DE-ACTIVATION OF DIN OF DIRECTORS HAVE BEEN HELD ILLEGAL UNDER THE COMPANIES ACT,2013 - Synopsis

Since all the writ petitions are connected and have been heard

together, they are decided by this common judgment.

2. This batch of writ petitions has been filed to challenge the

de-activation of the Director Identification Number by invoking

Section 164(2) of the Companies Act, 2013 (hereinafter referred to

as 'the Act of 2013') with a direction to activate the Director

Identification Number allotted to the petitioners. The activation of

the Director Identification Number is required, as the petitioners

were dis-qualified to be Director for any of the Companies in

reference to the dis-qualification occurred in one company.

3. Similar controversy was raised in other High Courts and after

considering the issue at length, the Gujarat High Court decided

batch of petitions led by Special Civil Application No. 22435 of

2017 by its order dated 18.12.2018. The Special Civil Application

has been allowed. Therein also, the name of the petitioner was

struck off from the list of Director of various companies. The

publication of which was made under Section 248 of the Act of

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2013. A direction to activate the Director Identification Number of

the petitioner forthwith has been given, if not activated so far. It

was however with the liberty to take legal action against the

petitioner for any statutory default or non-compliance of the

provisions of the Companies Act.

4. In the light of the aforesaid and taking into consideration that

the similar issue has been decided by eight other High Courts

taking similar view, we need to refer certain paras of the judgment

of its application in this case also.

5. The relevant paras of the judgment of the Gujarat High Court

in Special Civil Application No. 22435 of 2017 are quoted

hereunder:.

20. So far as Section 164 of Act of 2013 is

concerned, it is titled as “Disqualifications for

appointment of Director”. On close reading of the

said Section 164, it transpires that Sub-section (1)

thereof speaks about the ineligibility or

disqualification of a person to be appointed as a

director in future, whereas Sub-section (2) speaks

about the ineligibility of the director, who is

already working as a director or has worked as a

director in the past, in the company which has

committed defaults as mentioned therein, to be

reappointed as a director of that company or

appointed in other company. As such, there is no

procedure required to be followed by the

respondent authorities for declaring any person

or Director ineligible or disqualified under the

said provision. A person would be ineligible to be

appointed as Director, if he falls in any of the

Clauses mentioned in Sub-section (1) and the

person is or has been a Director in a company,

and the company makes defaults as contemplated

in Clause (a) of (b) of Sub-section (2) thereof, he

would be ineligible to be reappointed in the said

defaulting company and appointed in any other

company. The ineligibility is incurred by the

person/director by operation of law and not by

any order passed by the respondent authorities,

and therefore, adherence of principles of natural

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justice by the respondents is not warranted in the

said provision, as sought to be submitted by

learned Advocates for the petitioners. As such, as

per Rule 14 of the said Rules of 2014, the

Director has to inform the company in Form DIR-

8 and the company has to inform the Registrar in

Form DIR-9, when its director incurs

disqualification under Section 164(2) of the Act.

However, the question still remains to be

examined as to whether the respondents could

have shown the status of the petitioners as

disqualified in the impugned list?

21. As per Clause (a) of Sub-section (2) of Section

164, no person, who is or has been a Director of

a company, which has not filed financial

statements or annual returns for any continuous

period of three financial years shall be eligible to

be reappointed 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 said provision has

come into force w.e.f. 1.4.2014. Hence, three

financial years, if counted from the said date

would be the financial years 2014-15, 2015-16,

and 2016-17. At this stage, it is pertinent to note

that the Companies Act, 1956 has stood repealed

in view of Section 465 of the Act of 2013, and the

corresponding Section 274 of the Act of 1956

regarding disqualification of the directors did not

prescribe disqualification for the Directors of a

private company for not filing financial

statements or annual returns for continuous

period of three financial years. Of course, it was

incumbent on the part of every company not

having a share capital, to file with the Registrar

annual returns as per Section 160 and failure to

file such returns entailed penal consequences as

per Section 162 of the Act of 1956. However, no

such disqualification as under Section 164(2) of

the Act of 2013, was being incurred by the

Directors of private company under Section 274

of the Act of 1956, inasmuch as, Clause (g) of

Sub-section (1) of Section 274 of the Act of 1956

contemplated disqualification of a Director of a

public company only. It is only by virtue of

Section 164(2) the Director of any company

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would become ineligible to be reappointed as

Director in the defaulting company or appointed

as Director in other company, if the defaults

under the said provision applied. The said

provision having come into force w.e.f. 1.4.2014,

the three financial years contemplated in the said

provision would be 2014-15, 2015-16, and 2016-

17 only. The submission of Mr. Devang Vyas for

the respondents that filing of documents due after

1.4.2014 would include the documents to be

submitted for the year 2013-14 as well, and

therefore, failure to file the documents

continuously for three financial years for the

purposes of Section 164(2)(a) would be 2013-14,

2014-15, and 2015-16, could not be accepted, as

it would tantamount to giving effect to the Section

164(2)(a) retrospectively.

22.It cannot be gainsaid that every statue is

prima facie prospective, unless it is expressly or

by necessary implication made to have

retrospective operation. As this juncture, it would

be useful to reproduce the general principles

concerning retrospectivity, as narrated by the

Supreme Court in case of Commissioner of

Income Tax (Central)-I, New Delhi Vs. Vatika

Township Private Limited, reported in (2015) 1

SCC 1 :-

“General Principles concerning retrospectivity:

27. A legislation, be it a statutory Act or a

statutory Rule or a statutory Notification, may

physically consists of words printed on papers.

However, conceptually it is a great deal more

than an ordinary prose. There is a special

peculiarity in the mode of verbal communication

by a legislation. A legislation is not just a series

of statements, such as one finds in a work of

fiction/non fiction or even in a judgment of a

court of law. There is a technique required to

draft a legislation as well as to understand a

legislation. Former technique is known as

legislative drafting and latter one is to be found

in the various principles of ‘Interpretation of

Statutes’. Vis-à-vis ordinary prose, a legislation

differs in its provenance, layout and features as

also in the implication as to its meaning that arise

8

by presumptions as to the intent of the maker

thereof.

28. Of the various rules guiding how a legislation

has to be interpreted, one established rule is that

unless a contrary intention appears, a legislation

is presumed not to be intended to have a

retrospective operation. The idea behind the rule

is that a current law should govern current

activities. Law passed today cannot apply to the

events of the past. If we do something today, we

do it keeping in view the law of today and in force

and not tomorrow’s backward adjustment of it.

Our belief in the nature of the law is founded on

the bed rock that every human being is entitled to

arrange his affairs by relying on the existing law

and should not find that his plans have been

retrospectively upset. This principle of law is

known as lex prospicit non respicit : law looks

forward not backward. As was observed in

Phillips vs. Eyre, a retrospective legislation is

contrary to the general principle that legislation

by which the conduct of mankind is to be

regulated when introduced for the first time to

deal with future acts ought not to change the

character of past transactions carried on upon

the faith of the then existing law.

29. The obvious basis of the principle against

retrospectivity is the principle of 'fairness’, which

must be the basis of every legal rule as was

observed in the decision reported in L’Office

Cherifien des Phosphates v. YamashitaShinnihon

Steamship Co.Ltd. Thus, legislations which

modified accrued rights or which impose

obligations or impose new duties or attach a new

disability have to be treated as prospective unless

the legislative intent is clearly to give the

enactment a retrospective effect; unless the

legislation is for purpose of supplying an obvious

omission in a former legislation or to explain a

former legislation. We need not note the

cornucopia of case law available on the subject

because aforesaid legal position clearly emerges

from the various decisions and this legal position

was conceded by the counsel for the parties. In

any case, we shall refer to few judgments

containing this dicta, a little later.

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30. We would also like to point out, for the sake of

completeness, that where a benefit is conferred by

a legislation, the rule against a retrospective

construction is different. If a legislation confers a

benefit on some persons but without inflicting a

corresponding detriment on some other person or

on the public generally, and where to confer such

benefit appears to have been the legislators

object, then the presumption would be that such a

legislation, giving it a purposive construction,

would warrant it to be given a retrospective

effect. This exactly is the justification to treat

procedural provisions as retrospective. In

Government of India & Ors. v. India Tobacco

Association, the doctrine of fairness was held to

be relevant factor to construe a statute conferring

a benefit, in the context of it to be given a

retrospective operation. The same doctrine of

fairness, to hold that a statute was retrospective

in nature, was applied in the case of Vijay v. State

of Maharashtra & Ors. It was held that where a

law is enacted for the benefit of community as a

whole, even in the absence of a provision the

statute may be held to be retrospective in nature.

However, we are confronted with any such

situation here.

31. In such cases, retrospectivity is attached to

benefit the persons in contradistinction to the

provision imposing some burden or liability

where the presumption attaches towards

prospectivity. In the instant case, the proviso

added to Section 113 of the Act is not beneficial to

the assessee. On the contrary, it is a provision

which is onerous to the assessee. Therefore, in a

case like this, we have to proceed with the normal

rule of presumption against retrospective

operation. Thus, the rule against retrospective

operation is a fundamental rule of law that no

statute shall be construed to have a retrospective

operation unless such a construction appears

very clearly in the terms of the Act, or arises by

necessary and distinct implication. Dogmatically

framed, the rule is no more than a presumption,

and thus could be displaced by out weighing

factors.

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32. Let us sharpen the discussion a little more. We

may note that under certain circumstances, a

particular amendment can be treated as

clarificatory or declaratory in nature. Such

statutory provisions are labeled as “declaratory

statutes”. The circumstances under which a

provision can be termed as “declaratory

statutes” is explained by Justice G.P. Singh in the

following manner:

“Declaratory statutes

The presumption against retrospective operation

is not applicable to declaratory statutes. As stated

in CRAIES and approved by the Supreme Court :

“For modern purposes a declaratory Act may be

defined as an Act to remove doubts existing as to

the common law, or the meaning or effect of any

statute. Such Acts are usually held to be

retrospective. The usual reason for passing a

declaratory Act is to set aside what Parliament

deems to have been a judicial error, whether in

the statement of the common law or in the

interpretation of statutes. Usually, if not

invariably, such an Act contains a preamble, and

also the word 'declared' as well as the word

'enacted'. But the use of the words 'it is declared'

is not conclusive that the Act is declaratory for

these words may, at times, be used to introduced

new rules of law and the Act in the latter case will

only be amending the law and will not necessarily

be retrospective. In determining, therefore, the

nature of the Act, regard must be had to the

substance rather than to the form. If a new Act is

'to explain' an earlier Act, it would be without

object unless construed retrospective. An

explanatory Act is generally passed to supply an

obvious omission or to clear up doubts as to the

meaning of the previous Act. It is well settled that

if a statute is curative or merely declaratory of

the previous law retrospective operation is

generally intended. The language 'shall be

deemed always to have meant' is declaratory, and

is in plain terms retrospective. In the absence of

clear words indicating that the amending Act is

declaratory, it would not be so construed when

the preamended provision was clear and

unambiguous. An amending Act may be purely

11

clarificatory to clear a meaning of a provision of

the principal Act which was already implicit. A

clarificatory amendment of this nature will have

retrospective effect and, therefore, if the principal

Act was existing law which the Constitution came

into force, the amending Act also will be part of

the existing law.”

The above summing up is factually based on the

judgments of this Court as well as English

decisions."

33. A Constitution Bench of this Court in

Keshavlal Jethalal Shah v. Mohanlal

Bhagwandas & Anr., while considering the nature

of amendment to Section 29(2) of the Bombay

Rents, Hotel and Lodging House Rates Control

Act as amended by Gujarat Act 18 of 1965,

observed as follows:

“8. ...The amending clause does not seek to

explain any pre-existing legislation which was

ambiguous or defective. The power of the High

Court to entertain a petition for exercising

revisional jurisdiction was before the amendment

derived from Section 115, Code of Civil

Procedure, and the legislature has by the

amending Act attempted to explain the meaning

of that provision. An explanatory Act is generally

passed to supply an obvious omission or to clear

up doubts as to the meaning of the previous Act.”

34. It would also be pertinent to mention that

assessment creates a vested right and an assessee

cannot be subjected to reassessment unless a

provision to that effect inserted by amendment is

either expressly or by necessary implication

retrospective.

35. We would also like to reproduce hereunder

the following observations made by this Court in

the case of Govinddas v. Income-tax Officer,

while holding Section 171(6) of the Income Tax

Act to be prospective and inapplicable for any

assessment year prior to 1st April, 1962, the date

on which the Income Tax Act came into force:

“11. Now it is a well settled rule of interpretation

hallowed by time and sanctified by judicial

12

decisions that, unless the terms of a statute

expressly so provide or necessarily require it,

retrospective operation should not be given to a

statute so as to take away or impair an existing

right or create a new obligation or impose a new

liability otherwise than as regards matters of

procedure. The general rule as stated by

Halsbury in Vol. 36 of the Laws of England (3rd

Edn.) and reiterated in several decisions of this

Court as well as English courts is that

‘all statutes other than those which are merely

declaratory or which relate only to matters of

procedure or of evidence are prima facie

prospectively and retrospective operation should

not be given to a statute so as to affect, alter or

destroy an existing right or create a new liability

or obligation unless that effect cannot be avoided

without doing violence to the language of the

enactment. If the enactment is expressed in

language which is fairly capable of either

interpretation, it ought to be construed as

prospective only.'"

36. In the case of C.I.T., Bombay v. Scindia

Steam Navigation Co. Ltd., this Court held that

as the liability to pay tax is computed according

to the law in force at the beginning of the

assessment year, i.e., the first day of April, any

change in law affecting tax liability after that

date though made during the currency of the

assessment year, unless specifically made

retrospective, does not apply to the assessment for

that year.”

23. 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

13

of the Directors of private company existing

under the Act of 1956. It is also a settled legal

position that Section 6 of the General Clauses

Act, saves a right accrued and/or a liability

incurred, under the repealed Act, whenever any

Act is repealed. Learned Advocates for the

petitioners have also rightly relied upon the

decision of the Supreme Court in case of Dilip

Kumar Sharma and Ors. Vs. State of M. P.

(supra) and in case of Tolaram Relumal and

Anr. Vs. The State of Bombay (supra), in which

it has been held inter alia that when two

interpretations are possible, one favouring the

subject ought to be made applicable especially in

case of penal statute. It is also held by the

Supreme Court in case of Madhya Pradesh Vs.

Narmada Bachao Andolan and Anr. (supra) that

an interpretation, which is just, fair and sensible

should be made and not an interpretation which

results in drastic consequences.

24. In the light of the said legal position, it is

required to be held that Sub-section (2) of Section

164 of 2013 could be made applicable only

prospectively and not retrospectively. Therefore,

the financial years contemplated in the said

provision have to be counted from 1st of April

2014 i.e. financial years 2014-15, 2015-16, and

2016-17. The disqualification under the said

provision would be attracted, or the Director of a

company would become ineligible to be

reappointed as the Director of the defaulting

company or appointed in other company for a

period of five years, only if the company in which

he was the Director had not filed the financial

statements or annual returns for continuous

period of three financial years from 2014-15.

25.As discussed herein above, the annual general

meeting has to be held within six months from the

date of closing of the financial year. In case of

Financial Year 2016-17, AGM could be held up to

30th September 2017, and the annual returns

could be filed within 60 days and financial

statements within 30 days of holding of such

AGM i.e. up to 30th of November and 30th of

October 2017 respectively, even if the benefit of

14

additional period available under Section 403

was not availed of. Under the circumstances, the

Director would incur disqualification or would

become ineligible to be reappointed as a Director

of a company or appointed in other company for

a period of five years, for the defaults under

Clause (a) of Subsection (2) of Section 164, only

after 30th of October or 30th of November, as the

case may be, of the year 2017. Hence, the

impugned list dated 12.9.2017 showing the

petitioners as disqualified for a period of five

years from 1.11.2016 to 31.10.2021, therefore,

appears to be not only premature, but untenable

at law.

26. Of course, such disqualification as

contemplated under Section 164 would take place

automatically on any of the eventualities as

mentioned therein taking place, and therefore,

would be incurred by operation of law. As rightly

submitted by Mr.Vyas, as such no declaration is

required to be made or any action required to be

taken or any order required to be passed by any

authority under the Act. However, the action of

the respondents in publishing the impugned list

on 12.9.2017 of the Directors associated with the

“struck off companies” under Section 248,

showing the concerned Directors of the

companies, including the petitioners as

disqualified for a period of five years from

1.11.2016 to 31.11.2021 by no stretch of

imagination is justified, and could not be said to

be in consonance with the provisions contained in

Section 164(2) of the Act of 2013. Neither the

replies filed by the respondents to the petitions

contain any explanation, nor Mr.Vyas in his

submissions was able to explain as to how the

petitioners could be shown as disqualified

Directors for the period from 1.11.2016 to

31.11.2021, when even according to him, the

provisions contained in Section 164(2) were

applied prospectively, and the default would start

after 1.4.2017. The Court, therefore, is of the

opinion that the impugned list published on

12.9.2017 by the respondent No.1 deserves to be

quashed and set aside.

15

29. This takes the Court to the next question as to

whether the respondents could have deactivated

the DINs of the petitioners as a consequence of

the impugned list ? In this regard, it would be

appropriate to refer to the relevant provisions

contained in the Act and the said Rules. Section

152(3) provides that no person shall be appointed

as a Director of a company, unless he has been

allotted the Director Identification Number under

Section 154. Section 153 requires every

individual intending to be appointed as Director

of a company to make an application for

allotment of DIN to the Central Government in

such form and manner as may be prescribed.

Section 154 states that the Central Government

shall 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 applying for or obtaining or possessing

another DIN. Rules 9 and 10 of the said Rules of

2014 prescribe the procedure for making

application for allotment and for the allotment of

DIN, and further provide that the DIN allotted by

the Central Government under the said Rules

would be valid for the lifetime of the applicant

and shall 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 authorised officer or

Regional Director to cancel or deactivate the DIN

allotted to the Director, nor any of the clauses

mentioned in the said Rule contemplates

cancellation or deactivation of DIN of the

Director of the “struck off company” or of the

Director having become ineligible under Section

164 of the said Act. The reason appears to be that

16

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 lifetime of the applicant and on the

basis of such DIN he could become Director in

other companies 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 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.

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”

companies under Section 248, also was not

legally tenable. Of course, 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 change 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.

32. Much reliance was placed by the learned ASG

Mr.Vyas on the condonation of delay scheme

dated 29.12.2017 introduced by the Ministry of

Corporate Affairs after the publication of the

impugned list, however, the said scheme would

not justify the action of the respondents, in

publishing the impugned list, which was

absolutely contrary to the provisions of the Act of

2013 and the Rules made thereunder. The said

scheme was in force from 1.1.2018 to 31.3.2018,

which was extended up to May 2018, under which

the Directors associated with the “struck of

companies”, which had failed to file financial

statements or annual returns continuously for a

period of three financial years from 2013-14 to

2015-16 were granted an opportunity to rectify

17

the default, by following the procedure laid down

therein. However, this Court has held hereinabove

that the provisions of Section 164(2)(a) having

come into force from 1.1.2014, three financial

years for the purpose of the said provision would

be financial years 2014-15, 2015-16 and 2016-17

only, and not 2013-14, 2014-15, and 2015-16. In

any case, due to deactivation of the DINs, the

concerned Directors were unable to take benefits

of the said scheme also. Hence, the said scheme

could not be pressed into service for justifying the

publication of the impugned list.

6. The similar view has been taken by Madras High Court as

well as High Court of Madhya Pradesh.

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