 

CASES REFERRED TO

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Jai Shankar Agrahariv.Union of India[Writ (C) No. 12498 of 2019, dated 16-1-2020] (para 10),Chetan Chokhaniv.Union of India[W.P. No. 21504 (W) of 2019, dated 22-11-2019] (para 13),Dhiraj Kumar Mantriv.Union of India[W.P. No. 22071 (W) of 2019, dated 3-12-2019] (para 13),Subhas Kumar Biswasv.Union of India[W.P. No. 700 (W) of 2020, dated 22-1-2020] (para 13) andSatish Kumar Guptav.Union of India[W.P. No. 1224 of 2018], dated 7-2-2020] (para 14).

Mrs. Maju AgarwallaandBajrang Manotfor the Petitoner.Shiv Chandra Prasadfor the Respondent.

ORDER

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The Court

1.The subject-matter of the writ petitions being common, both are taken up for hearing together.

2.The grievance of the petitioners, as directors of several companies, is that their Directors Identification Numbers (DINs) were deactivated by the impugned action of the respondent no. 3, the Registrar of Companies (RoCs) without following the due process of law.

3.It is submitted by learned counsel for the petitioners that although only one of the companies was alleged to have committed default, the DIN of the petitioners was deactivated in respect of the other companies, in which they were directors, as well, which wasde horsthe law.

4.Moreover, even in respect of the defaulting company, the DIN of the petitioners could not be deactivated without giving an opportunity of hearing to the petitioners on the allegations made against them in respect of each company.

5.The disqualification of the company-in-question took place in the year 2014, that is, prior to the 2018 Amendment of the Companies Act, 2013 (hereinafter referred to as “the 2013 Act”) and as such, the provisions of the 2018 Amendment would not be applicable thereto.

6.By relying on the provisions of Section 164 of the 2013 Act, learned counsel for the petitioners argues that the disqualification contemplated in the said section was restricted to the defaulting company only and not to the other companies, in which the directors of the defaulting company were also directors.

7.By placing particular reliance on sub-section (2) of Section 164, learned counsel submits that the restriction as to such director was limited to eligibility to be “reappointed” as a director of the defaulting company but envisaged the expression “appointed” in respect of other companies, both for a period of five years from the date of default.

8.Distinguishing thus, learned counsel argues that, in any event, the petitioners’ DIN could not be deactivated in respect of the other companies than the alleged defaulting company. The expression “reappointed” ex facie indicates that the petitioner has been a director of the defaulting company while the expression “appointed”, relating to other companies, meant fresh appointments. As such, the existing directorship of the concerned persons in the other companies was not touched by the said provision.

9.Learned counsel for the petitioner next argues that, in consonance with the principle ofAudi Alteram Partemenshrined in natural justice, the petitioners had to be given a hearing prior to such disqualification as a director, which would prevent such decision from being arbitrary andex parte. In the present case, however, no hearing was given to the petitioners at all.

10.Learned counsel for the petitioners cites, in this context, a division bench judgment of the Allahabad High Court rendered on (unreported) in several matters, including theJai Shankar Agrahariv.Union of India[Writ No. 12498 of 2019, dated 16-1-2020] (unreported). It was held therein,inter alia, that Section 248 of the 2013 Act does not talk of disqualification which a director would suffer so as to incur disqualification under section 164(2), read with Section 167 of the said Act. The mere fact of striking off of a company by itself cannot prejudice a director for the purpose of Sections 164(2) and 167(1) of the 2013 Act. A prior notice, it was held, would be necessary to find out whether the alleged disqualification which was incurred by the directors, as alleged by the Registrar of Companies, was an undisputed fact or, if disputed, opportunity to the concerned person was given to establish otherwise.

11.Moreover, if a director, despite knowing about his disqualification, continues to act as a director, he would incur penalty, but the continuance of a person as a director, in office of the director could not be said to be bad in law.

12.It was further held in the said judgment that various High Courts had examined relevant statutory provisions on the aspect of whether there is any provision empowering the RoCs to deactivate the DIN of the directors, allotted under section 154 of the 2013 Act. The entire view was, that there is no such provision to deactivate the DIN of a director only on the ground that a director has incurred disqualification under section 164(2)(a) or his office has become vacant under section 167(1)(a). As such, it was held that, in the absence of any such provision to deactivate the DIN of the petitioners if they have incurred disqualification under section 164 of the 2013 Act, the action of the RoC in deactivating such DIN could not be sustained.

13.That apart, three unreported judgments of a Single Judge of this Court,Chetan Chokhaniv.Union of India[W.P. No. 21504 (W) of 2019, dated 22-11-2019],Dhiraj Kumar Mantriv.Union of India[W.P. No. 22071 (W) of 2019, dated 3-12-2019] andSubhas Kumar Biswasv.Union of India[W.P. No. 700 (W) of 2020, dated 22-1-2020], along with a bunch of several other writ petitions, were cited by the petitioner. The Single Judge in the said judgments, had held that the DIN of a director could at best be disqualified in respect of the defaulting company and not in respect of other companies, of which the same person is a director. Relying on those judgments, learned counsel for the petitioners argues that in the present case as well, the DIN of the petitioners could not be deactivated in their entirety, thereby denuding the petitioners powers as a director in companies other than the defaulting company.

14.In reply, learned counsel for the respondents places reliance on a division bench judgment of the Bombay High CourtSatish Kumar Guptav.Union of India[W.P. No. 1224 of 2018], dated 7-2-2020], wherein it was held tentatively that at the time of admission of an appeal, the statutory provisions prevailed over the government circulars. In this context, it was held that,prima facie, Section 164 could operate retrospectively, in view of the filing of financial statements or annual returns of a company, as contemplated in Section 164(2)(a) of the 2013 Act, being the basis of disqualification. In the event the company did not file financial statements or annual returns for a continuous period of three financial years, then the action is triggered. Hence, in respect of such non-filing, the number of years preceding the disqualification, would be taken into account to apply the rigour of Section 164(2)(a).

15.Learned counsel for the respondents cites another judgment dated January 27, 2020 delivered by a learned Single Judge of the Madras High Court, where it was held,inter alia, that an irrational interpretation cannot be given that the DIN can still attaches itself to the individual after he resigns or is disqualified from the post of directorship or vacates the office. Consequently, it was held, when a director is disqualified, it follows that the DIN should be deactivated. Such disqualification automatically follows for non-compliance of the requisite filings of annual returns/financial statements by the defaulting company and could only exist during the life time of the post of director, and not for the entire life of the individual.

16.Upon considering the arguments of both sides and the legal provisions-in-question, it is evident that in the opinion of a division bench of the Allahabad High Court as well as a learned Single Judge of this court in the four judgments cited by the petitioners, the disqualification of the DIN of a director for the default of a particular company, of which he is a director, cannot disqualify the said director from acting in the said capacity in the other companies, which did not allegedly commit default.

17.As such, in any event, the disqualification of the DIN of the petitioners could not operate in respect of other companies than the defaulting company. In the event the DIN of a director is to be deactivated and not merely the name of the company struck out from the RoC, the said person has to be given notice individually and heard and given an opportunity to establish that he was not liable for the alleged default committed by the company. Subscribing to such view, as iterated in the division bench judgment of the Allahabad High Court cited by the petitioners, this court is of a similar opinion that an opportunity of hearing had to be given to the petitioners prior to the deactivation of their DINs, even in respect of the defaulting company, which has not been given in the present case.

18.The division bench of the Allahabad High Court went one step further by holding that the RoC cannot deactivate the DIN only on the ground that a director has incurred disqualification under section 164(2)(a) or his office has become vacant under section 167(1)(a). Since such DIN is allocated under section 154 of the 2013 Act, and there is no provision in the Act for the deactivation of the DIN of a director only on the ground of such disqualification under section 164(2)(a) or Section 167(1)(a), the action of the RoC in the present case, in deactivating the DIN of the petitioners on the ground of such violation of Section 164(2)(a) of a particular company cannot confer a right on the RoC to deactivate such DIN. In the absence of any such provision of deactivation of DIN in the 2013 Act, the mere disqualification under section 164(2)(a) of a company cannot give rise to the consequence of deactivating the DIN, for which there is no provision in the statute. In case of contravention of any of the provisions of Sections 152, 155 and 156, a punishment is provided under section 159 of the 2013 Act. However, there is no scope of deactivation of an existing DIN on any ground whatsoever in the 2013 Act.

19.In view of the aforesaid findings, W.P. No. 268 of 2019 and W.P. No. 273 of 2019 are allowed, thereby setting aside the impugned orders of the RoC in the said respective writ petitions, deactivating the DINs, bearing No. 00031327 of the petitioner in W.P. No. 268 of 2019 and No. 00031338 of the petitioner in W.P. No. 273 of 2019. The respondents are directed to immediately reactivate and/or allocate new DIN numbers if their previous numbers have been allocated to some other directors, within a fortnight from the date of communication of this order by the respective petitioners in the writ petitions to the respondents and to take all consequential action necessary to give effect to such reactivation/allocation of DINs.

20.There will be no order as to costs.

21.Urgent certified website copies of this order, if applied for, be made available to the parties upon compliance with the requisite formalities.

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