Allowed

Smt Bharathi Talagadadevi and another v. Union of India and another

Telangana HC1 Oct 2020WP/17316/2020

Case brief

AI extract

What is this about?

Directors challenged their disqualification for failure to file financial statements or annual returns and sought restoration of their DINs. Following an earlier common order, the court allowed the petition, setting aside the disqualification and DIN deactivation and directing reactivation for functioning as directors outside struck-off companies.

What did the court decide?

Disqualification and DIN deactivation set aside; Registrar directed to reactivate the petitioners' DINs, enabling them to function as directors other than in struck-off companies.

Smt Bharathi Talagadadevi and another Vs Union of… — Company and Corporate | Telangana HC (2020)

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HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD

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(Special Original J u risd iction )

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THURSDAY, THE FIRST DAY OF OCTOBER

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TWO THOUSAND AND TWENTY

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PRESENT

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THE HON'BLE SRI JUSTICE CHALLA KODANDA RAM

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WRIT PETITION NO:17316 OF 2020

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Between:

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Smt Bharathi Talagadadevi, W/o Talagadadevi Suhrahmanya Sastry, Aged about 4B years, R/o Plot No.8, Sri Chakra Enclave, Sainikipuri, Tirumalagirim, Sainikipuri, Hyderabad, Telangana State-500094.

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Sri N4adhu Kumar Karanam, S/o Sri Karanam Venkateshwarlu, Aged about 32 years, R/o 42 28619D, lVoulali. Near Venkateshwara Swamy Temple, New l,4aruthiNagar.Hyderabad.TelanganaState-500O4O.

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...pETtTtONERS

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AND

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Union of lndia, Rep. by its the lvlinistry of Corporate Affairs, A Wing, Shastri Bhawan. Rajendra Prasad Road, New Delhi - 1 10 001 , Represented by its

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Secreta ry.

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The Registrar of Companies, (For State of Telangana). 2nd Floor. Corporate Bharvan, GSI Post Tattiannaram Nagole, Bandlaguda, Hyderabad - 500 068

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RESPONDE NTS

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Petitron under Ad,icle 226 of the Constitution of India praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to pass an order or direction or any other proceedings one in the nature of Writ of l\4andamus declaring the action of respondents in disqualifying the petitioners as a directors and deactivating the 1st petitioner Director ldentification Number (DlN) A2920283 and 2nd petitioner Director ldentification Number (DlN) 07509023 by vide notification and restricting the petitioners to incorporate new companies Under Companies Act. 2013 as arbitrary, illegal, without^{jurisdiction,} contrary of the provisions of the Companies Act. 2013 and Rule 11 of the Companies (Appointment of Directors) Rules, 2014. violative of the principles of natural^justice besides violating the petitioner rights guaranteed under Article 14 and Article 19 (1) (g) of the Constitution of lnd ia.

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lA NO: 1 OF 2020

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Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased to direct th'd,' l st Respondent to stay the disqualification and restore the 1st petitioner Director ldentification Numbe(DlN) 02920283 and 2nd petitioner Director ldentification Number (DlN) 07509023 of the petitioners so as to enable the petitioners to incorporate new companies Under Companies Act. 20'1 3.

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Counsel for the Petitioner: SRl. K. SANDEEP

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Counsel for the Respondents: SRl. NAMAVARAPU RAJESHWAR RAO,

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ASSISTANT SOLICITOR GENERAL

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The Court made the following: ORDER

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THE iiON'BLE SRI JUSTICE CHALLA KODANDT\ RAI\I

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WRIT PETITION No. 17316 of 2020

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ORDER:

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'l'irL I)r iitiolr('rs r:ha11cr.rgc thelr disrlu,r.i i. rii,rn i:()rl I)ircctorshilr r-rnder Scction 16.1(2) ol- the Conrpanie s A,.1, 2O l.l, lirr' the alleged crlault in liling financial statement/ An nual Relurns, and conse<1:ently 5s.p restoration of their Director I,lentificatron Numbers (I)lN) r'iz., 02920283 and 07509023 resper:tivr:ly.

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Learrr,::d counsel for the petitioners submits t hat the issue raised in t he present Writ Petition is squarely r;c,ve:red by the common o'de:' dated lA.O7 .2O),9 in W.P.No.5421l oi 2018 and b:rtch.

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[,crrrr cr] Srancling Counsel for thc ,,.,, rt:sponrlr n Rcgisirar ol Comparnie s does r.rot disputc the aloresard sLlbmrss r)ll.

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''For the foregoing reasons, the impugned crders in thc /rit petitions to the extent of disqualifyin3 the petiti(':rers under Section l6al2l(al of the Lct and deactivation of their DINS, are set aside, anc tt.e 2"d resporLd€nt is directed to activate the DINS of the p,:titioners, enabliog them to function as Directors other tha!r :.n strike off cornpanies.

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It is made clear that this order will not prr:clurle the 2"i resipondent from taking appropriate action in ac<,ordance with lrrw for violations as envisaged under Section 1.6tll2l of the Ar:1, giving the said provision prospective e,f(.ct from 01.04,2014 and for necessary action against DIN .n case of violations of Rule 11 of the Rules.

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It is also made clear that if the petitirlners are aggrie.red by thc action of the respondents in striki:1g off thcir^(:ompanies under Section 248 of the Act, the1, rle at liberty ro avail alternative remedy under Section 252 rf the Act.

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All the writ petitions are accordingly allowed to the

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extent indicated above."

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In vieu, of the said Order dated 18.07.2019 and lor the

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reasons recorded therein, this Writ Petition is also allo,"ved in terms

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thcreol. No co s ts.

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Miscelianeous Petitirtns, if anv stand closed.

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SD/.B.SATYAV THI ASSISTANT REG RAR

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//TRUE COPY// SEL II OFFIC ER

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To,

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The Secretary, lVinistry of Corporate Affairs, Union of lndia, A Wing, Shastri Bhawan, Ralendra Prasad Road, New Delhi - 1 10 001 .

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The Registrar of Companies, (For State of Telangana), 2"" Floor, Corporate Bhawan, GSI Post Tattiannaram Nagole, Bandlaguda, Hyderabad - 500 068.

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One CC to Sri K. Sandeep, Advocate IOPUC]

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One CC to Sri. Namavarapu Rajeshwar Rao, Assistant Solicitor General [OPUC]

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(Along with a copy of order, dated 18.07.2019 in W.P.No.5422 o{ 2018 and batch)

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Two CD Copies

CHR

HIGH COURI:

DATED t01l1t:.)i2020

ORDER

W.P.No.173;16^{of 2020}

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ALLOWIN(::i THE^{WRIIT PETITION} WITHOUT^I:]OSTS

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THE HON'BLE SRI ]USTICE A.RAJASHEKER REDDY

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COMMON ORDER

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Since, the issue involved in all the writ^petitions is one and the same, they are heard together and are being disposed of by this common order.

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The petitioners are the directors of the private companies, registered under the Companies Act, 2013 (18 of 2013)^(for short'the Act'). Some of the such companies are active, and some of them have been struck off from the register of companies under Section 248(7)( c ) of the Act, for not carrying on any business operation for the specified period mentioned in the said provision, and for not making any application within the specified period, for obtaining the status of a dormant company under Section 455 of the Act.

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The petitioners, who were directors of the struck off companies, and who are presently directors of active companies, during the relevant period in question, failed to file financial statements or annual returns for a continuous period of three^years. Therefore, the 2nd respondent^passed the impugned order under Section 164(2) of the Act, disqualifying them as directors, and further making them ineligible to be re-appolnted as directors of that company/ or any other company, for a period of five years from the date on which the respective companies failed to do so. The Director Identification Numbers (DINs) of the petitioners were also deactivated. Aggrieved by the same, the present writ petitions have been flled.

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This clurt granted interim orders in the writ^per:il ions directing the 2nd respondent tc) activate DINs of the^petitioners, to enable tlem to function other than in stril.:c off companies.

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Heard :he learned counsel appearing for the^{p:titlonersin all the} writ petitions, S- K.Lakshman, learned Assistant Solicitor^(;eleral appearing for the respondents - Union of India.

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6, Learn:d counsel for the petitioners, contend that before^passing the impugned order, notices have not been issued, giving the:m opportunity, and this amounts to violation of principles of natural lLrstice, and on this ground alone, the, impugned orders are liable to be set asicle.

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Learned counsel submits that Section 16at:2)(a) of the Act empowers the a rlhority to disqualify a person to be a di[ect,]r, provided he has not filed financial statements or annual returns of the corrpany to which he is director, for any continuous period of three financial years. Learned counsel further l;.rbmits that this provision came into forr:e u,ith effect from 1.4.2014, and p-ior thereto i.e., under Section 27+(L)(g) of the Companies Act, 1956 ( 1 of 1956), which is the analogous provision, tlrere was no such requirement for tre directors of the private companies. T-tey contend that this provision urrrle' Act 1B of 2013, will have prospective operation and hence, if the di-ectors of company fail to comply with thcr requirements mentioned in tht: said provision subsequent to the said (late, the authority under the Act, is ,vithin its jurisdiction to disqualify them. But in the present cases, the 2nc res;1:rondent, taking the period prior to 1,4.201,1, i.e., giving the provision retrosp€ctive effect, disqualified the petitioners as directors, which is illega I and arbi.rary.

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B. With regard to deactivation of DINs, learnecl counsel for the petitioners subm t. that the DINs, as contemplated under tlule 2(d) of the Companies (Appointment and Qualification of Directors), I{ules, 2014 (for

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short'the Rules), are granted for life time to the applicants under Rule 10(6) of the said Rules, and cance/iation of the DIN can be^made only^for the grounds mentioned in clauses (a) to (f) under Rule 11 of the Rules, and the said grounds does not^provide for deactivation for having become ineliglble for appointment as Directors of the company under Section 164 of the Act. Learned counsel further submits that as against the deactivation, no appeal is provided under the Rules, and appeal to the Tribunal under Section 252 of the Act is provided only against the dissolution of the company under Section 248 of the Act.

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Learned counsel further submits that 1't respondent - Government of India represented by the Ministry of Corporate Affairs, has floated a scheme dated 29.72.201,7 viz., Condonation of Delay Scheme - 2018, wherein the directors, whose DINs have been deactivated by the 2"d respondent, allows the DINS of the Directors to be activated. However, such scheme is not applicable to the companies which are struck off under Section 2a8(5) of the Act. In case of active companies, they can make application to National Company Law Tribunal under Section 252 of the Act, seeking for restoration, and the Tribunal can order for reactivation of DIN of such directors, whose DIN are deactivated. However, under Section 252 only the companies, which are carrying on the business, can approach the Tribunal and the companies, which have no business, cannot approach the Trlbunal for restoration. They submit that since the penal provision is given retrospective operation, de hors the above scheme, they are entitled to invoke the jurisdiction of this court under Article 226 of the Constitution of India.

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With the above contentions, learned counsel sought to set aside the impugned orders and to allow the writ petitions.

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On the other hand learned Assistant Solicitor General submits that failure to file financial statements or annual returns for any continuous period

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of three financiai^years, automatically entail their disqualification^under Section 16a(2)(:) of the Act and the statute does not^prcv de^{for issuanceof} any notice. He-'rce, the petitioners, who have failed tr: cr:mply with^the statutory requirement under Section 164 of the Act,^(:annot complain^of violation of prinr:^ples of natural^justice, as it is a deeming^{provision.Learned} counsel further submits that the^petitioners have alt€rrrative^remedyof appeal under S,:ction 252 of the Act, and hence writ^{petitionsmay not be} entertained.

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To consider the contention of the learned /\s:;istant Solicitor General with recrard to alternative remedy of appeal under :;ection 252 of the Act, the said I)rovision is required to be considered, anl the same is extracted as un(j,lr for better appreciation:

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252. A ppea I to Tribunal

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(1) Ar)' person aggrieved by an order of the Registrar, not Fying a company as dissolved uncer Section 248, may file an appeal to the Tribuna !/ithin a^period of three^years frcrn the date of the order of the Registrar and if th€,--ribunal is of the op nion that th l removal of the name of the company from the reg ister of companies is not^justified i1 view of the absence of any of the grounds on w1i,:h the order was passed by the l3qlstrar, it may order restoration of the name of th(: c()mpany in the reqister of compan es;

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Provid€d that before passing an order under this section, t1e Tribunal shall give a reasonab e opportunity of making representations and of being heard to the Registrar, the^(:ompany and all the persons concerned:

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Provid€cl further that if the Registrar is satisfied, that tlre name of the cornpany has teen struck off from the register of companies eithor in3dvertently or on basis of in(c,rrect information furnished by the company or its directors, which requires restoration in the register of companies, he may within e p:riod of three years from the date of passing of the order dissolving the comp:ry Jnder Section 24i3, fie an a)plication before the Tribunal seeking restoration cf name of such cornpany.

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(2) A (!py of the order passed by the Tribunal shall be fi ed by the company with the Registrrr ,/rth n thirty days from the date of the order anl rn receipt of the order, the Regi,.trar shall cause the name of the company to t.e r€stored in the reqrster of comsan es and shall issue a fresh certificate of incorpo-,tt on.

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(3) If 3 :ompany, or any member or creditor oT !v^-ker thereof feels aggrieved by tne company having rts name struck off froir th,: register of companies, the Tribunal or an application made by the company, nrernber, credrtor or workman befo'e the expiry of twenty years from the publicaticn n the Official Gazette of the xotice under sub-section (5) of Section 248, if sirtis;fied that the corrrpany \ryas, a: tne time of its name being struck off, carrytng ot business or in operation or otl'e.wrse it is just that the name of the company t)e restored to the regrster of comlanies, order the name of the company to be resto-eC to the register of companies, 3nd the Tribunal may, by the order, give such other directions and make such provisions as deemed just for placing the company anc all tther persons in the same pcsrtion as nearly as may be as if the name of the company has not been struck off from the register of companies.

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A reading of above provisron goes to show that if the company is dissolved Under SeCtiOn 248 Of the Act, any^person aggrieved^{by the same,} can^file an appeal. Thus the said provision provides the forum for redressal against the dissolution and striking off the company from the register of companies. It does not deal with the disqualification of the directors, and deactivation of their DINs. In the present case, the petitioners are only aggrieved by their disqualification as directors and deactivation of DINs, but not about striking off companies as such. Hence, Section 252 of the Act, cannot be an alternative remedy for seeking that relief, and the contention of the learned Assistant Solicitor General, in this regard, merits for rejection.

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Under Section 16a(2)(a) of the Act, if the Director of a company fails to file financial statements or annual returns for any continuous period of three financial years, he shall not 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. The said provision under the Act 1B of 2013, came into force with effect from 01.04.2014, and the petitioners are disqualified as directors under the said provision. At this stage, the issue that arises for consideration is - whether the disqualification envisaged under Section 164(2)(a) of the Act, which provision came into force with effect from 0I.04.2014, can be made applicable with prospective effect, or has to be^given retrospective operation? In other words, the issue would be, from which financial year, the default envisaged under Section 16a(2)(a) of the Act, has to be calculated, to hold the director of the company liable? In this regard, the learned counsel brought to the notice of this Court, the General Circular No.08/14 dated 4.4.2O14 issued by the Ministry of Corporation affairs, which clarifies the applicability of the relevant financial years. The relevant portion of the said circu la r is as under:

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"A number of provisions of the Companies Act, 2013 including those relating to maintenance of books of account,^preparation, adoption and filing of frnancial statements (and documents required to be attached thereto),^{Auditors reports} and the Board of Directors report^(Board's report) have been brought into force with

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effect from 1t April, 2014. Provisions of Schedule II (usefu lv€s to compute depreciation) a,'rd Schedule III (format of financial statements;) have also been brought into force From that date. The relevant Rules^pertaining tc tfese^provrsions have also beer notified,^placed on the website of the Ministry arc have come into force from the same date.

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The Ministr/ has received requests for clarification with regar(l t,l the relevant financial years^,!ith effect from which such provisions of the ne\v /\ct relating to maintenance )f books of account,^preparation, adoption and f ling of financial statements (a1d attachments thereto), auditors report and Bo;r(l's report will be applica ble.

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Although th€^position in this behalf is quite clear, to make th rgr; absolutely clear it is hereby nltificd that the financial statements (and documents^required to be attached thereto), auditors report and Board's report in respecl of inancial years that commenced earlier than 1st April shall be governed l)y the relevant provrsions/sch:dules/rules of the Companies Act, 1956 and lrhrt in respect of financial years {onrmencing on or after 1't April, 2014, the provisrons of the new Act shall apply.^"

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A reading of th'r above circular makes it clear the finanr:iirl statements and the documents required to be attached thereto, auditors report and Board's report in respect of financial years that commenced earlie:r than 01.O4.2014, shall be govern:C by the provisions under the Companiers Act, 1956 and in respect of finan,:ial years commencing on or after 01.04.2O1L, the provlsions of the new Act shal apply.

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14, At 'his stage it is required to be noticed^'_l-at the analogous provision to Section 16a(2)(a) of the Act 18 of 2013, is Section 27aQ)@) of Act 1 of 1956. The said provision under Act 1 of 1956 is e'xtracted as under for ready reference:

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Section 274(1) A person shall not be capable of being appcirterl director of a company, if -

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(9) such pe-scn is already a director of a public company wh ch,

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(A) has not filed the annual accounts and annull r€turns for any continuous three financial years commencing c,n and after the rirst day of April, 1999; or

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P.ovided tl'rat ;.rcl- person shall not be eligjble to be appointed as a director oF any other publrc c(r.rpany for a period of five years from the date on !,,hiah such public cornpany, in wh ch he is a director, failed to file annual accounts trd,lnnual returns under sub-claLrse (A) or has failed to repay its deposits or interest or redeem its debentures on due date or pay dividend referred to in clause (B).

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A reading of the above provision under Act 1 of 1956, ma<os it clear that if a person capable :f being appointed director of a company anc such person is already a directt- of a public company, which has not fil,:tl .rnnual accounts and annual returns for any continuous three financial years r:ommencing on

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and after the first day of April 1999, shall not be eligible to be appointed as a director of anY other^public company for a^period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns. So the statutory requirement of filing annual accounts and annual returns, is placed on the directors of a 'public company'. There is no provision under the Act 1of 1956, which places similar obligations on the directors of a 'private company'. Therefore, nonfiling of annual accounts and annual returns by the directors of the private company/ will not disqualify them as directors under the provisions of Act 1 of 1956.

¶100

Under Section 764(2) of the new legislation i.e., Act 18 of 2013, no such distinction between a 'private company' or a 'public company' is made and as per the said provision goes to show that no person who is or has been a director of a^'company', fails to file financial statements or annual returns for any continuous period of three financial years, will not be eligible for appointment as a director of a company. As already noted above, the said provision, came into force with effect from 01.04.2014.

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Coming to the facts on hand, the 2nd respondent has disqualified the petitioners under Section 164(2)(a) of the Act 18 of 2013, for not filing financial statements or annual returns, for period prior to 01.04.2014. The action of the 2nd respondent runs contrary to the circular issued by the Ministry of the Corporate Affairs, and he has given the provisions ofAct 18 of 2013, retrospective effect, which is impermissible.

¶102

t7. The Apex Court in COMMISSIONER OF INCOME TAX (CENTRAL)-L NEW DELHI v. VATIKA TOWNSHIP PRIVATE LIMITED, has dealt with the general principles concerning retros pectiv ity. The relevant portion of the judgment is thus:

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A legislation, be it a statutory Act or a statutory Rule or a statutory Notification, may^physically consists of words pnnted on papers. However, '^{(:ots) t scct}

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conceptually rl s a^great deal more than an ordinary prose. Tlrere is a speclal peculiarity in t rc nrode of verbal communication by a legislatlon. A lellislat on is not Just^{a series01 :jtatements,such as onefinds in a work of fiction/1(,n'iction oreven} in a^judgrnent()f a court of law. There is a technrque required tc^(jraFt a legislation as wel'as to Lrderstand a legislation. Former technique is^kro"r'n as^legislative drafting and Jatter one is to be found in the various^principles o''lnlerpretation of Statutes'. Vs':r-vs ordinary^prose, a legislation differs in its^p o,/enance, lay-out and features a; also in the implication as to its meaning that aris€s by^presumptions as to the inten: of the maker thereof.

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Of the various rules guiding how a legislation has to le rnlerpreted, one eslablished ruls is that unless a contrary intention appears, a legrsl.ticn is^presumed not to be intenled to have a retrospective operation. The idea b3h nd the rule rs that a current l,rw should^govern current activities. Law^passed to{Jay cannot apply to the events^()1'the past, If we do something today, we do it ke-.tr,inq in the law of today and in force and not tomorrow's backward adjustment of t. Our belief in the nature of the law is founded on the bed rock that every human lrerng; is entitled to arrange his af,airs by relying on the existing law and should not fird that his^plans have been retrcspectively upset. This principle of law is known as le):^prospicit non respicit : law ooks forward not backward. As was observed in Prillips vs. Eyre [(1870)^{LR 6,]311,a retrospective legislationis contrary to th: geieralprinciple} that legislatLon t)y which the conduct of mankind is to be regulated wfren introduced for the first t rro to deal with future acts ought not to change th{} rhirracter of^past transactions cerried on upon the faith of the then existing law.

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The otvio!s basis of the principle against retrospectivrty i:; the principle of 'fa rness', whrcl nrust be the basis of every legal rule as lva; observed in the decision reporte(l rn L'Office Cherifien des Phosphates v. Yamas rita-Shinnrhon Steamship Co. l-td. [{1994) 1Ac 486]. Thus, legislations whicl rnodified accrued rights or rr/hich rmpose obiigatlons or impose new duties or atta{:h a new disability have to be treal.ed as prospective unless the legislative intent is cealy to give the enactment a r:trospective effect; unless the legislation rs for purpos: of supplying an obvious orr rssion in a former legislation or to explain a forner legislation. We need not note : ret cornucopia of case law available on the sub.lect beciuse aforesaid legal positon^(l{l.rry emerges from the various decisions and this lcg.r position was corlceded by t1c counsei for the parties. In any case, we :;hlll refer to few .lu(lgments^{cont:rin ng this dicta,a littlelater.}

¶108

We wo,r c also like to point out, for the sake of complete'r€ ss that where a be.refrt rs conf,l r:11 by a legislation, the rule agarnst a retrospe,rlrve^{(:onstruction} rs drfferent. If a lirq slation confers a benefit on some persons but !^/ th-.ut inflictng a corresponding c::r ment on some other person or on the public gencrally, and where to confer suc.r benefit appears to have been the legislators ob]3ct, then the presumptron \r',ould be that such a legislation, grving it a purpos ve construction, would warrant r: to be given a retrospective effect. This exactly is tlre justification to treat^procedural provisions as retrospective, In Government of Irda & Ors. v. Indian Tobaccc ,\ssociation, [(2005) 7 SCC 396], the doctrine of Firirness was held to be relevant factf,r to construe a statute conferring a benefit, in th€ ronlext of it to be 9i!en^{a retro:f)ectiveoperation.The same doctrine} of^fairne:is, tl^hold that^a statute was retrospective in nature/ was applied in the case of ,,/itay v. State of Maharashtra & Crs., [(2006) 6 SCC 289]. It was held that where a aw is enacted for the benefit of community as a whole, even in the absence ol a provision the statute may b€: held to be retrospective in nature. However, \ve are (sic not) confronted witl) any such situation here.

¶109

In such cases, retrospectivity is attached to benefrt the persons in contradistinctl( ll tc the provision imposing some burden or larility where the presumpt on allaclred towards prospectivity. In the instant case, tl)e proviso added to Section 113 )f the Act is not beneficial to the assessee. On tlt€ contrary, it is a provision which is onerous to the assessee. Therefore, in a case I ke this, we have to proceed wirlr the normal rule of presumption against retrospect ve operation. Thus, the rule agarnst retrospective operation ls a fundamental ru e ,)f law that no st.tute sl-all be construed to have a retrospective operatrcn unless such a constructicn a[,f]€ars very clearly in the terms of the ACt, or arises. l)y ieCeSSary and distinct implrcatron. Dogmaticaily framed, the ruie is no more than a presumption, and thLrs could l)e^(lisplaced by out weighing factors.

¶110

There i,. yct another very interesting piece of evidence trat clarifies that provisron beyorC any pale of doubt viz., the understanding of CB) itself regarding this provis on. lt r; contained in CBDT Circular No.8 of 2OO2 dat(,d 2,,.8.2002, with the subjec: "Fr"rance Act, 2002 - Explanatory Notes on provision relating to Direct Taxes". This c r,:ular has been issued after the passing of the Finarce Act, 2002, by wh ch amendrr€:nt to section 113 was made. In this circular, va^.i()us amendments to the Income tax Act are discussed amply demonstrating as to y/hrch amendments are clarificator./,/relrospective in operation and which amendments ar: prospective.

¶111

¶112

For example, Explanation to section 158-BB is stated to be clarificatory in nature. Likewise, it is mentioned that amendments rn Sectron 145 whereby provisions of that section are made appricable to brock assessments is made crarificatorv and would take effect retrospectively from 1st day of )uly, 1995. When rt comes to amendment to Section 113 of the Act, this very circular provides that the said amendment along with the amendments in Section 158-BE, would be prospective i.e., will take effect from 1.6,2002."

¶113

Thus, the Apex Court in the above^judgment, has made it clear that unless a contrary intention appears, a legislation has to be presumed to have prospective effect. A reading of Section 164 of the Act does not show that the legislation has any intention, to make the said provision applicable to past transactions. Further, the Apex Court in the above judgment at paragraph No.43, found that the circular issued by the authority after passing of the legislation, clarifying the posltion with regard to applicability of the provisions, has to be construed as an important piece of evidence, as it would clarify the provision beyond any pale of doubt. In the present case, as already noted above, the Ministry of Corporation affairs has issued the circular No.0B/2014 dated 4.4.2014 clarifying that financial statements commencing after 01.04.2014, shall be governed by Act 1B of 2013 i.e., new Act and in respect of financial years commencing earlier to 01.04.2014, shall be governed by Act 1 of 1956. At the cost of repetition, since in the present cases, as the 2nd respondent / competent authority, has disqualified the petitioners as directors under Section 164(2)(a) of the Act 18 of 2013, by considering the period prior to 01.04.2014, the same is contrary to the circular, and also contrary to the law laid down by Apex Court in the above referred^judgment.

¶114

If the said provision is given prospective effect, as per the circular dated 4.4.2014 and the law laid down by the Apex Court, as stated in the writ affidavits, the first financial year would be from 01-04-2014 to 31.03.2015 and the second and third years financial years would be for the years ending 31.03.2016 and 31.03.2017. The annual returns and financial statements are to be filed with Registrar of Companles only after the conclusion of the annual general meeting of the company, and as^per the first

¶115

¶116

proviso to Sectlon 96(1) of the Act, annual general meretirrg for the year ending 31.03.2017, can be held within six months frlrn the closing of financial year i.(1., by 30.09.2017. Further, the time linril. for filing annual returns under Siection 92(4) of the Act, is 60 days frorr annual general meeting, or the ast date on which annual general mee-ing ought to have been held wilh r ormal fee, and within 270 days with additicnarl fee as^per the proviso to Section 403 of the Act. Learned counsel subrn t that if the said dates are calcu ated, the last date for filing the annua re:urns would be 30.77.2017, anl the balance sheet was to be filed on 30.10.2017 with normal fee and \vith additional fee, the last date for filing arrnual returns is 27.07.2OL8. In cther words, the disqualification could ge t triggered only on or after 27.07.2C'!8. But the period considered by the 2"i respondent in the present writ p3titlons for clothing the petitioners with disqualification, pertains prior to 01.04.20t4. Therefore, when the omissior, which is now pointed out, was 1ot envisaged as a ground for disqtialification prior to 1.4.2014, the petitioners cannot be disqualified on the s:ici ground. This analogy is trace.rolc to Article 20(1) of the Constitution of IrdIa, which states that "/Vo person:;hall be convicted of any offence except for violation of a law in force at the ti;n€ of the commission of the act chargea as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law i. force at the time of the commission of :he offence". In view of the sarrre, the ground on which the petitioners were disqualified, cannot stand to legal scrutiny, and the same is liable to be s;et aside.

¶117

A learned Single Judge of the High Court of Karnataka in YASHODHARA SHROFF ys, UNION OF INDLq2 considering Section rca(Z)(a) of the Act and other provisions of the Act, and various judgments, passed an elaborate order and held that the sairl provision has no retrospective operation. The observations of the learned _udce, pertaining to

¶118

t $'.1, N,,.-sl9 t I t,l l0 i- .rfLi balch darcd 11.06.2019

¶119

¶120

private companies, which are relevant for the present purpose, are extracted

¶121

as under;

¶122

In view of the aforesaid discussion, I have arrived at the following conclusions:

¶123

(a) It is held that Section 16a(2)(a) of the Act is not u/tra^yirus Article 1.4 of the Constitution. The said^provision is not manifestly arbitrary and also does not fall within the scope of the doctrine of proportionality. Neither does the said provision violate Article 19(1)(q) of the Constitution as it is made in the interest of general public and a reasonable restriction on the exercise of the said right. The object and purpose of the said provision is to stipulate the consequence of a disqualification on account of the circumstances stated therein and the same is in order to achieve probity, accountability, and transparency in corporate governance.

¶124

(b) That Article (sic) Section 164(2) of the Act applies by operation of law on the basis of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post disqualification and this is not in violation of the^principles of natural^justice, is not ultra^ylres Article 14 of the Constitution.

¶125

(c) That Section 164(2) of the Act does not have retrospective operatron and rs therefore, neither unreasonable nor arbitrary, in view of the interpretation placed on the sa me.

¶126

(d)

¶127

(e) Insofar as the private companies aTe concerned, disqualification on account of the circumstances stated under Section 164(2)(a) of the Act has been brought into force for the first time under the Act and the consequences of d squalification could not have been imposed on directors of^private companies by taking into consideration any period prior to 01.04.2014 for the purpose of reckonrng continuous period of three financial^years under the said provision. The saad conclusion is based on the^principal drawn by way of analogy from Article 20(1) of the Constitution, as at no point of time^prior to the enforcement of the Act, a disqualification based on the circumstances under Section 164(2) of the Act was ever envisaged under the 1956 Act vis-e-vis directors of private companies. Such a disqualification could visit a director of only a^public company under Section 27 4(L)(9\ of 1956 Act and never a director of a private company. Such disqualification of the^petitioners who are directors of^private companies is hence q uas h ed.

¶128

¶129

(g) Consequently, where the disqualification under Section 164(2) ot the Act is based on a continuous^period of three financial^years commencing from 01.04.2014, wherein financial statements or annual returns have not been filed by a^public or private company, the directors of such a company stand disqualified and the consequences of the sald disqualif cation would apply to them under the Act.

¶130

A learned Single of the High Court of Gujarat at Ahmedabad in

¶131

GAURANG BALVANTLAL SHAH S/O BALVANTLAL SHAH vs. UNION OF

¶132

INDIA3 expressed similar view as that of the leaned single ludge of High Court of Karnataka (1 supra), and held that Section l6a(2) of the Act of 2013, which had come into force with effect from 7.4.2014 would have prospective, and not retrospective effect and that the defaults contemplated under Section t64(2)(a) with regard to non-filing of^{financial statementsor}

¶133

r r/Special Civil Application No.22435 of 20 l7 and batch dated I 8. I 2.20 I 8

¶134

¶135

annual returns 'rlr doy continuous period of three financ:i;tl^years would^be the default to le counted from the financial^year 2014 1l; only and not 2073- 1.4.

¶136

A learred single Judge of the High Court of [4adras in BHAGAVAN DAS DHANAN|'AYA DAS vs. UNIaN OF INDIA4 also e>:pressed similar view. The relevart portion is as under:

¶137

29, In fine,

¶138

(a) u./hen the New Act 2013 came into effect i,o'n 1.4.2014, the s;econd respondent herein has wrongly giverr re:rospective effect and erroneously disqualified the petation€r - directors from :i.1,2016 itself before the deadline commenc:cl vrrongly fixing the f rst financial year from 7.4.2073 to 31.3.2012.

¶139

(b) Uy virtue of the new Section 164(2)(a) of th3 2()13 Act using the expression'for any continuous period of three financial year" and in the light of section 2(41) defining "financial year" as well as their own General circular No.08/14 dated 4,4,2014, the first Financial .rear would be from t,4,20L4 to 31.3.2015, the second financial )/ear^{would be from1.4.2015to 31.3.2016 ani l:he thirdfinancial} year would be from t.4.20L6 to 31.3.2017, vvh,:reas the second resoondent clearly admitted in paras L5 and ZZ of the counter t:ffidavit that the default of filing statutory r,rtLrrns for the final vears commences from 2073-14, 2074-15 ;nC 2015-16 i,e, one year before the Act 2013 came into force,^--his is the basic incurable legal infirmity that vitiates tl-e ,rntire impugned f:,roceed^ings.

¶140

In v ew of the above facts and circumstances ancl the judgments referred to supra, as the impugned orders in pres;ent writ petitions disqualifying the petitioners as directors under Section 16;2.(2t)(a) of the Act, have been pasied considering the period prior to 01.02.2014, the same cannot be susta ned, and are liable to be set aside to that e{tent.

¶141

As farr as the contention regarding issuance of prilr notice before disqualifying th() petitioners as directors is concerned, Se:tion 16a(2)(a) is required to be loticed, and the same is extracted as under for ready reference:

¶142

Disq ualification for appointment of director;

¶143

t M,.N,,.2,s.155 ol-10 I - ,r d barch dared 27.07.20I g

¶144

¶145

(

¶146

(2) No person who is or has been a director of a company which_

¶147

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

¶148

(b)...

¶149

Shall be eligible to be re-appointed as a director of that company or appointed in other companies for a period of five years from the date on which the said company fails to do so,

¶150

A reading of the above provision makes it clear that it provides disqualification on happening of an event i.e., if a person who is or has been a director of a company has not filed financial statements or annual returns for any continuous period of three financial years/ shall be ineligible to be reappointed as a director of that company or appointed in any other company for a period of five years from the date on which the said company fails to do so. The provision does not provide for issuance of any prior notice or hearing. A learned single ludge of the High Court of Karnataka in Yashodara Shroff v. Union of India (1 supra), as well as the learned single Judge of the High Court of Gujarat at Ahmedabad.in Gaurang Balvantlai Shah s/o Balvantlal Shah vs. Union of India (2 supra)r after analyzing various provisions of the Act and Rules framed thereunder, and by relying on various judgments of the Apex Court, held that Section 76aQ)@) of the Act applies by operation of law on the basls of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post-disqualification and this is not in vlolation of the principles of natural justice and hence, is not ultra vires Article 14 of the Constitution. I concur with the sa id reasoninq.

¶151

Thus, from the above, it is clear that Section^{1,64(2)(a) of the Act} is a deeming^provision and the disqualification envisaged^{under the said} provision comes into force automatically by operation of law on default and Legislature did not^provide for^issuance of any^{prior notice, but the} respondents notified disq^ua lification^{even beforeit incurred, and deactivated} DiNs, which is illegal arbitrary and^{againstprovisions containedin} Section 164(2)(a) of the Act.

¶152

1.+

¶153

The rext grievance of the^petitioners is^{with rellardto deactivation} of their DINs. The contention of the^{learned counselfor the petitionersis} that except for the^grounds mentioned^{under Rule 11 (a) to (f) of the Rules,} the DINs cannot be cancelled or deactivated,^{and the ! iolation mentioned} under Section I64(2)(a) of the Act, ls not one of the^{(Jrotinds mentioned} under clauses (.,) to (f) of Rule 11, and hence^for the alleg,.-d^{violation under} Section 164(2)(a)ofthe Act, DIN cannot be cancelled.

¶154

Ru le 10 of the Rules provide for allotment of DIN and under sub rule (6) of Ru t,r 10, it is allotted for life time. Ru e 1 I provides for cancellation or deactivation. Rule 11, which is relevan: 'or the present purpose, is extrJcted as under for ready reference:

¶155

cancellation or surrender or deactivation of Dtfl: The Central Government o- Regional Director (Northern Region), Noida or an/ lffcer authorized by the Regional Director may, upon being satisfied on verificati()n of^particulars or documentary f)roo'attached with the application received from any^person, cancel or deactivate the till\ in case -

(a)

(b)

(c)

(d)

(e)

the DIN is found to be duplicated in respect of the sar.re^{p,:rson provided} the^(lata related to both the DIN shall be merged with :he Yalidly retained nur'tber;

¶162

the I)IN was obtained in a wrongful manneT or by fraucu ent means; of the Ceath of the concerned individuali

¶163

the^(:oncerned individual has been declared as a^person of unsound mind by l cor.rpetent Court;

¶164

if ttr(: concerned individual has been adjudicated an insrl,,ent;

¶165

Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunlt\ ,)f )eing heard sha,l be given to the concerned indiv du:l;

¶166

(r)

¶167

on 3r'r applrcat on made in Form DIR-5 by the DIN holde- t() surrender his or her DIN alr) rg wrth declaration that he has never been appo n:ec as director in any company a.rd the said DIN has never been used for filing o'any document with any aLrthority, lhc Central Government may deactivate such DIN,

¶168

Provided that before deactivation of any DIN in such (as3, the Central Government s.rall verify e-records.

¶169

Explar irt on: for the purposes of clause (b) -

¶170

¶171

Th€ te-ms "wrongful manner" means if the DIN rj obtained on the st'ength of dl(:uments which are not legally valid or incompl,ltl (locuments are furnished or ln suppression of material information or on t..t( t asis of wrong certification or t)y making misleading or false information or by nt srepresentation;

¶172

(ir) the ternr^"'raudulent means" means if the DIN^js obtained v/it h an intent to deceive any other person or any authority inc uding the Cen:ra Govern ment.

¶173

Clauses (a) to (f) of Rule 11, extracted above, trovides for the

¶174

circumstances u,rder which the DIN can be cancelled or de;:ctivated. The said grounds, aTe different from the ground^,-.nvisaged under

¶175

¶176

Section 16ae)ft) of rhe Acr. Therefore, for the alleged violation under Section 164 of the Act, DINs cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules.

¶177

Learned Single Judge of the Gujarat High Court in the decision

¶178

cited 2 supra, held as under:

¶179

"29. Thrs takes the Court to tie next question as to whether the respondents Could have deactivated the DlNs of the petrtroner u, , .on."qrln." of the mpugned list? In this regard, it would be appropriate t" 1"r"i t" ii" rerevant provisions contained in the Act and the said Rules. Section fSSl:l- piovroes that no person shall be appointed as a Director of a company, ,"f".,'nI nu, been allotted the Dlrector Identification Number under Section 154. Section 153 requires every individual intending to be appointed as Director of a'-ompany to make an application for allotment of DIN to the central Government In iuch form and manner as may be prescribed. section 154 states that the centrar Government shal within one..month from the receipt of the application under Section 153 allot a DIN to an applicant in such manner as may be prescribed. Section 155 prohibits any individual, who has already been allotted a DIN under Section 154 from apptying for or obtaining or possessrng another DIN. Rures 9 and 1o of the said Rures of ,014 prescribe the procedure for making application for allotment and for the alotment of DIN, and further provide that the DIN altotted by the Central Government under the said Rules would be valid for the life time of the applicant and sha not be allotted to any other person.

¶180

30, Rule 11 provides for cancellation or surrender or deactivation of DIN. Accordingly, the Central Government or Regional Director or any authorized officer of Regional Director may, on being satisfied on verification of particulars of documentary proof attached with an application from any person, cancel or deactivate the DIN on any of the grounds mentioned in Clause (a) to (f) thereof. The said Rule 11 does not contemplate any suo motu powers either with the Central Government or with the authorized officer or Regional Director to cancel or deactivate the DIN allotted to the Director, nor any of the clauses mentioned in the said Rules contemplates cancellation or deactivation of DIN of the Director of the "struck off company" or of the Director having become ineligible under Sectron 164 of the said Act. The reason appears to be that once an individual, who is intending to be the Director of a particular company is allotted DIN by the Central Government, such DIN would be valid for the life time of the applicant and on the basis of such DIN he could become Director in other companres also. Hence, if one of the companies in which he was Director, is "struck off", his DIN could not be cancelled or deactivated as that would TUn counteT to the^provisions contained^{in the} Rule 11, which specifically^provides for the orcumstances under^{whichthe DINcould} be cancelled or deactivated,

¶181

In that view of the matter, the Court^{is of the opinion that the action of the} respondents in deactivating the DINS of the^petitioners -^{Directors alongwith the} publication of the impugned list of Directors of^"struck off" companres under Section 248, also was not^legally tenable.^{Of couTse, as per Rule 12 of the said} Rules, the individual who has^{been allotted} the^{DIN, in the eventof any change in} his^particulars stated in Form^{DIR -3 has to intimatesuch chanqe to theCentral} Government within the^{prescribedtime in FormDIR-6, however,if that is notdone,} the DIN could not be^{cancelledor deactivated. The cancellation or deactivation of} the DIN could be^{resortedto by the concerned respondentsonly as per the} provisions contained in the said Rules."

¶182

In view of the^{abovefacts and circumstancesand the judgment} referred to supra, the^{deactivation of the DINsof the petitioners for alleged} violations under Section^{164 of the Act, cannotbe sustained'}

¶183

¶184

For^{t.he foregoingreasons,the impugned orCersin the writ} petitions to :1e extent of^{disqualifyingthe} l)otitioners^under section 164(2)(a)^{of the Act and deactivation of their DINs, are set aside,} and the 2nd resr:ondent^is directed^{to activatethe DINS c,f the petitioners,} enabling them t() function as Directors other than^{in strike off companies.}

¶185

It is made clear that this order will not^preclude the 2'd respondent fro r taking appropriate action in accord arrcr: with law for violations as en'/lsaged under Section 764(2) of the A.c:, giving the said provision prospr:ctive effect from O7.04.2074 and fo' necessary action against DIN in r:ase of violations of Rule 11 of the Rules.

¶186

It is a so made clear that if the petitioners ar€r .,ggrieved by the action oF the reslondents in striking off their companies Lrrderr Section 24g of the Act, they arr: at liberty to avail alternative remedy unler Section 252 of the Act.

¶187

A[ the writ petitions are accordingly allc,u,ed to the extent ind icated a bovo

¶188

Int€rlocutory applications pending, if any, shal stand closed. No order as to cos,,,;.

¶189

A,RAJASHEKER FIEDDY,J

¶190

DATE 1B- 0 7--2019 AVS

Smt Bharathi Talagadadevi and another v. Union of India and another

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Smt Bharathi Talagadadevi and another v. Union of India and another

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