Section 164(2) disqualifying directors for 5 yrs on failure to submit financials for 3 years is not ultra vires: HC

Case Details: Zacharia Maramkandathil Mohan v. Union of India - [2021] 131 taxmann.com 87 (Kerala)

Judiciary and Counsel Details

• • N. Nagaresh, J.
  • Navod Prasannan Pattali and K.V. Krishnakumar, Adv. for the Petitioner. 
  • T.V. Vinu, Adv. and P. Vijayakumar, ASGI for the Respondent.

Facts of the Case

The petitioners were individuals who were disqualified under Section 164(2) for failing to file financial statements/annual reports for their respective company which results in the deactivation of DIN, and the same was contested by the petitioners.

The petitioners argued that the circumstances that led to disqualifications under section 164(1) were personal to the Directors, such as insanity, insolvency, criminal convictions, and so on. Non-filing by a Company of Annual Returns or Financial Statements for a continuous period of three years, failure of a Company to repay deposits accepted or interest payable, failure of a Company to redeem debentures on due dates, failure to pay dividends, and so on were the incidents that resulted in disqualification under section 164(2). Directors were not personally responsible for the circumstances that resulted in disqualification under section 164(2). The effects, on the other hand, were disastrous.

It was also argued that where the implications of disqualification were so serious and civil, natural justice norms should be followed, even if the disqualification was by operation of law. Failure to file Annual Returns/Financial Statements might be due to circumstances beyond the Directors’ control, such as pandemics, lockdowns, lack of access to or prohibition of internet services, and so on. As a result, before disqualification, the impacted Directors should be given the opportunity to be heard.

Even if a business has not submitted Annual Returns or Financial Statements for two financial years in a row, the registrar will send it a notice and place its name in the inactive company register. It was argued that the notice under section 455(4) should be considered as an obligatory obligation and that the disqualification stipulated under section 164(2)(a) could not take effect until a notice under section 455(4) was issued.

High Court Held

The High Court of Kerala said that the ineligibility against DIN emerges by operation of law after reviewing the circumstances of the case. As a result, there is no need for a hearing. It has been claimed that the law does not condone and there is no provision to condone the disqualification of Directors for failing to file Annual Returns/Financial Statements for three years in a row for whatever reason. No authority has the legal ability to excuse or waive disqualification as a result of a breach of section 164.

In addition to the aforementioned, the legislation makes no exceptions for the submission of Financial Statements/Annual Returns or for disqualification under section 164(2); thus, granting an opportunity to be heard would be only a formality. Directors are subject to severe responsibility under the law. Furthermore, Directors’ ineligibility under section 164 is not the form of a suspension, lasting just five years and not indefinitely. Thus, disqualifying directors for 5 yrs on failure to submit financials for 3 years was not ultra vires.

Case Review

• • Yashodhara Shroff v. Union of India [2019] 106 taxmann.com 297/155 SCL 299 (Kar.) (para 83) affirmed.

List of Cases  Referred to

• • Meethelaveetil Kaitheri Muralidharan v. Union of India [2020] 120 taxmann.com 152/[2021] 163 SCL 296 (Mad.) (para 21)
  • State Bank of Patiala v. S.K.Sharma [1996] 3 SCC 364 (para 21)
  • S.L.Kapoor v. Jagmohan [1980] 4 SCC 379 (para 22)
  • State of Jharkhand v. Brahmaputra Metallics Ltd. [2020] 122 taxmann.com 21 (SC) (para 26)
  • State of Madhya Pradesh v. Narmada Bachao Andolan [2011] 7 SCC 639 (para 27)
  • Sajjan Singh v. State of Punjab AIR 1964 SC 464 (para 29)
  • Dr. Subramanian Swamy v. Director, Central Bureau of Investigation [2005] 2 SCC 317 (para 37)
  • Official Liquidator v. P.A.Tendolkar [1973] 1 SCC 602 (para 39)
  • Yashodhara Shroff v. Union of India [2019] 106 taxmann.com 297/155 SCL 299 (Kar.) (para 43)
  • Union of India v. W.N Chadha [1993] Supp (4) SCC 260 (para 47)
  • Gaurang Balvantlal Shah v. Union of India [2019] 101 taxmann.com 261 (Guj.) (para 68)
  • Mukul Pathak v. Union of India [2019] 111 taxmann.com 41 (Delhi) (para 68)
  • Jai Shankar Agrahari v. Union of India [2021] 127 taxmann.com 893 (All.) (para 68).