'Public At Large Cannot Be Put To The Whim & Fancy Of Recalcitrant Directors': Calcutta HC Upholds Disqualification Of Directors U/S 164(2) Of Companies Act

The Calcutta High Court on Friday observed that the provisions for disqualification of directors due to non-filing of balance sheets and annual returns as envisaged under Section 164(2) and Section 167(1) of the Companies Act, 2013 is aimed at ensuring probity and the highest standard of governance in both private and public companies.

Justice Rajasekhar Mantha was adjudicating upon a case wherein the petitioners had been disqualified as directors of a company one M/s. Hahnemann International Pvt. Ltd pursuant to Section 164(2) of the Companies Act, 2013 for not filing balance sheets and annual returns for a continuous period of three years from the year 2014-15. The Registrar of Companies (ROC) had also deactivated the Director Identification Number (DIN) of the petitioners.

Opining that such a conduct of the petitioners amounts to deliberate and wilful negligence, the Court underscored, 

"This Court is of the view that the object and purposes of Section 164 and 167, as amended is to ensure probity and the highest standard of governance in Companies both public and private. A failure to file balance sheet and the annual returns for three consecutive years amounts to deliberate and wilful negligence. The public at large dealing with such companies cannot be put to the uncertainty, whim and fancy of recalcitrant directors. After all the requirements and compliances mandated under the Companies Act, are not only for the benefit of the shareholders of a particular company but also for the public at large, which rely upon such compliances, in assessing the conduct of and in deciding their relations with such companies."
 

The Court held further, 

"The object and purpose of Section 164(2) and 167(1) is indeed laudable. It is aimed at ensuring good governance and maintenance of high standards of probity and protection of the interest of Shareholders. Transparency in the activities of Companies is very vital for ensuring an enduring business atmosphere in an economy."

Background 

The petitioners had contended that they were not afforded a prior hearing before they were disqualified as directors and hence the principle of natural justice had been violated. It was further argued that the petitioners were not permitted to avail the benefit of the "Company's Fresh Start Scheme of 2020" despite applying for such a benefit vide letter dated November 11, 2020. It was further submitted that the Registrar is not authorized to deactivate their Director Identification Numbers (DIN) and that such deactivation of DIN pursuant to the disqualification should not be automatic.

Furthermore, the petitioners had submitted that they were unable to file balance sheets and annual returns from March 31, 2015 since they had left the job of filing returns and balance sheet to one Moinak Kundu, an accountant of their company. However, the said accountant did not file the same despite having filed Income Tax and GST returns. It was also averred that due to the illness of one of the directors, the annual returns and balance sheets had not been filed. 

Observations 

The Court at the outset observed that the reason given by the petitioners or failing to file annual returns and balance sheet after the year ended on March 31, 2005 is 'frivolous'. It was further stated that the conduct of the petitioners in leaving the responsibility of filing balance sheet and annual returns on an accountant is not only 'irresponsible but amounts to wilful negligence'. Enumerating further, the Court underscored, 

"It is difficult to accept that, the petitioners are diligent enough in filing Income Tax and GST returns but not Balance Sheets and Annual Returns. The illness of the petitioner No.2 cannot be a reason for not filing return for a continuous period of three years. No proof of evidence of such illness has been disclosed in the petition. It is essentially to deter conduct of this nature that Section 164 (2) and 167 (1)(a) have been introduced and applied under the Companies Act, 2013."

The Court further observed that disqualification under Sections 164 (2) and 167 (1)(a) of the Companies Act is automatica and by operation of law and hence it leaves no discretion on the authorities. Thus, it was held that in such circumstances, the application of the principle of natural justice or extending any prior hearing does not arise. Reliance was placed on Coordinate Bench judgments of this Court in Naresh Kumar Poddar v. Union of India, through Secretary, Ministry of Corporate Affairs and Anr and Gautam Mehra Vs. Union of India & Ors. The Court also referred to the Karnataka High Court judgment in Yashodhara Shroff v. Union of India. 

 "The language object and purpose of the aforesaid two provisions of the Act of 2013 are clear and explicit and provide for automatic consequences. There are no exceptions. There is no scope of condonation or curing the omission. The Rules of Natural Justice cannot therefore be read into the process of application and operation of Section 164 (2) and 167 (1) of the said Act", the Court observed further. 

It was further held that the provisions of the Companies Act, 2013 has an overriding effect on the Companies (Appointment and Qualifications of Director) Rules of 2014. Thus, it was observed that the 2014 Rules cannot have any manner of application or confer any right on the petitioners insofar as their disqualification as directors is concerned. 

Pertinently, the Court also observed that pursuant to the judgment of the Karnataka High Court judgment in Yashodhara Shroff v. Union of India, the Registrar cannot deactivate DIN of the petitioners upon disqualification under Section 164(2) of the Companies Act. Accordingly, the Court directed for the revival of the DIN of the petitioners but underscored that such DIN would not entitle the petitioners to act as directors in any other company.

"It is, therefore, held that deactivation of the DIN of the petitioners is not automatic. In view of the above the DIN of the petitioners shall be revived subject to the company having filed DR-9 within prescribed or extended time. The said DIN shall not be applied to entitle the petitioners to act as directors in any other company", the Court observed further. 

Accordingly, the petition was disposed of. 

Case Title: Satya Narayan Banik & Ors v. Union of India & Ors

Case Citation: 2022 LiveLaw (Cal) 40

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