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January 30, 2021

Law introduced for deactivation of DIN on disqualification of directors is prospective or retrospective?

by Rubina Dsouza in Corporate Law

Law introduced for deactivation of DIN on disqualification of directors is prospective or retrospective?

Introduction

A company has no physical existence; it is merely a legal entity. The person acting on the company’s behalf is called a Director. Under company law, a director can be disqualified due to any of the following reasons:

  • He is of an unsound mind and is declared so by the court
  • He is insolvent
  • He is in the process of declaring insolvency and his application is pending
  • He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been imprisoned for at least six months. However, if a person has been convicted of any offence and has served a period of seven years or more, he shall not be eligible to be appointed as a director in any company
  • If an order has been passed disqualifying him of being appointed as a director by a court or Tribunal
  • He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly with others, and a period of six months has elapsed from the last day fixed for the payment of the call
  • He has been convicted of offences dealing with related party transactions at any time during the last preceding five years
  • He has failed to acquire a Director Identification Number.

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act.

What are the benefits of Document Identification Number (DIN)?

DIN provides the following advantages to the taxpayers:

  • Greater transparency and improvement in service delivery by the Income Tax Department
  • Maintenance of a detailed record of the responses with respect to any communication issued by the Income Tax Department
  • Protects the Rights of the Taxpayers

Let us refer to the case of Naresh Kumar Poddar vs Union of India where the issue under consideration was whether deactivation of DIN under Section 164(2) for disqualification was prospective or retrospective in nature?

Facts of the Case:

  • The petitioner was a director of a Private Limited Company, namely, Lambodar Vinimay Private Limited.
  • Vide public notice dated April 7, 2017, it was declared that the name of the said company would stand removed/struck off from the Register of Companies within 30 days from the date of the notice, under Section 248(1) of the Companies Act, 2013.
  • Accordingly, the petitioner’s Director Identification Number (DIN) and Digital Signature Certificate (DSC) were deactivated under Section 164(2) of the 2013 Act, with effect from November 1, 2016 till October 3, 2021.
  • The present writ petition was preferred, challenging such disqualification of the petitioner by the impugned notice.

Issues Raised before the High Court (HC)

  • Whether Section 164(2)(a), as introduced by the 2014 Amendment and the proviso to Section 167(1)(a), as introduced by the 2018 Amendment, are prospective, retrospective or retroactive in nature; and
  • Whether there is any scope for giving opportunity to the defaulting company or its directors to represent against the disqualification under Section 164, read with Section 167 of the 2013 Act.

Observations of HC on if there is any scope for giving opportunity to the defaulting company or its directors to represent against the disqualification

  • A clear reading of Section 164(2) and Section 167(1)(a), both with the corresponding provisos (as amended) left no scope of any discretion on the part of the authorities in case of a company incurring the defaults as contemplated therein.
  • It was well-settled that the rules of natural justice could only be applied if an opportunity of hearing/representation was of relevance and affected the outcome of the procedure.
  • In the absence of any discretion of the authorities, since the disqualification under the said sections was automatic on the perpetration of the defaults contemplated therein, an opportunity of representation/hearing to the defaulter would merely be an exercise in futility.
  • Thus, the question, was answered in the negative.

Observations of HC on whether Section 164(2)(a) and the proviso to Section 167(1)(a), are prospective, retrospective or retroactive in nature

  • Section 92(4) provides that every company shall file with the Registrar of Companies (ROCs) a copy of its annual return within 60 days from the date on which the AGM is held or should have been held, with consequent compliance of deposit of fees/additional fees as prescribed.
  • Section 92(5) stipulates the pecuniary penalty visiting non-compliance of sub-section (4).
  • Section 137(1), on the other hand, grants 30 days from the date of AGM or, when not adopted at an AGM or adjourned AGM, provisional filing of financial statements, subject to filing within 30 days of the date of adjourned AGM in case of financial statements of a company
  • Section 96 provides for AGM, which is to be held not more than 15 months after the date of the previous AGM and within 6 months (apart from the first AGM) from the date of closing of the financial year
  • Section 403 stipulates the documents and fees to be filed by a company.
  • The provisos to Section 403 envisage delayed filing of such document, fact or information as required under Section 92 or 137, upon payment of additional fee as prescribed.
  • A conjoint reading of the aforesaid provisions reveals that noncompliance of the provisions regarding filing/submission of annual returns and financial statements by a company, as envisaged in Sections 92 and 137 of the 2013 Act, shall result in pecuniary fines as penalty; nothing more, nothing less.
  • However, the scenario completely changed with the introduction of the 2014 Amendment to Section 164(2), with effect from April 1, 2014.
  • The directors of a defaulting company now became liable, for contravention of Sections 92 and 137, to ineligibility for re-appointment as a director of that company or appointment in any other company for 5 years from the date of default.
  • This consequence was newly-introduced and had no parallel in the 2013 Act or, for that matter, in the 1956 Act.
  • Although the aforesaid provisions “disqualify” the directors for 5 years, the effect of such disqualification was penal in nature.
  • Even if the intendment of the legislature in the present case was considered to be for the benefit of the community as a whole by streamlining the economy and shutting out recalcitrant operators, if a literal reading of the provision giving retrospective effect produces absurdity or anomaly, the same had to be construed to be only prospective and not retrospective in nature
  • One should consider the practical implication of giving retrospective/retroactive effect to the amended provisions of Section 164(2) and the proviso to Section 167(1)(a).
  • Assuming that a company had failed to file its annual returns and/or financial statements for 3 consecutive years, the only consequence suffered by a director of the defaulting company would be in pecuniary penalty, affecting the pocket of the director or the company at best but not visiting them with the grave consequence of depriving the director of her/his livelihood for 5 crucial years
  • Now, assuming retroactive effect is given to the 2014 and 2018 Amendments, as on the date on which such amendments come into force, that is, April 1, 2014 and May 7, 2018 respectively, the directors would be removed from office, not only in the defaulting company but in the other companies where they are directors, despite no defaults having been committed by such other companies.
  • In such a case, the previous default would attract operation of the amendments, if retroactive effect is given thereto, and would entail the directors suffering a grievous violation of their fundamental right under Article 19(1)(g) of the Constitution without any possibility of the directors, or anyone for that matter, having been able to predict such consequence on the relevant date, that is, the date of such default.
  • In such a factual scenario, it could not be argued by reasonable prudence that a retroactive effect ought to be given to the amendment-in-question.
  • This was an irreconcilable anomaly that would befall the directors if retrospective/retroactive effect is given to the amendments-in-question, not justiciable even by applying Article 19(6).
  • In the absence of any requirement of adherence to the principles of natural justice or any scope of discretion in applying the amended provisions of Sections 164 and 167 of the 2013 Act, there was no scope for the authorities to consider the reason behind defaults and desist from disqualifying the directors if necessary.
  • The fall-out of retrospective operation of the amendments was fatal to small and medium businesses, which still comprised the backbone of the economy.
  • Taking into consideration the ground-level impact and practical impossibility of giving retrospective effect, it was held that the operation of the 2014 and 2018 Amendments to the 2013 Act are prospective in nature.
  • The three-year default contemplated therein had to commence from the financial year 2014- 2015 (April 1, 2014 – March 31, 2015) and end in the financial year 2016-2017 (ending on March 31, 2017).
  • As far as the amended proviso to Section 167(1)(a) of the 2013 Act was concerned, the operation of such proviso has also to be construed prospectively by applying it to companies in default of Sections 92 and 137 of the 2013 Act only after May 7, 2018.

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