MADRAS HC: APPOINTMENT AND QUALIFICATIONS OF DIRECTORS RULES DOES NOT EMPOWER THE REGISTRAR OF COMPANIES TO DEACTIVATE THE DIN
Madras High Court on 9th October, 2020 before the Hon'ble two judge bench, The Chief Justice A.P. Sahi and Justice Senthilkumar Ramamoorthy quashed the writ appeals sought by Appellants which were arising out of a common order dated on 13th January, 2020.
The separate writ petitions filed by each Appellant to quash the respective disqualification by the Registrar of Companies (the ROC) and for consequential reactivation of the Director Identification Number (DIN) or permission for appointment/reappointment as director were dismissed.
The Companies Act, 2013 (CA 2013) deals with disqualifications for appointment as a director in Section 164. Under Section 164(2)(a) of CA 2013, the name of each Appellant was included in a list of disqualified directors, which was published on the website of the first Respondent. The DIN of each Appellant/director was consequently deactivated and such disqualification and deactivation were challenged in the writ petitions. The two main grounds on which the disqualification and deactivation were challenged are: First, prior notice was not issued to the Appellants concerned calling upon him to show cause as to why he should not be disqualified as a director. Secondly, the ROC was not entitled to deactivate the DIN of these directors as per CA 2013 and the rules framed thereunder.
The learned single Judge concluded that a notice would be an empty formality in the facts and circumstances because the disqualification occurs ipso facto and the issuance of a notice would make no difference. The appellants contended that the ROC does holds the power to deactivate the DIN. Further appellants submitted that the principles of natural justice were violated by not providing a prior notice to the directors who were declared as disqualified. In support of this contention, the Companies [Registration Offices and Fees] Rules, 2014 was referred and, in particular, to Rules 5 and 11 thereof. Rule 5 deals with the powers and duties of registrars.
On behalf of the respondents Mr.Sankaranarayanan, the learned Additional Solicitor General made three submissions. His first contention was with regard to constructive notice. According to him, Section 164(2) was introduced so as to ensure that this obligation is fulfilled by companies in public interest. Secondly, he defended that the grounds of disqualification under Section 164(1) of CA 2013 are personal to the director concerned and may require a verification of material facts and circumstances.
Therefore, before it is determined that a director is disqualified under Section 164(1), a prior notice may be required so as to verify the relevant material facts. Thirdly, it was submitted that the ROC is fully aware as to whether such financial statements and annual returns have been filed for the relevant period by the company concerned. If these documents are not filed, the disqualification under Section 164(2) is triggered ipso facto.
Therefore, the issuance of prior notice becomes an empty formality. The respondent finally concluded the submissions thus, by pointing out that the expression 'public interest' is used in several provisions of CA 2013 and emphasized that actions taken in public interest, such as the disqualification and deactivation of DIN, should not be interfered with by the Court.
The Court proffered that it involves two stages. First stage to determine as to whether the company concerned committed a default.The prior notice requirement is clearly not an empty formality as regards disqualification under Section 164(2). The court remarked a corollary exception to the natural justice rule, namely, the possibility of only one conclusion or the absence of prejudice. Secondly, as to whether the ROC is entitled to deactivate the DIN. For this purpose, the court closely examined rule 9, 10 and 11 of the Appointment and Qualifications of Directors Rules, 2014 (AQD Rules).
In the light of the above analysis the appeals were allowed and the impugned order dated 27th January, 2020 were set aside. Consequently, the publication of the list of disqualified directors by the ROC and the deactivation of the DIN of the Appellants were quashed. However, the court made it clear that it is, open to the ROC concerned to initiate action with regard to disqualification subject to an enquiry to decide the question of attribution of default to specific directors by taking into account the observations and conclusions. Consequently, connected miscellaneous petitions were closed.