The Madhya Pradesh High Court recently gave its decision in the case of, Abbas Maru v. The Union of India, [Writ Petition No. 15683 of 2020], wherein it has held that, the Director Identification Number (‘DIN’) cannot be cancelled or deactivated resorting to Sections 164 or 167 of the Companies Act, 2013 (“the Act”).
The petitioners in the writ petitions challenged the action taken by the Registrar of Companies, Madhya Pradesh, Gwalior (“ROC”) whereby the petitioners’ DIN was deactivated and were disqualified under Section 164(2) of the Act for a period of 5 years from acting as directors of companies.
All the writ petitions were heard and decided by the common order dated June 9, 2022 and for the sake of convenience, facts of the writ petition bearing no. 15683/2020 (“the Writ Petition”) were considered by the High Court.
The petitioners in the writ petition were working as directors for a few companies and obtained DIN from the respondents as per Section 154 of the Act read with rule 9 and 10 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (‘the Rules’). The petitioners incorporated a company - Kanchan Creation Limited in the State of Madhya Pradesh for the purpose of providing and managing manpower in various industries and organizations. As the said company did not carry out any business, the petitioners did not file the financial statements or annual returns for a continuous period of 3 years.
Subsequently, on 13 September 2017, the respondents posted a list of disqualified directors of the struck off companies all over the country with a separate list of companies having registered office under the jurisdiction of various offices of the respondents across India with the title ‘List of Disqualified Directors’ under Section 164(2)(a) of the Act. The said list showed that the petitioners were disqualified to act as directors in all companies with effect from November 1, 2018 and their DIN was deactivated.
The issue which arose for consideration before the High Court at Madhya Pradesh was whether the ROC can cancel or deactivate the DIN resorting to Sections 164 or 167 of the Act?
Submissions on behalf of the petitioners:
The submissions made on behalf of the petitioners in the writ petitions are summarized below:
(i) Language of Section 164(2) and 167(1)(a) of the Act makes it clear that disqualification shall operate only with respect to a company which is in default of filing financial statements and annual returns and not with respect to any other company because it is not the intention of legislature to disqualify the director who is director in the defaulting company to automatically cease as director in other companies;
(ii) As per rule 11 of the Rules, there is no mention about deactivation of DIN pursuant to Sections 164(2) and 167(1) of the Act, therefore, stretching rule 11 of the Rules would be arbitrary and illegal;
(iii) Rule 11 of the Rules does not contemplate exercise of suo motu power by the Central Government or Regional Director or Registrar of Companies (if authorized so) to deactivate DIN.
(iv) Violation of principle of natural justice as no opportunity was provided to the petitioners before passing such order while rule 11(e) of the Rules which specifically provides for an opportunity of hearing;
(v) A person cannot be punished for the same offence twice because punishment for non-filing of financial statements and annual returns is prescribed under Sections 92 and 137 of the Act.
(vi) Sections 92 and 137 of the Act has been prescribed upon the “officer who is in default” as per Section 2(6) of the Act and not on each and every director of the company; and
(vii) Section 164 of the Act shall be prospective and not retrospective. Reliance was placed on Supreme Court judgments wherein it was held that when two interpretations are possible; one favouring the subject ought to be made applicable especially in case of a penal statute.
Submissions on behalf of respondents:
The submissions made on behalf of the respondents for opposing the writ petitions are summarized are below:
(i) Reliance was placed upon the Company Law Settlement Scheme, 2014 (CLSS, 2014) vide General Circular No.34 of 2014 by which all directors and companies were given a chance for course correction to submit financial statement/ annual return and to cure the defects. Therefore, all these petitioners were aware of the consequences and therefore, it cannot be said that the petitioners were not given an opportunity of hearing;
(ii) The respondents' action is under Section 164(2) read with Section 167(1) of the Act, therefore, no error has been committed by the respondents; and
(iii) Since names of the company were struck off from the register of Registrar of Companies due to non-filing of statutory documents since 2014-15 notice under Section 248(1) of the Act was issued to the company and its directors.
The High Court observed that Section 152 of the Act deals with the ‘Appointment of Director’ whereas Section 153 deals with ‘Application for allotment of DIN’ and Section 154 is in respect of ‘Allotment of DIN’. As per Section 152(3), allotment of DIN under Section 154 is a prerequisite for appointment as a director of a company.
The High Court thereafter analysed rule 11 of the Rules and observed that, cancellation or deactivation of DIN can be done at the instance of any person while moving an application along with a fee as specified in the Rules and after providing an opportunity of hearing. It was also observed that no application was filed by any person regarding cancellation or deactivation of DIN. The High Court also considered that rule 11 of the Rules prescribes certain contingencies which may lead to deactivation and cancellation of DIN. Sections 164 of the Act deals with disqualification for appointment of director and Section 167 of the Act deals with vacation of office of director and does not deal with cancellation of DIN. Therefore, resorting to Sections 164 and 167 of the Act for cancellation/ deactivation of DIN is arbitrary and illegal. The only source available for deactivation of DIN is provided under rule 11 of the Rules.
The High Court after analysing Sections 164(1) and 164(2) of the Act held that applying the grounds mentioned in rule 11 of the Rules and treating them to be the grounds available under Sections 164(2) and 167(1) of the Act would lead to an anomaly and would apparently enable the authorities to move arbitrarily and illegally.
In view of the above and considering the judgments passed by different High Courts from time to time, the High Court allowed the writ petitions, set aside the impugned orders passed by the ROC and accordingly held that DIN cannot be cancelled or deactivated resorting to Sections 164 or 167 of the Act.
Please find attached a copy of the order.
This update has been contributed by Aashdin Chivalwala (Principal Associate).
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