Mohan Gupta & Others vs Union Of India And Others
2021 Latest Caselaw 6203 Cal

                      In the High Court at Calcutta
                     Constitutional Writ Jurisdiction
                              Appellate Side

The Hon'ble Justice Sabyasachi Bhattacharyya



                           W.P.A. No. 6458 of 2020

                            Mohan Gupta & others
                                      Vs.
                           Union of India and others



     For the petitioners              :        Mr. Jishnu Saha,
                                               Ms. Sonal Shah,
                                               Mr. Kushagra Shah,
                                               Mr. Aniket Chaudhury

     For the respondents              :        Mr. Avinash Kankani

     Hearing concluded on             :        22.11.2021

     Judgment on                      :        08.12.2021



     Sabyasachi Bhattacharyya, J:-

1. The petitioners are the Joint Managing Directors of a Company,

namely, the Gupta Machine Tools Private Limited. The present writ

petition has been filed against disqualification of the petitioners as

Directors under Section 164(2)(b) of the Companies Act, 2013

(hereinafter referred to as 'the Act').

2. The learned Senior Advocate appearing for the petitioners argues that

no notice was given to the petitioners prior to such disqualification

under Section 164(2)(b) of the Act.

3. Secondly, it is argued that the deposits could not have been termed

as 'unpaid' within the purview of Section 74 of the Act. In this

context, the learned Senior Advocate refers to Section 74(1)(b) of the

Act and submits that the deposits were renewed from time to time,

which is permitted under the said provision. Thus, there does not

remain any question of any dues being unpaid.

4. That apart, it is argued by the petitioners, the Company was

converted to a private limited company with effect from May 26, 2016.

As such, it is argued that on the subsequent date of disqualification,

the Company could not have incurred any liability under Section 74.

5. It is next argued that the deposits were only accepted from the

Promoters/Directors/Share-holders of the Company and not from the

public in general, thereby attracting the exemption under Rules

2(1)(c)(viii) and (xiii) of the Companies (Acceptance and Deposits)

Rules, 2014 (for short, 'the 2014 Rules').

6. The learned Senior Advocate argues that the 2014 Rules are

clarificatory in nature and, as such, have retrospective occupation.

In support of such proposition, the petitioners cite Allied Motors (P)

Ltd. vs. Commissioner of Income Tax, reported at AIR 1997 SC 1361.

7. The learned Senior Advocate for the petitioners further argues that

the Company itself, as well as the Full-Time Director thereof, was

discharged in a criminal proceeding on the same allegations. As

such, it is argued, the other Directors, that is, the petitioners could

not have suffered the consequences of disqualification of their

Directors Identification Number (DIN) as the allegation against the

petitioners was regarding the defaults committed by the company.

8. Learned counsel appearing for the respondents contends that the

2014 Rules came into operation with effect from April 01, 2014.

Hence, the same could not be applicable with retrospective effect to

the petitioners.

9. It is next argued that Section 18(3) of the Act specifically provides

that the registration of a Company under the said Section, which

deals with conversion of Companies already registered, shall not

affect any debts, liabilities, obligations or contracts incurred or

entered into by or on behalf of the Company before conversion and

those will be inferred in the manner as if such registration had not

been done. It is, thus, contended that the mere conversion of the

Company into a Private Limited Company did not absolve either the

Company or its Directors from the liabilities incurred previously in

the capacity of a public Company.

10. It is next argued by the respondents that the discharge of the

Company and the Full-Time Director in a criminal action is not

conclusive and/or binding on this Court.

11. That apart, it is argued that the discharge took place on September

30, 2019, that is, after the decision of disqualification in respect of

the petitioners was alleged by the Registrar of Companies (ROC).

Hence, the discharge could not have any material bearing on the

present case.

12. Upon taking due note of the submission of the parties and the

materials on record, the first argument of the petitioners, that is, the

absence of notice to the petitioners before the disqualification under

Section 164(2) of the Act, does not vitiate such disqualification in any

manner. Section 164 of the Act does not contemplate any such prior

individual notice; more so, since notice had been issued to the

Company itself and the Full-Time Director as well and the present

petitioners could not feign ignorance thereof.

13. That apart, there is no statutory right of hearing of the Directors prior

to disqualification, which eliminates the requirement of a prior notice.

14. As far as the operation of the 2014 Rules is concerned, Rule 1(2)

clearly prescribes that the same shall come into force on the 1st day

of April, 2014. In the teeth of such specific prospective operation

having been provided in the Rules, there is no scope of argument that

the said Rules have retrospective operation. The ratio laid down in

Allied Motor (supra) was laid down in a different factual context than

the present case and does not, in view of the specific language of Rule

1(2) of the 2014 Rules, help the petitioners in any manner

whatsoever. The said judgment was rendered in the context of the

Income Tax Act, 1961. The Supreme Court held therein that the rule

of reasonable construction must be applied while construing a statute

and literal construction should be avoided if it defeats the manifest

object and purpose of the Act.

15. The said judgment was rendered in the context that a proviso had

been inserted to Section 43B of the Income Tax Act, 1961 and the

Supreme Court clearly held that a proviso which is inserted to remedy

the intended consequences and to make the provision workable, a

proviso which supplies an obvious omission in the Section and is

required to be read into the Section to give the Section a reasonable

interpretation, requires to be treated as retrospective in operation so

that a reasonable interpretation can be given to the Section as a

whole. Such argument does not hold good in the present context in

view of the specific enumeration in Rule 1(2) of the 2014 Rules as

regards the date of commencement of the same being April 1, 2014.

16. That apart, such applicability of the 2014 Rules is irrelevant in any

event since, at the relevant juncture when the alleged offences were

committed by the Company, the 1975 Rules were applicable and not

the 2014 Rules. The provisions of Rules 2(b)(ix) and (xi) of the 1975

Rules are on similar footing as those under which the petitioners and

the Company were charged.

17. Section 2(c)(viii) of the 2014 Rules brings within the fold of

exemptions any amount received from a person who, at the time of

the receipt of the amount, was a Director of the Company and the

Director furnishes to the Company at the time of giving the money

declaration in writing to the effect that the amount is not being given

out of funds acquired by him for operating or accepting loans of

others. Sub-rule (xiii) thereof provides that any amount brought in by

the Promoters of the Company by way of unsecured loan in

persuasion of the stipulation of any lending financial institution or a

bank, subject to fulfillment of the conditions following thereafter,

would also be entitled to such exemption. There is no substantial

distinction between the said provisions and those of Rules 2(1)(c)(viii)

and (xiii) of the 2014 Rules. Hence, although there cannot arise any

question of the 2014 Rules having any retrospective effect, since the

same was not merely clarificatory in nature as argued by the

petitioners, even under the 1975 Rules, the petitioners were entitled

to similar exemptions on which they were charged.

18. Section 18(3) of the Act clearly applies to the present case, since mere

conversion of the Company into a Private Limited Company, in order

to avoid previous defaults or otherwise, would not absolve the

petitioners, as Directors, or the Company itself from the offences

committed under Section 74 of the Act, in the event such defaults

were actually proved and not exempted.

19. As regards the discharge of the Full-Time Director and the Company

in a criminal action, not only did the same occur subsequent to the

ROC complaint under Section 74(1)(b), the same was rendered in a

different context, in which the standard of proof was "beyond

reasonable doubt", unlike in the present matter.

20. The respondents are justified in arguing that the said order passed in

a criminal action cannot debar this Court from deciding the matter or

treat such order to be on the same footing as the principle of res

judicata.

21. As per Section 74(1)(b) of the Act, the Company shall repay, within

three years from the commencement of the Act or on or before expiry

of the period for which the deposits were accepted, whichever is

earlier. The said provision has to be read in context and in

conjunction with Section 74(2), which clearly provides that the

Tribunal may, on an application made by the Company, after

considering the financial condition of the Company, the amount of

deposit or part thereof and the interest payable thereon and such

other matters, allow further time as considered reasonable to the

Company to repay the deposit. In the event of renewal in compliance

with the said sub-section, it could not be said that the Company or,

for that matter the petitioners, were guilty of any offence within the

ambit of Section 164(2)(b) of the Act.

22. The term "deposits", as defined in Section 2(31) of the Act, envisages

the same to include any receipt of money by way of deposit or loan or

in any other form by a Company, but does not include such

categories of amount as may be prescribed in consultation with the

Reserve Bank of India.

23. Sections 73 and 74 of the Act, on the other hand, prohibit acceptance

of deposits from the public. Section 74, read in conjunction with

Section 73, would have included the money taken by the Company

unless, as discussed above, the exemptions were applicable to the

withdrawals.

24. Hence, in view of the exemption under the 1975 Rules, more

specifically Rules 2(b)(ix) and (xi) of the same, no liability within the

contemplation of Sections 164 and 167 could have been imposed on

the Company and/or the petitioners.

25. Since the petitioners were Joint Managing Directors of the Company,

it would be unfair to indict the petitioners of an offence which was

exempted within the contemplation of the statute.

26. Hence, the disqualifications envisaged under Section 164 and Section

167 of the Act were not applicable to the petitioners and, as such, the

decision disqualifying the petitioners' DIN and the consequential

vacation of office were illegal and bad in the eye of law.

27. Hence, W.P.A. No. 6458 of 2020 is allowed, thereby setting aside the

impugned decision of deactivate the DIN of the petitioners from

January 24, 2019 to January 23, 2024. Consequently, the

respondents shall take necessary steps to re-activate the DSC and

DIN Nos. 005393026, 00596747 and 00603910 of the petitioners at

the earliest, positively within one month from date.

28. There will be no order as to costs.

29. Urgent certified copies of this order shall be supplied to the parties

applying for the same, upon due compliance of all requisite

formalities.

( Sabyasachi Bhattacharyya, J. )