Calcutta High Court
Naresh Kumar Poddar vs Union Of India on 5 January, 2021
In The High Court at Calcutta
Constitutional Writ Jurisdiction
Original Side
The Hon'ble Justice Sabyasachi Bhattacharyya
W.P.O. No. 493 of 2019
Naresh Kumar Poddar
Vs.
Union of India, through Secretary,
Ministry of Corporate Affairs and another
For the petitioner : Mr. Palash Tiwari,
Mr. Mainak Swarnokar
For the respondent : Mr. Avinash Kankani
Hearing concluded on : 17.12.2020
Judgment on : 05.01.2021
The Court:
1. The petitioner was a director of a Private Limited Company, namely,
Lambodar Vinimay Private Limited, incorporated on January 27, 2009.
2. Vide public notice no. ROC/WB/STK/2017/1 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
(hereinafter referred to as "the 2013 Act"). 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
has been preferred, challenging such disqualification of the petitioner by
the impugned notice dated April 7, 2017.
3. Learned counsel for the petitioner argues that sub-section (2) of Section
164 of the 2013 Act came into force from April 1, 2014 and can apply
only prospectively. Thus, the three financial years, non-filing of the
annual return and financial statement of the company for which would
make the petitioner liable for deactivation of his DIN, would commence
from April 1, 2014. The relevant three financial years would be 2014-
2015, 2015-2016 and 2016-2017, covering the period from April 1, 2014
to March 31, 2017. Hence, it is argued, the deactivation of the DIN with
effect from November 1, 2016 was patently illegal.
4. The petitioner further argues that the last date for filing financial
statements for the third financial year was October 30, 2017 (with
regular fees) and July 27, 2018 (with additional fees) as per Section 403
of the 2013 Act, which provides for an additional period of 270 days.
Thus, in any event, no question of disqualification of the petitioner arose
before the expiry of the said period.
5. Learned counsel for the petitioner next submits that the proviso to
Section 167(1)(a) was inserted by the Amendment of Act of 2018 with
effect from May 7, 2018. The said provision reads as follows:
"Section 167: Vacation of office of director - (1) The office of a director shall
become vacant in case -
(a) he incurs any of the disqualifications specified in section 164:
Provided that where he incurs disqualification under sub-section (2) of
section 164, the office of the director shall become vacant in all the companies,
other than the company which is in default under that sub-section;
.... .... .... ...."
6. It is contended that such proviso would be applicable to companies
whose names are struck off only after the introduction of the 2018
Amendment, that is, after May 7, 2018 and could not be invoked in the
case of the petitioner.
7. The proviso, prior to the 2018 Amendment, read as follows:
"Provided that the office shall be vacated by the director even if he has
filed an appeal against the order of such Court;" and did not contemplate
the vacancy of the office of the director in respect of companies other
than the defaulting company.
8. Learned counsel places reliance on Keshavan Madhava Menon vs. State
of Bombay, reported at AIR 1951 SC 128, to submit that every statute is
presumed to be prospective, unless the contrary is specifically stipulated.
Thus, the operation of the amended Section 164(2) and the amended
proviso to Section 167(1)(a) of the 2013 Act would not be operative prior
to April, 2014 and May, 2018 respectively.
9. Learned counsel for the petitioner contends that a conjoint reading of
Sections 92, 96, 137 and 403 of the 2013 Act makes it clear that a copies
of the annual returns of the company and of the financial statements
thereof have to be filed within 60 days and 30 days respectively from the
date on which the Annual General Meeting (AGM) is held. The AGM has
to be held once in the financial year, within six months from the date of
closing of the financial year, latest before expiry of 15 months from the
last AGM. The first proviso to Section 403(1) allows documents to be
submitted, filed or registered within a period of 270 days from the date
by which they could have been submitted, on the payment of additional
prescribed fees. The second proviso thereto allows the same to be filed
even after the said period of 270 days, without prejudice to any other
legal action or liability under the 2013 Act. It is submitted that such
provisions ought to be construed to the effect that the petitioner's
company could have filed its annual returns latest by November 30 and
financial statements by October 30 of the relevant financial year ending
on March 31, even without availing of the additional period of 270 days.
10. Thus, the director of the company would incur disqualification or be
ineligible to be reappointed as director of a company or appointed in any
other company for five years, for defaults under Section 164(2)(a), only
after October 30 or November 30, as the case may be, of the year 2017.
The impugned notice disqualifying the petitioner for five years from
November 1, 2016 to October 31, 2021 is premature and untenable at
law.
11. Learned counsel for the petitioner reiterates the proposition that no
retrospective effect can be given to the amended Section 164(2)(a).
12. By citing Dilip Kumar Sharma and others vs. State of Madhya Pradesh
[AIR 1976 SC 133] and Tolaram Relumal and another vs. State of Bombay
[AIR 1954 SC 496], it is submitted that when two interpretations are
possible, the one favouring the subject ought to be made applicable,
especially in case of a penal statute. By relying on State of Madhya
Pradesh vs. Narmada Bachao Andolan and another [(2011) 7 SCC 639],
learned counsel submits that an interpretation which is just, fair and
sensible should be made and not one which results in drastic
consequences.
13. Learned counsel further argues that a DIN, once allotted by the Central
Government to a particular director, is valid for her/his lifetime, allowing
her/him to become director in other companies as well. There is no
provision defining a "disqualification of director", at least with regard to
Section 154(2) of the 2013 Act, though Rule 11 of the relevant Rules
provides for cancellation, surrender or deactivation of DIN under certain
circumstances. Since such circumstances do not arise in the present
case, the company being struck off could not necessarily imply the
cancellation/deactivation of its director, that is, the petitioner.
14. In support of his contentions, counsel for the petitioner cites the
following judgments:
Sr
Name of the parties Case No. Quorum Court
no.
1 Mrs. Sunita Jain & Ors. WPC 7367/2018 Hon'ble High Court
Vs. Union of India & Dated: 18.03.2018 Division of Delhi
Ors. Bench
2 Arun Seth vs. Union of M.A.T. 1874/2017 Hon'ble High Court
India Dated 15.11.2017 Division of Calcutta
Bench
3 Kshitij Dattaray Shah W.P. 802/2018 Hon'ble High Court
vs. Union of India Dated 26.03.2018 Division of Bombay
Bench
4 Gaurang Balwantlal SCA/22435/2017 Hon'ble High Court
Shah Vs. Union of India Dated 18.12.2018 Single of Gujrat
Bench
5 Sunita Mehta Vs. W.P. 2729/19 Hon'ble High Court
Ministry of Corporate Dated 13.02.2019 Single of Telengana
affairs Bench
6 Bhagvan Das W.P/25455/2017 Hon'ble High Court
Dhananjaya Das v/s Dated 03.08.2018 Single of Madras
Union of India Bench
7 Yashodhara Shroff Vs. W.P./52911/2017 Hon'ble High Court
Union of India Dated 12.06.2019 Single of Karnataka
Bench
8 Siddharth Gupta & WPC/1487/2019 Hon'ble High Court
Another Vs. Union of Dated: 25.04.2019 Single of
India & Another Bench Chhattisgarh
15. Learned counsel for the respondents, on the other hand, submits that
the petitioner stood disqualified by operation of Section 164(2)(a) and
Section 167(1)(a) of the 2013 Act, which cannot be read in isolation.
Default, as per the said provisions, is triggered for not filing financial
statements for a continuous period of three years and/or balance sheet
within thirty days of the date of AGM.
16. The said provisions, it is submitted, do not envisage any adjudicatory
hearing to be provided to the errant company or concerned directors. The
action taken for such default is through operation of the prevalent
mandate of the 2013 Act. Disqualification of the petitioner is the
consequence of operation of law and there is no scope of following
principles of natural justice, as there is no discretion with the authorities
to take recourse to any other procedure or to arrive at any other
decision/conclusion.
17. Learned counsel for the respondents next contends that the nature of
Section 164 of the 2013 Act is 'disqualifying' and not penal. Penal
consequence for not filing financial statements is envisaged under
Section 137 of the 2013 Act, which corresponds to Section 220 of the
Companies Act, 1956. The penal consequence for not filing annual
returns is envisaged under Section 92 of the 2013 Act, corresponding to
Sections 159 and 162 of the 1956 Act. Thus, penal consequences are
provided for separately in both the 1956 and 2013 Acts.
18. Section 164 of the 2013 Act, however, is disqualifying in nature and not
penal in the sense of criminal law and hence, retrospective in nature. The
amended Section 164 merely creates a disability to be appointed or
continue as a director in respect of a past event and no new penal
provision has been introduced.
19. Section 164, read with Section 167, of the 2013 Act is clearly intended to
be retrospective in operation.
20. The original provision, that is, Section 167(1)(a), created a paradoxical
situation as the office of all directors in a Board would become vacant
when they were disqualified under Section 164(2) and a new person
could not be appointed as a director as they would also attract such a
disqualification. Thus, it is argued, the newly-introduced proviso to
Section 167(1)(a) of the 2013 Act is curative and declaratory in nature. A
proviso is added to an enactment to qualify or create an exception to the
enactment and, ordinarily, is not interpreted as stating a general rule. A
proviso inserted to remedy unintended consequences and to make the
provision workable, supplying an obvious omission in the section and
required to be read into the section to give the latter 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.
21. As regards principles of natural justice, learned counsel for the
respondents reiterates that neither Section 164(2)(a) nor Section
167(1)(a) of the 2013 Act envisages any adjudicatory hearing to the
errant companies or concerned directors. Action is taken thereunder by
operation of law, that is, the 2013 Act. Such disqualification is an
automatic consequence by operation of law and there is no scope of the
authorities exercising any discretion, thus, negating any scope of
hearing.
22. Learned counsel for the respondents cites the following judgments:
S/l
Name of the parties
No.
1 Gautam Mehra vs. Union of India
W.P.A. 22790 of 2019
2 Vijay vs. State of Maharashtra & Ors.
(2006) 6 Supreme Court Cases 289
3 K. Prabhakaran vs. P Jayarajan
(2005) 1 Supreme Court Cases 754
4 State of Bombay (Now Maharashtra) vs. Vishnu Ramchandra
All India Reporter 1961 Supreme Court 307
5 Shah Bhojraj Kuverji Oil Mills and Ginning Factory vs. Subhash
Chandra Yograj Sinha
All India Reporter 1961 Supreme Court 1596
6 Allied Motors (P) Limited vs. Commissioner of Income Tax, Delhi
(1997) 3 Supreme Court Cases 472
7 Punjab National Bank and Others vs. Manjeet Singh & Another
(2006) 8 Supreme Court Cases 647
Subhas Kumar Biswas vs. Union of India & Ors.
Imraj Ali Molla vs. Union of India and Others
Mukul Somany & Anr. vs. Registrar of Companies & Anr.
Sourajit Ghosh vs. Union of India & Ors.
23. The legal questions posed in the present case are:
(i) 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
(ii) 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.
24. The other questions raised by the parties are corollaries of the above two
broad questions.
25. For the sake of brevity, the second question posed above is taken up first
for resolution. A clear reading of Section 164(2) and Section 167(1)(a),
both with the corresponding provisos (as amended) leaves no scope of
any discretion on the part of the authorities in case of a company
incurring the defaults as contemplated therein. It is well-settled that the
rules of natural justice can only be applied if an opportunity of
hearing/representation is of relevance and affects the outcome of the
procedure. In the absence of any discretion of the authorities, since the
disqualification under the said sections is 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, question (ii) as formulated above, is answered in the
negative.
26. While dealing with question (i) above, some of the provisions of the 2013
Act are required to be considered. Those are as follows:
"92. Annual return. - (1) Every company shall prepare a return (hereinafter referred to
as the annual return) in the prescribed form containing the particulars as they stood on
the close of the financial year regarding -
(a) its registered office, principal business activities, particulars of its holding,
subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
[(c) Omitted by Act 1 of 2018, S. 23(i)(a). Prior to its omission, Cl. (c) read
as under:-
"(c) its indebtedness;".]
(d) its members and debenture-holders along with changes therein since the close
of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein
since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees
along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and
details of compounding of offences and appeals made against such penalty or
punishment;
(i) matters relating to certification of compliances, disclosures as may be
prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors [the words "indicating their names, addresses,
countries of incorporation, registration and percentage of shareholding held by
them" Omitted by Act 1 of 2018, S. 23(i)(b)]; and
(k) such other matters as may be prescribed,
and signed by a director and the company secretary, or where there is no company
secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual
return shall be signed by the company secretary, or where there is no company
secretary, by the director of the company:
Provided further that the Central Government may prescribe abridged form of
annual return for "One Person Company, small company and such other class or classes
of companies as may be prescribed.
(2) The annual return, filed by a listed company or, by a company having such
paid-up capital and turnover as may be prescribed, shall be certified by a company
secretary in practice in the prescribed form, stating that the annual return discloses the
facts correctly and adequately and that the company has complied with all the
provisions of this Act.
(3) Every company shall place a copy of the annual return on the website of the
company, if any, and the web-link of such annual return shall be disclosed in the
Board's report.
(4) Every company shall file with the Registrar a copy of the annual return,
within sixty days from the date on which the annual general meeting is held or where no
annual general meeting is held in any year within sixty days from the date on which the
annual general meeting should have been held together with the statement specifying
the reasons for not holding the annual general meeting, with such fees or additional
fees as may be prescribed, [The words "within the time as specified, under section
403" Omitted by Act 1 of 2018, S. 23(iii) (w.e.f. 7-5-2018)].
(5) If a company fails to file its annual return under sub-section (4), before
the expiry of the period specified therein, the company shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to five lakhs
rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not be
less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
(6) If a company secretary in practice certifies the annual return otherwise than
in conformity with the requirements of this section or the rules made thereunder, he
shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees.
.... .... .... ....
96. Annual general meeting. - (1) Every company other than a One Person Company
shall in each year hold in addition to any other meetings, a general meeting as its
annual general meeting and shall specify the meeting as such in the notices calling it,
and not more than fifteen months shall elapse between the date of one annual general
meeting of a company and that of the next:
Provided that in case of the first annual general meeting, it shall be held within a
period of nine months from the date of closing of the first financial year of the company
and in any other case, within a period of six months, from the date of closing of the
financial year :
Provided further that if a company holds its first annual general meeting as
aforesaid, it shall not be necessary for the company to hold any annual general meeting
in the year of its incorporation:
Provided also that the Registrar may, for any special reason, extend the time
within which any annual general meeting, other than the first annual general meeting,
shall be held, by a period not exceeding three months.
(2) Every annual general meeting shall be called during business hours, that is,
between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be held
either at the registered office of the company or at some other place within the city, town
or village in which the registered office of the company is situate:
Provided that annual general meeting of an unlisted company may be held at any
place in India if consent is given in writing or by electronic mode by all the members in
advance:
Provided further that the Central Government may exempt any company from the
provisions of this sub-section subject to such conditions as it may impose.
Explanation.--For the purposes of this sub-section, "National Holiday" means
and includes a day declared as National Holiday by the Central Government.
.... .... .... ....
137. Copy of financial statement to be filed with Registrar. - (1) A copy of the
financial statements, including consolidated financial statement, if any, along with all
the documents which are required to be or attached to such financial statements under
this Act, duly adopted at the annual general meeting of the company, shall be filed with
the Registrar within thirty days of the date of annual general meeting in such manner,
with such fees or additional fees as may be prescribed [The words "within the time
specified under section 403" Omitted by Act 1 of 2018, S. 39(i)(a)]:
Provided that where the financial statements under sub-section (1) are not
adopted at annual general meeting or adjourned annual general meeting, such
unadopted financial statements along with the required documents under sub-section (1)
shall be filed with the Registrar within thirty days of the date of annual general meeting
and the Registrar shall take them in his records as provisional till the financial
statements are filed with him after their adoption in the adjourned annual general
meeting for that purpose:
Provided further that financial statements adopted in the adjourned annual
general meeting shall be filed with the Registrar within thirty days of the date of such
adjourned annual general meeting with such fees or such additional fees as may be
prescribed [The words "within the time specified under section 403" Omitted by
Act 1 of 2018, S. 39(i)(b) (w.e.f. 7-5-2018)]:
Provided also that a One Person Company shall file a copy of the financial
statements duly adopted by its member, along with all the documents which are
required to be attached to such financial statements, within one hundred eighty days
from the closure of the financial year:
Provided also that a company shall, along with its financial statements to be filed
with the Registrar, attach the accounts of its subsidiary or subsidiaries which have been
incorporated outside India and which have not established their place of business in
India:
Provided also that in the case of a subsidiary which has been incorporated
outside India (herein referred to as "foreign subsidiary"), which is not required to get its
financial statement audited under any law of the country of its incorporation and which
does not get such financial statement audited, the requirements of the fourth proviso
shall be met if the holding Indian company files such unaudited financial statement
along with a declaration to this effect and where such financial statement is in a
language other than English, along with a translated copy of the financial statement in
English.
(2) Where the annual general meeting of a company for any year has not been
held, the financial statements along with the documents required to be attached under
sub-section (1), duly signed along with the statement of facts and reasons for not
holding the annual general meeting shall be filed with the Registrar within thirty days of
the last date before which the annual general meeting should have been held and in
such manner, with such fees or additional fees as may be prescribed [The words
"within the time specified, under section 403" Omitted by Act 1 of 2018, S.
39(ii) (w.e.f. 7-5-2018)].
(3) If a company fails to file the copy of the financial statements under sub-section
(1) or sub-section (2), as the case may be, before the expiry of the period
specified therein, the company shall be punishable with fine of one thousand rupees for
every day during which the failure continues but which shall not be more than ten lakh
rupees, and the managing director and the Chief Financial Officer of the company, if
any, and, in the absence of the managing director and the Chief Financial Officer, any
other director who is charged by the Board with the responsibility of complying with the
provisions of this section, and, in the absence of any such director, all the directors of
the company, shall be punishable with imprisonment for a term which may extend to six
months or with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees, or with both.
.... .... .... ....
403. Fee for filing, etc. - (1) Any document, required to be submitted, filed, registered
or recorded, or any fact or information required or authorised to be registered under this
Act, shall be submitted, filed, registered or recorded within the time specified in the
relevant provision on payment of such fee as may be prescribed:
Provided that where any document, fact or information required to be submitted,
filed, registered or recorded, as the case may be, under section 92 or 137 is not
submitted, filed, registered or recorded, as the case may be, within the period provided
in those sections, without prejudice to any other legal action or liability under this Act, it
may be submitted, filed, registered or recorded, as the case may be, after expiry of the
period so provided in those sections, on payment of such additional fee as may be
prescribed, which shall not be less than one hundred rupees per day and different
amounts may be prescribed for different classes of companies:
Provided further that where the document, fact or information, as the case may
be, in cases other than referred to in the first proviso, is not submitted, filed, registered
or recorded, as the case may be, within the period provided in the relevant section, it
may, without prejudice to any other legal action or liability under this Act, be submitted,
filed, registered or recorded as the case may be, on payment of such additional fee as
may be prescribed and different fees may be prescribed for different classes of
companies:
Provided also that where there is default on two or more occasions in submitting,
filing, registering or recording of the document, fact or information, it may, without
prejudice to any other legal action or liability under this Act, be submitted, filed,
registered or recorded, as the case may be, on payment of a higher additional fee, as
may be prescribed and which shall not be lesser than twice the additional fee provided
under the first or the second proviso as applicable.
(2) Where a company fails or commits any default to submit, file, register or
record any document, fact or information under sub-section (1) before the expiry of the
period specified in the relevant section, the company and the officers of the company
who are in default, shall, without prejudice to the liability for the payment of fee and
additional fee, be liable for the penalty or punishment provided under this Act for such
failure or default.
.... .... .... ...."
27. 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.
Sub-section (5) of Section 92 stipulates the pecuniary penalty visiting
non-compliance of sub-section (4).
28. 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.
29. Section 96 of the 2013 Act provides for AGM, which is to be held not
more than 15 months after the date of the previous AGM and within a
period of 6 months (apart from the first AGM) from the date of closing of
the financial year.
30. Section 403 of the 2013 Act 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
of the 2013 Act, upon payment of additional fee as prescribed.
31. A conjoint reading of the aforesaid provisions reveals that non-
compliance 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.
32. However, the scenario has 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 become 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 a
period of five years from the date of default. This consequence has been
newly-introduced and had no parallel in the 2013 Act or, for that matter,
in the 1956 Act. Similarly, before the amendment to Section 167(1)(a) by
way of a proviso, with effect from May 7, 2018, there was no provision in
the 2013 or 1956 Act which automatically vacated the office of the
director in all companies other than the defaulting company in case a
director incurs disqualification under sub-section (2) of Section 164.
33. Although the aforesaid provisions "disqualify" the directors for a span of
five years, the effect of such disqualification is patently penal in nature.
Several provisions of the 2013 Act (for example Section 152 pertaining to
appointment of directors) ensure that the disqualification of a director
entails the concerned director to be precluded not only from acting as
director of the defaulting company but all other companies in which he is
a director for a five-year period, which is sufficient to throw off the
director from the limelight of competition, by hitting at the root of
her/his goodwill and integrity. Nature abhors a vacuum, which
translates into the functioning of the concerned person in his capacity as
director of companies to be replaced by others in the line of competition.
The concerned director misses out on participation in company affairs for
five crucial years and might lose relevance in the cut-throat rat-race of
the corporate world. This directly affects the fundamental right of the
director, enshrined in Article 19(g) of the Constitution of India, that is,
the right to practice any profession, or to carry on any occupation, trade
or business. Although Article 19(6) clarifies that nothing in sub-clause (g)
of Article 19(1) shall affect the operation of any existing law insofar as it
imposes, or prevent the State from making any law imposing, in the
interests of the general public, reasonable restrictions on the exercise of
the right conferred by sub-clause (g), the expression "reasonable" is not
applicable to the scenario under discussion, since the punishment of
disqualification would be rather disproportionate with the offence, more
so if operative for a previous period of default, when the director had no
scope of apprehending the severe penalty to be meted out by a future
statutory amendment. Such disqualification would effectively screen off
the director from his commercial activity for five crucial years, which may
witness an era of difference in technology and finance in the fast-paced
modern world. The specific instances given in Article 19(6) of the
Constitution, pertaining to any law relating to the professional or
technical qualifications necessary for practicing any profession or
carrying on any occupation, trade or business, or the carrying on by the
State of any trade, business, industry or service, whether to the
exclusion, complete or partial, of citizens or otherwise, are indicators as
to the ratio behind Article 19(6) and are completely inapplicable to the
situation at hand.
34. Thus, even abiding by the ratio laid down by the Supreme Court in Vijay
vs. State of Maharashtra and others (supra), to the effect that the general
rule of retrospective construction is not applicable to a disqualifying
provision or to a curative or clarificatory statute, the context of the
disqualification is to be assessed in each particular case to appreciate
whether it is 'disqualifying' merely by nomenclature but penal in effect or
is uniformly disqualifying, both in nomenclature and effect. The said
report itself clarifies strongly that every law that takes away a right
vested under the existing law is, ordinarily, retrospective in nature. Even
if the intendment of the legislature in the present case is 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 has to be construed to be only prospective and not retrospective in
nature.
35. Speaking of anomalies, 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 has failed to file its annual returns and/or financial statements
for three consecutive years, ending between the enactment of the 2013
Act and before April 1, 2014 (for Section 164) and May 7, 2018 (for
Section 167), 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 five
crucial years.
36. As on the date when such default for three years ripens and reaches
culmination, it would not have been possible for the director to
apprehend that the rigours of the 2014 or the 2018 Amendment would
be breathing down their neck soon.
37. 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
cannot be argued by reasonable prudence that a retroactive effect ought
to be given to the amendment-in-question. This is 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) of the Constitution.
38. The relevant test here is not a mere lip-service to public good but of the
ground-level impact of the amendment. Such an amendment (if
retrospective) would, without fail, be anomalous and absurd, outlying the
"reasonableness" envisaged in Article 19(6) of the Constitution and
overreaching the justification for the ratio laid down in Vijay vs. State of
Maharashtra and others (supra).
39. State of Bombay vs. Vishnu Ramchandra (supra) specifies operation of its
ratio to statutes which create no new punishment but authorize "some
action" based on past conduct and reaches out to statutes designed to
protect the public against acts of a harmful character which, it lays
down, may be considered retrospectively if the language admits of such
an interpretation. The "harmful" nature of the act has to factor in the
practical consequence of the act. Till April 1, 2014, the consequence was
mere pecuniary penalty. Thereafter, more so after May 7, 2018, the
character of the offence itself was vilified to the extent of interdicting with
the right of the concerned directors to practice their trade, thereby
changing the rules after commencement of the game. This itself is absurd
even as per the standards laid down in State of Bombay vs. Vishnu
Ramchandra (supra).
40. As far as Shah Bhojraj (supra) is concerned, even the Supreme Court
observed in paragraph no. 11 thereof that the arguments advanced by
the parties were interesting and much could be said on both sides,
particularly, as the legislature had by a subsequent amendment changed
the proviso therein. However, in the facts of that case, such question was
not considered at length. A proviso, it was observed, is added to qualify
or create an exception to an enactment and is not interpreted ordinarily
to state a general rule.
41. Even otherwise, the ratio said report is not applicable in the present
circumstance. In the report, a curtailment of the rights regarding a
landlord-tenant relationship was being considered. Rent control acts, it
is well-settled, often afford a cloak of protection to tenants. Such
protection is a creature of the statute-in-question and can be taken
away, even retrospectively in some cases, by subsequent amendments.
Directorship of a company, however, is an existing right guaranteed
under the Constitution of India and is not any additional cloak of
protection provided by subordinate legislation. In the latter case, a new
punishment is created, not merely "some action" based on past conduct,
as contemplated in Vishnu Ramchandra (supra). Thus, the ratio of the
said reports cannot be applied to the present case at all.
42. In Allied Motors (supra), the Supreme Court dealt with
curative/declaratory provisos and held that those might have
retrospective effect. However, the amended provisions of Section 164 and
Section 167 of the 2013 Act are not merely curative provisions. By virtue
of the 2018 Amendment to Section 167, for example, vacancy of the
director's office is contemplated in all companies other than the
defaulting company, which serious consequence cannot be relegated to
the toothless domain of a mere curative provision. If effect is given to
such a provision retrospectively, the right guaranteed to directors under
the Constitution of India itself would be obliterated for 'offences'
committed without having any inkling or premonition of the future
introduction of such provision. Thus, Allied Motors (supra) is not helpful
for the respondents in the present case.
43. K. Prabhakaran (supra) deals with the right to contest an election, which
might be nipped in the bud by an amendment to the relevant law.
However, in the present case, the existing right of directorship in
companies is being considered. There is a sea of difference between the
two, inasmuch as an inchoate statutory right, if not exercised, would not
prejudice an election candidate drastically whereas the erasing of the
existing fundamental right to continue with one's profession, as in the
case of directors of companies, has serious economic and financial effects
to the detriment of the directors, affecting their livelihood. The two are
not on equal footing and, thus, do not merit analogy.
44. Since Gautam Mehra (supra) differed with the proposition laid down in
Subhas Kumar Biswas (supra) as to the prospectivity of the 2014 and
2018 amendments and also since Subhas Kumar Biswas (supra) was a
product of the same logic delivering the present judgment, propriety
demands that the ratio laid down in Subhas Kumar Biswas (supra) is not
assumed to be valid here, to obviate any scope of bias in thought-
process.
45. Sourajit Ghosh (supra), rendered by a co-ordinate Bench of this court, did
not consider Subhas Kumar Biswas (supra) or enter into all the questions
raised in the present writ petition and hence can be kept out of the
present discussion. As to the other judgments cited by the respondents,
only Gautam Mehra (supra), the judgment of Justice Debangsu Basak of
this court, has to be considered in serious light, being relevant on the
point and having discussed several other judgments of this court and
others. The learned Single Judge examined the context of the
amendments-in-question and the development of company law in recent
years. The pre-dominant logic in the said report was based on the Literal
Rule of interpretation. It was held that principles of natural justice
should not be applied mechanically and that, if the statute itself permits
consideration of periods of time anterior to the statute coming into effect,
a Government Circular (No. 8/2014 dated April 14, 2014) could not
override such statutory provisions. The premise of the report under
consideration was that the cancellation of DIN occurs by virtue of a
statute and is imperative to give effect to the disqualification suffered
under statute. Justice Basak held that, as was the scheme under the Act
of 1956, a company governed by the Act of 2013 cannot have an
existence ad infinitum if it continues to remain in default for non-
compliance of the statutory provisions, which visits the company with
stipulated consequences, which are graded and are nuanced on the
gravity of the situation. There are methods for curing such defaults as
well. There being nothing in the amendments to prevent disqualification
in case of previous defaults under Sections 92 and 137 of the 2013 Act
for three years, the learned Single Judge differed with the ratio of Subhas
Kumar Biswas (supra) and Chetan Chokhani vs. Union of India and others
[W.P. No. 21504(W) of 2019] but agreed with Mukul Somany (supra) and
Sourajit Ghosh (supra). However, the yardsticks and factors which weighs
with this court in the present context, were not available and/or
considered in Gautam Mehra (supra).
46. Justice Basak, while referring the matter to a larger Bench, dealt with
the recent development of company law in an erudite manner. However,
with utmost humility, there are several other factors which create a
relevant backdrop for the development of company law. The evolution of
company law jurisprudence cannot be taken in isolation with the general
economic scenario prevalent in the country. Some other factors which
are relevant in the context are discussed below in brief.
47. The 'unorganized' or non-corporate sector holds sway over a major chunk
of the economy of developing countries, including India, primarily in the
manufacturing and production domains, apart from tourism and
partially in trading. The capital incentives gained by the corporate sector
is off-set by the implicit advantages available to the unorganized sector,
since the latter is unfettered with several liabilities with regard to
revenue, capital, adherence to the industrial and labour laws and
manipulation of resources. While the corporate sector has to pay higher
interest and viably stick to corporate laws and labour laws, the
unorganized sector thrives on exploitation of means and people. This has
a direct effect on the business of the corporate sector, in particular small
operators and private limited companies, barring a few eminent and
resourceful ones.
48. 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 is no scope for
the authorities to consider the reason behind defaults and desist from
disqualifying the directors if necessary. This lack of discretion in the
matter of disqualification operates directly to the detriment of corporate
functioning of the small and medium corporate operators. The fall-out of
retrospective operation of the amendments is fatal to small and medium
businesses, which still comprise the backbone of the economy. There can
be umpteen reasons, arising from the inherent disadvantages of
functioning befalling private limited companies and small corporate
units, which might result in unintentional contravention of Sections 92
and 137 of the 2013 Act. That apart, there might be 'Black Swan'
situations, for example, economic recession and debilitating pandemics,
which would throw off business and commerce out of gear for
considerable periods of time, having little or no effect on robust or anti-
fragile (Courtesy: Nassim Nicholas Taleb for the terms 'Black Swan' and
'anti-fragile') large operators but ruining the credibility and goodwill of
small companies, completely veering them off course. Sops in the form of
credit incentives for MSMEs and other medium sector units have been
proved to be ineffective to alleviate such large-scale economic disasters.
This, coupled with the automatic disqualification envisaged in the 2014
and 2018 amendments to the 2013 Act, is sufficient to ruin the economy
as a whole which, somewhat counter-intuitively, is detrimental to the
growth of the economy. Thus, attributing retrospective/retroactive effect
to the said amendments would run contradictory to the purpose of public
good. The simplistic approach of merely identifying non-performers in an
attempt to provide a fillip to commerce, by a pseudo-streamlining of the
economy, loses teeth in the broader perspective discussed above.
49. Taking into consideration the above factors and the ground-level impact
and practical impossibility of giving retrospective effect, it cannot but be
held that the operation of the 2014 and 2018 Amendments to the 2013
Act are prospective in nature.
50. To be specific, the amendment to Section 164(2), with effect from April 1,
2014 has to be applied prospectively. The three-year default
contemplated therein has 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 is 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.
51. On a conjoint reading of the provisions in proper perspective, the distilled
effect is that, the DIN of directors of defaulting companies can only be
deactivated for violations of Sections 92 and 137 of the 2013 Act
commencing from April 1, 2014 and such disqualification shall extend to
other companies than the defaulting company, as envisaged in the
amended proviso to Section 167(1)(a), only in case the default takes place
post-May 7, 2018. Needless to mention, the deactivation of DIN for
violation of pre-existing Company Rules, framed under the 2013 Act, can
happen within the limited scope of such Rules only, and not on blanket
non-compliance of Sections 92 and 137 of the 2013 Act.
52. Since the above questions and factors did not fall for consideration in
Gautam Mehra (supra), the ratio laid down therein does not impede the
conclusion reached in the present case.
53. That apart, in paragraph no. 69 of Gautam Mehra (supra), the learned
Single Judge held that the decision on the topic, as to why an event
occurring prior to April 1, 2014 can be taken into consideration for the
purpose of considering whether a person suffered disqualification under
Section 164 of the Act of 2013, need not detain the Court in considering
the relief to be granted to the petitioner in that case. In paragraph nos.
95 and 96 of the report, the learned Single Judge merely referred to the
judgments considered therein and it was specified that in the facts of the
said case, the petitioner was not entitled to any relief as he had failed to
explain the delay in approaching the court and had not explained as to
why the defaulting company did not avail of the condonation of delay
scheme in vogue from time to time, for which he stood disqualified to be
a director by operation of provisions of Section 164(2)(a) of the Act of
2013. The learned Single Judge further clarified that since the views
expressed therein were in conflict with Chetan Chokhani (supra) and
Subhas Kumar Biswas (supra) but in consonance with Mukul Somany
and another (supra) and Sourajit Ghosh (supra), there were conflicting
views of this court on the same issue and it would be appropriate to
invoke the provisions of Rule 26 of the Writ Rules of the High Court, thus
referring the said writ petition to a Division Bench.
54. As such, there was no specific adjudication in Gautam Mehra (supra) on
the question as to whether the operation of the amendments to Sections
164 and 167 of the 2013 Act is retrospective or prospective. Moreover,
there was no formulation of any particular question of law for reference,
but the writ petition was merely transferred under the general provisions
of Rule 26 of the Writ Rules, to be considered by a Division Bench.
Hence, there was no reference or adjudication on the questions which are
in issue in the present case and, thus, Gautam Mehra (supra) does not
operate as a precedent on such questions. In fact, there was no reference
on any specifically-formulated question, as contemplated under Chapter
II, Rule 1 (Fourth proviso) of the Appellate Side Rules of this court, in
Gautam Mehra (supra).
55. Question (i), as formulated above, is, thus, answered to the effect that
Section 164(2)(a), as introduced by the 2014 Amendment, and the
proviso to Section 167(1)(a), as introduced by the 2018 Amendment, to
the 2013 Act are prospective in operation.
56. W.P.O. No.493 of 2019 is thus allowed, thereby setting aside the
deactivation of DIN by virtue of the notice dated April 7, 2017.
57. There will be no order as to costs.
58. Urgent certified website copies of this order, if applied for, be made
available to the parties upon compliance with the requisite formalities.
( Sabyasachi Bhattacharyya, J. )
