The Gujarat High Court has quashed the list of disqualified directors published by the Ministry of Corporate Affairs (MCA) on September 12, 2017. The Court held that Section 164(2) of the Companies Act is prospective in nature and will take effect only from its date of notification, viz, April 1, 2014.
In September 2017, the MCA had published a list of nearly three lakh disqualified directors.
Section 164(2)(a) states that a director of private limited company incurs disqualification on the default of the company to file annual returns and statements for a period of three consecutive years.
The Court held that the period is applicable only from the financial year 2014-2015. The Annual General Meeting has to be held within six months of the closing of the financial year. The annual returns could be filed within 60 days of the AGM and financial statements could be filed within 30 days of the date of AGM. Hence, for filing annual returns and financial statements, the directors had time till November 30, 2017 and October 30, 2017,respectively. However, the list of disqualified directors was published on September 12. This was held to be illegal by the Court.
No retrospective application for Section 164(2)
The Court rejected the argument that Section 164(2) applied with effect from 2013-14. The Court noted that there was no corresponding provision in the Companies Act 1956 to disqualify directors on failure to file returns and statements. The Court also held that unless there is explicit mention, a statutory provision cannot be given retrospective effect.
“So far as the issue involved in the present petitions is concerned, as discussed earlier, no disqualification was attached to the directors of private companies for not filing the annual returns and the financial statements by the concerned companies under the Act of 1956. Such provision of disqualification for the director of a company – public or private company, has been incorporated for the first time in Section 164(2) of the Act of 2013. Such being the case, the said provision has to be construed as having prospective effect. If retrospective effect is given to it, that would destroy, alter and affect the right of the Directors of private company existing under the Act of 1956“, held the judgment authored by Justice Bela M Trivedi.
Reference was also made to Section 6 of the General Clauses Act, which saves a right accrued under a repealed Act.
Striking off will not lead to cancellation of DIN
The Court held that striking off of a company under Section 248 of the Companies Act will not lead to deactivation of Director Identification Number(DIN). The Central Government had no power under Companies Act and the Rules to deactivate DIN on ground of striking off of a company.
The circumstances under which DIN can be deactivated are spelt out under Section 155 of the Act read with Rule 11 of the Companies (Appointment of Directors) Rules 2014.
“Hence, if one of the companies in which he was Director is “struck off”, his DIN could not be cancelled or deactivated as that would run counter to the provisions contained in the Rule 11, which specifically provides for the circumstances under which the DIN could be cancelled or deactivated
“In that view of the matter, the Court is of the opinion that the action of the respondents in deactivating the DINs of the petitioners – Directors along with the publication of the impugned list of Directors of “struck off” companies under Section 248, also was not legally tenable” , held the Court, directing the MCA to activate the DIN of the petitioners.
Last August, the Madras HC had also quashed the list of disqualified directors on the ground that the Act will take effect only from the financial year 2014-15.