Smt Bharathi Talagadadevi and another V. Union of India and another

WP/17316/2020

AI Insights

The case involves two petitioners, directors of private companies, who were disqualified and had their DINs deactivated under Section 164(2) of the Companies Act, 2013, for failing to file financial statements or annual returns for three consecutive years. The petitioners challenged the disqualification and DIN deactivation, arguing that the actions were arbitrary, illegal, and violated principles of natural justice. The court examined whether the disqualification could be applied retrospectively and whether the DINs could be deactivated based on the grounds specified in the Companies (Appointment and Qualification of Directors) Rules, 2014. The court found that the disqualification was applied retrospectively, which was impermissible, and that the grounds for DIN deactivation were not met as per the rules.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 721721 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 01-10-2020
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX (CENTRAL)-L NEW DELHI v. VATIKA TOWNSHIP PRIVATE LIMITED, YASHODHARA SHROFF vs. UNION OF INDIA, GAURANG BALVANTLAL SHAH S/O BALVANTLAL SHAH vs. UNION OF INDIA, BHAGAVAN DAS DHANANJAYA DAS vs. UNION OF INDIA
• Laws Referred To: Companies Act, 2013, Companies (Appointment of Directors) Rules, 2014, Constitution of India
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NAMAVARAPU RAO
• Assessee Lawyers: K SANDEEP
• Keywords: Director Identification Number (DIN); Disqualification of Directors; Natural Justice; Retrospective effect; Writ of Mandamus
• Section: 248; 252; 164(2)(a)

Judgement Text

"HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD (Special Original J u risd iction ) THURSDAY, THE FIRST DAY OF OCTOBER TWO THOUSAND AND TWENTY PRESENT THE HON'BLE SRI JUSTICE CHALLA KODANDA RAM WRIT PETITION NO:17316 OF 2020 Between: 1. Smt Bharathi Talagadadevi, W/o Talagadadevi Suhrahmanya Sastry, Aged about 4B years, R/o Plot No.8, Sri Chakra Enclave, Sainikipuri, Tirumalagirim, Sainikipuri, Hyderabad, Telangana State-500094. 2. Sri N4adhu Kumar Karanam, S/o Sri Karanam Venkateshwarlu, Aged about 32 years, R/o 42 28619D, lVoulali. Near Venkateshwara Swamy Temple, New l ,4aruthiNagar.Hyderabad.TelanganaState-500O4O. ...pETtTtONERS AND 1. Union of lndia, Rep. by its the lvlinistry of Corporate Affairs, A Wing, Shastri Bhawan. Rajendra Prasad Road, New Delhi - 1 10 001 , Represented by its Secreta ry. 2. The Registrar of Companies, (For State of Telangana). 2nd Floor. Corporate Bharvan, GSI Post Tattiannaram Nagole, Bandlaguda, Hyderabad - 500 068 RESPONDE NTS Petitron under Ad,icle 226 of the Constitution of India praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to pass an order or direction or any other proceedings one in the nature of Writ of l 4andamus declaring the action of respondents in disqualifying the petitioners as a directors and deactivating the 1st petitioner Director ldentification Number (DlN) A2920283 and 2nd petitioner Director ldentification Number (DlN) 07509023 by vide notification and restricting the petitioners to incorporate new companies Under Companies Act. 2013 as arbitrary, illegal, without jurisdiction, contrary of the provisions of the Companies Act. 2013 and Rule 11 of the Companies (Appointment of Directors) Rules, 2014. violative of the principles of natural justice besides violating the petitioner rights guaranteed under Article 14 and Article 19 (1) (g) of the Constitution of lnd ia. lA NO: 1 OF 2020 Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased to direct th'd,' l st Respondent to stay the disqualification and restore the 1st petitioner Director ldentification Numbe(DlN) 02920283 and 2nd petitioner Director ldentification Number (DlN) 07509023 of the petitioners so as to enable the petitioners to incorporate new companies Under Companies Act. 20'1 3. Counsel for the Petitioner: SRl. K. SANDEEP Counsel for the Respondents: SRl. NAMAVARAPU RAJESHWAR RAO, ASSISTANT SOLICITOR GENERAL The Court made the following: ORDER THE iiON'BLE SRI JUSTICE CHALLA KODANDT RAI I WRIT PETITION No. 17316 of 2020 ORDER: 'l'irL I)r iitiolr('rs r:ha11cr.rgc thelr disrlu,r.i i. rii,rn i:()rl I)ircctorshilr r-rnder Scction 16.1(2) ol- the Conrpanie s A,.1, 2O l.l, lirr' the alleged crlault in liling financial statement/ An nual Relurns, and conse<1:ently 5s.p restoration of their Director I,lentificatron Numbers (I)lN) r'iz., 02920283 and 07509023 resper:tivr:ly. Learrr,::d counsel for the petitioners submits t hat the issue raised in t he present Writ Petition is squarely r;c,ve:red by the common o'de:' dated lA.O7 .2O),9 in W.P.No.5421l oi 2018 and b:rtch. [,crrrr cr] Srancling Counsel for thc ,,.,, rt:sponrlr n Rcgisirar ol Comparnie s does r.rot disputc the aloresard sLlbmrss r)ll. ''For the foregoing reasons, the impugned crders in thc /rit petitions to the extent of disqualifyin3 the petiti(':rers under Section l6al2l(al of the Lct and deactivation of their DINS, are set aside, anc tt.e 2\"d resporLd€nt is directed to activate the DINS of the p,:titioners, enabliog them to function as Directors other tha!r :.n strike off cornpanies. It is made clear that this order will not prr:clurle the 2\"i resipondent from taking appropriate action in ac<,ordance with lrrw for violations as envisaged under Section 1.6tll2l of the Ar:1, giving the said provision prospective e,f(.ct from 01.04,2014 and for necessary action against DIN .n case of violations of Rule 11 of the Rules. It is also made clear that if the petitirlners are aggrie.red by thc action of the respondents in striki:1g off thcir (:ompanies under Section 248 of the Act, the1, rle at liberty ro avail alternative remedy under Section 252 rf the Act. 2 All the writ petitions are accordingly allowed to the extent indicated above.\" In vieu, of the said Order dated 18.07.2019 and lor the reasons recorded therein, this Writ Petition is also allo,\"ved in terms thcreol. No co s ts. Miscelianeous Petitirtns, if anv stand closed. SD/.B.SATYAV THI ASSISTANT REG RAR //TRUE COPY// SEL II OFFIC ER To, CHR 1. The Secretary, lVinistry of Corporate Affairs, Union of lndia, A Wing, Shastri Bhawan, Ralendra Prasad Road, New Delhi - 1 10 001 . 2. The Registrar of Companies, (For State of Telangana), 2\"\" Floor, Corporate Bhawan, GSI Post Tattiannaram Nagole, Bandlaguda, Hyderabad - 500 068. 3. One CC to Sri K. Sandeep, Advocate IOPUC] 4. One CC to Sri. Namavarapu Rajeshwar Rao, Assistant Solicitor General [OPUC] (Along with a copy of order, dated 18.07.2019 in W.P.No.5422 o{ 2018 and batch) 5. Two CD Copies + HIGH COURI: DATED t01l1t:.)i2020 ORDER W.P.No.173;16 of 2020 : / .i,1 r L ALLOWIN(::i THE WRIIT PETITION WITHOUT I:]OSTS ( c a l tlt S14 0I ocr 2020 z o (::!:)]:,T(;H /l r.\" o^ \"/. / ,1- ,)JiYl' w.P.NOs.5422. 72184. 73520. 73743. 13855. 1416 6- 24rl51. 30SC3. AN D 40953 0F 2or8. s547. 55A2. 5669. 5647, 5745. 6047. 6047. A1 AN R11'l/1 A753 6aEa aota Aoat Tnnl Tnne 7014 7046 7 nA() 8111. 8223, 8586, 8590, 9333. 9 0, 9381, 9468,9563, 95A4,9623, 9726 9737. OO54. 1()()s9 - 11208 tL223 Lt239 L263. 1 l Aaq. 1 2 18 1 0 12t44 L2L L2L94 t2200, L2209. 122t5, L22L7, t2243, 12260.12262. t22AA. L2342. l r?:pressed similar view. The relevart portion is as under: 29, In fine, (a) u./hen the New Act 2013 came into effect i,o'n 1.4.2014, the s;econd respondent herein has wrongly giverr re:rospective effect and erroneously disqualified the petation€r - directors from :i.1,2016 itself before the deadline commenc:cl vrrongly fixing the f rst financial year from 7.4.2073 to 31.3.2012. (b) Uy virtue of the new Section 164(2)(a) of th3 2()13 Act using the expression'for any continuous period of three financial year\" and in the light of section 2(41) defining \"financial year\" as well as their own General circular No.08/14 dated 4,4,2014, the first Financial .rear would be from t,4,20L4 to 31.3.2015, the second financial )/ear would be from 1.4.2015 to 31.3.2016 ani l:he third financial year would be from t.4.20L6 to 31.3.2017, vvh,:reas the second resoondent clearly admitted in paras L5 and ZZ of the counter t:ffidavit that the default of filing statutory r,rtLrrns for the final vears commences from 2073-14, 2074-15 ;nC 2015-16 i,e, one year before the Act 2013 came into force, --his is the basic incurable legal infirmity that vitiates tl-e ,rntire impugned f:,roceed ing s. 23. In v ew of the above facts and circumstances ancl the judgments referred to supra, as the impugned orders in pres;ent writ petitions disqualifying the petitioners as directors under Section 16;2.(2t)(a) of the Act, have been pasied considering the period prior to 01.02.2014, the same cannot be susta ned, and are liable to be set aside to that e{tent. 24. As farr as the contention regarding issuance of prilr notice before disqualifying th() petitioners as directors is concerned, Se:tion 16a(2)(a) is required to be loticed, and the same is extracted as under for ready reference: 164. Disq ualification for appointment of director; t M,.N,,.2,s.155 ol-10 I - ,r d barch dared 27.07.20I g ( l3 (2) No person who is or has been a director of a company which_ (a) has not filed financial statements or annual returns for any continuous period of three financial years; or (b)... Shall be eligible to be re-appointed as a director of that company or appointed in other companies for a period of five years from the date on which the said company fails to do so, A reading of the above provision makes it clear that it provides disqualification on happening of an event i.e., if a person who is or has been a director of a company has not filed financial statements or annual returns for any continuous period of three financial years/ shall be ineligible to be re- appointed as a director of that company or appointed in any other company for a period of five years from the date on which the said company fails to do so. The provision does not provide for issuance of any prior notice or hearing. A learned single ludge of the High Court of Karnataka in Yashodara Shroff v. Union of India (1 supra), as well as the learned single Judge of the High Court of Gujarat at Ahmedabad.in Gaurang Balvantlai Shah s/o Balvantlal Shah vs. Union of India (2 supra)r after analyzing various provisions of the Act and Rules framed thereunder, and by relying on various judgments of the Apex Court, held that Section 76aQ)@) of the Act applies by operation of law on the basls of the circumstances stated therein, the said provision does not envisage any hearing, neither pre-disqualification nor post-disqualification and this is not in vlolation of the principles of natural justice and hence, is not ultra vires Article 14 of the Constitution. I concur with the sa id reasoninq. 25. Thus, from the above, it is clear that Section 1,64(2)(a) of the Act is a deeming provision and the disqualification envisaged under the said provision comes into force automatically by operation of law on default and Legislature did not provide for issuance of any prior notice, but the respondents notified disq ua lification even before it incurred, and deactivated DiNs, which is illegal arbitrary and against provisions contained in Section 164(2)(a) of the Act. 1.+ 26. The rext grievance of the petitioners is with rellard to deactivation of their DINs. The contention of the learned counsel for the petitioners is that except for the grounds mentioned under Rule 11 (a) to (f) of the Rules, the DINs cannot be cancelled or deactivated, and the ! iolation mentioned under Section I64(2)(a) of the Act, ls not one of the (Jrotinds mentioned under clauses (.,) to (f) of Rule 11, and hence for the alleg,.-d violation under Section 164(2)(a)ofthe Act, DIN cannot be cancelled. 27. Ru le 10 Ru t,r of the Rules provide 10, it is allotted for for allotment of DIN and under sub 1 I provides for 'or the present life time. Ru e (a) rule (6) of cancellation or deactivation. Rule 11, which is relevan: purpose, is extrJcted as under for ready reference: 11. cancellation or surrender or deactivation of Dtfl: The Central Government o- Regional Director (Northern Region), Noida or an/ lffcer authorized by the Regional Director may, upon being satisfied on verificati()n of particulars or documentary f)roo'attached with the application received from any person, cancel or deactivate the till in case - the DIN is found to be duplicated in respect of the sar.re p,:rson provided the (lata related to both the DIN shall be merged with :he Yalidly retained nur'tber; the I)IN was obtained in a wrongful manneT or by fraucu ent means; of the Ceath of the concerned individuali the (:oncerned individual has been declared as a person of unsound mind by l cor.rpetent Court; if ttr(: concerned individual has been adjudicated an insrl,,ent; Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunlt ,)f )eing heard sha,l be given to the concerned indiv du:l; on 3r'r applrcat on made in Form DIR-5 by the DIN holde- t() surrender his or her DIN alr) rg wrth declaration that he has never been appo n:ec as director in any company a.rd the said DIN has never been used for filing o'any document with any aLrthority, lhc Central Government may deactivate such DIN, Provided that before deactivation of any DIN in such (as3, the Central Government s.rall verify e-records. Explar irt on: for the purposes of clause (b) - Th€ te-ms \"wrongful manner\" means if the DIN rj obtained on the st'ength of dl(:uments which are not legally valid or incompl,ltl (locuments are furnished or ln suppression of material information or on t..t( t asis of wrong certification or t)y making misleading or false information or by nt srepresentation; (ir) the ternr \"'raudulent means\" means if the DIN js obtained v/it h an intent to deceive any other person or any authority inc uding the Cen:ra Govern ment. (b) (c) (d) (e) (r) o 28. Clauses (a) to (f) of Rule 11, circumstances u,rder which the DIN can said grounds, aTe different from extracted above, trovides for the be cancelled or de;:ctivated. The the ground ,-.nvisaged under 15 Section 16ae)ft) of rhe Acr. Therefore, for the alleged violation under Section 164 of the Act, DINs cannot be cancelled or deactivated, except in accordance with Rule 11 of the Rules. 29. Learned Single Judge of the cited 2 supra, held as under: Gujarat High Court in the decision \"29. Thrs takes the Court to tie next question as to whether the respondents Could have deactivated the DlNs of the petrtroner u, , .on.\"qrln.\" of the mpugned list? In this regard, it would be appropriate t\" 1\"r\"i t\" ii\" rerevant provisions contained in the Act and the said Rules. Section fSSl:l- piovroes that no person shall be appointed as a Director of a company, ,\"f\".,'nI nu, been allotted the Dlrector Identification Number under Section 154. Section 153 requires every individual intending to be appointed as Director of a'-ompany to make an application for allotment of DIN to the central Government In iuch form and manner as may be prescribed. section 154 states that the centrar Government shal within one..month from the receipt of the application under Section 153 allot a DIN to an applicant in such manner as may be prescribed. Section 155 prohibits any individual, who has already been allotted a DIN under Section 154 from apptying for or obtaining or possessrng another DIN. Rures 9 and 1o of the said Rures of ,014 prescribe the procedure for making application for allotment and for the alotment of DIN, and further provide that the DIN altotted by the Central Government under the said Rules would be valid for the life time of the applicant and sha not be allotted to any other person. 30, Rule 11 provides for cancellation or surrender or deactivation of DIN. Accordingly, the Central Government or Regional Director or any authorized officer of Regional Director may, on being satisfied on verification of particulars of documentary proof attached with an application from any person, cancel or deactivate the DIN on any of the grounds mentioned in Clause (a) to (f) thereof. The said Rule 11 does not contemplate any suo motu powers either with the Central Government or with the authorized officer or Regional Director to cancel or deactivate the DIN allotted to the Director, nor any of the clauses mentioned in the said Rules contemplates cancellation or deactivation of DIN of the Director of the \"struck off company\" or of the Director having become ineligible under Sectron 164 of the said Act. The reason appears to be that once an individual, who is intending to be the Director of a particular company is allotted DIN by the Central Government, such DIN would be valid for the life time of the applicant and on the basis of such DIN he could become Director in other companres also. 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 TUn counteT to the provisions contained in the Rule 11, which specifically provides for the orcumstances under which the DIN could be cancelled or deactivated, 31. 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\" companres under Section 248, also was not legally tenable. Of couTse, as per Rule 12 of the said Rules, the individual who has been allotted the DIN, in the event of any change in his particulars stated in Form DIR -3 has to intimate such chanqe to the Central Government within the prescribed time in Form DIR-6, however, if that is not done, the DIN could not be cancelled or deactivated. The cancellation or deactivation of the DIN could be resorted to by the concerned respondents only as per the provisions contained in the said Rules.\" 30. In view of the above facts and circumstances and the judgment referred to supra, the deactivation of the DINs of the petitioners for alleged violations under Section 164 of the Act, cannot be sustained' l6 31. For t.he foregoing reasons, the impugned orCers in the writ petitions to :1e extent of disqualifying the l)otitioners under section 164(2)(a) of the Act and deactivation of their DINs, are set aside, and the 2nd resr:ondent is directed to activate the DINS c,f the petitioners, enabling them t() function as Directors other than in strike off companies. 32. It is made clear that this order will not preclude the 2'd respondent fro r taking appropriate action in accord arrcr: with law for violations as en'/lsaged under Section 764(2) of the A.c:, giving the said provision prospr:ctive effect from O7.04.2074 and fo' necessary action against DIN in r:ase of violations of Rule 11 of the Rules. 33. It is a so made clear that if the petitioners ar€r .,ggrieved by the action oF the reslondents in striking off their companies Lrrderr Section 24g of the Act, they arr: at liberty to avail alternative remedy unler Section 252 of the Act. 34. A[ ind icated a bovo the writ petitions are accordingly allc,u,ed to the extent 35. Int€rlocutory applications pending, if any, shal stand closed. No order as to cos,,,;. A,RAJASHEKER FIEDDY,J DATE AVS 1B- 0 7--2019 "