Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J. while addressing the petitions filed in respect to the impugned list of directors stated to have been disqualified under clause (a) of Section 164(2) of the Companies Act, 2013, explained with reasons and logic, the scheme of Section 164(2) and Section 167(1)(a) of the Act that was materially amended by the Companies (Amendment) Act, 2018.

Facts of the case

The present petitions were filed, inter alia, impugning the list of directors that were disqualified for default on the part of companies concerned in filing the annual returns and financial statements for the Financial Years 2014-2016, under Section 164(2)(a) of the Companies Act, 2013.

Adding to the above challenge, another challenge placed by the petitioner was to the list of disqualified directors published subsequently for defaults pertaining to the FYs 2012-2014 and 2013-2015.

The above-mentioned lists represent the disqualification of petitioners from being appointed/re-appointed as directors for a period of 5 years under Section 164(2)(a) of the Act. Names of the companies in which the petitioners were holding office have also been struck off from the Register of Companies.

Following are the 4 grounds on which the impugned list has been challenged:

  • Action of the respondents in disqualifying the petitioner is arbitrary as the petitioners were not afforded an opportunity to be heard, which is in violation of principles of natural justice.
  • Section 164 which mandates the disqualification of directors, being penal in nature, could not be applied retrospectively.
  • On the interpretation of Section 164(2)(a), it is noted that the petitioners cannot be disqualified to be directors of the companies, which have not defaulted in filing their annual returns and financial statements for a period of 3 consecutive years.
  • Defaults under Section 164(2) results in directors being disqualified from being appointed/re-appointed as directors but does not result in them demitting office as directors.

In addition, the petitioners also impugn the action of the respondents in deactivating their DINs and DSCs.

Conclusion

Court concluded its decision by providing relevant reasoning for the same in respect to the provisions of Sections 164(2) and 167(1)(a) of the Act.

To clarify the subject of controversy in the present petition, Court stated that it is limited to interpreting the provisions of Sections 164(2) and 167(1) (a) of the Act and no challenge to the constitutional vires of the aforesaid sections have been placed.

Following are the questions that the Court addressed in the present petition:

1.Whether the provisions of Section 164(2)(a) are retrospective?

Controversy arises in the context of the submissions advanced on behalf of the petitioners that considering the defaults in filing financial statements and annual returns for the financial year ending 31.3.2014 (FY 2013-14) and prior years for the purposes of imposing the disqualification under Section 164(2) of the Act, tantamount to applying the said provisions retrospectively. This, according to the petitioners, is impermissible.

None of the counsel appearing for the respondents canvassed the proposition that the provisions of Section 164(2) of the Act would relate back to a period prior to its enactment. Thus, concededly, the said Section is applicable prospectively.

  • Controversy, essentially, relates to whether the default as contemplated in clause (a) of Section 164(2) of the Act, in respect of a financial year prior to the said provision coming into force, could be considered for the purposes of the said Section.

Thus in view of the Court’s opinion, Section 164(2) of the Act operates prospectively. Such prospective operation would entail taking into account failure to file the financial statements pertaining to the financial year ending 31.03.2014 on or before 30.10.2014

“Court finds no reason why such defaults should not be considered for the purposes of Section 164 of the Act. Merely, because the returns to be filed pertaining to a period prior to 01.04.2014, is of no relevance considering that the default in doing so has occurred after the provisions of Section 164 of the Act had become applicable.”

2. Whether a prior notice and an opportunity of being heard were required to be afforded to the petitioners before including their names in the impugned list and whether the impugned list is void as being violative of principles of natural justice?

 Principles of natural justice admit a considerable degree of flexibility and said rules can be suitably modified where it is expedient to do so. Principles of natural justice are not inflexible.

Court proceeded to examine the statutory provisions and applicability of the audi alteram partem rule. Section 164 (2) of the Act merely sets out the conditions which if not complied with would disqualify an individual a person from being reappointed or appointed as a director.

 This process does not entail any decision-making process on the part of the Authorities administering the Act. Authority is not required to pass any order disqualifying an individual. Thus, in the said circumstances, audi alteram partem rule would be inapplicable.

Hence the Court is of the view that the principles of audi alteram partem are not applicable given the nature of the provisions of Section 164(2) of the Act. However, even if it is assumed that disqualifying a director entails an administrative decision, there is a qualitative decision required to be taken by the authorities, the rule of affording a prior hearing cannot be readily inferred as a part of Section 164(2) of the Act.

 3.Interpretation of provisions of Section 164(2) of the Act.

Court noted the contention of the petitioners that the petitioners may be disqualified to act as directors of the concerned companies that had committed defaults as contemplated under Section 164(2)(a) of the Act – that is, had failed to file financial statements or annual returns for a continuous period of three financial years – but they are not disqualified to act as a directors of companies that are not in default.

High Court noted that no person who is or has been a director of company shall be eligible to be re-appointed as a director of ‘that company’ or appointed in any ‘other company’.

“Clause (a) of Section 167 (1) of the Act indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act. The proviso to Clause (a) of Section 167(1) of the Act was introduced with effect from 07.05.2018, by virtue of the Companies (Amendment) Act, 2018.”

 Whereas Section 164 disqualifies a person from being appointed/reappointed as a director, the import of Section 167(1)(a) is that such a director demits his office immediately on incurring such disqualification.

Proviso to Section 167(a) as introduced by the Companies (Amendment) Act, 2018 with effect from 07.05.2018, cannot be read in isolation and without reference to the proviso to Section 164(2), which was introduced by the same amending enactment.

Court further added to its decisions that, the petitioners would not demit their office on account of disqualifications incurred under Section 164(2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. If they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company.

Thus, in view of the above observations, Court found no infirmity with the impugned list to the extent it includes the names of the petitioners as directors disqualified under Section 164(2) of the Act. Court also rejects the contention that the impugned list is void as having been drawn up in violation of the principles of natural justice.

Court finds merit in the contention that the petitioners cannot be stated to have demitted their office as directors by virtue of Section 167(1) of the Act.

The Scheme of Section 164(2) and Section 167(1)(a) of the Act was materially amended by the Companies Amendment Act, 2018 by the introduction of the provisos to Section 164(2) and Section 167(1)(a) of the Act with effect from 07.05.2018.

Directors who incur disqualification under Section 164(2) of the Act after the said date, would also cease to be directors in other companies on incurring such disqualification.

Respondents were directed to reactivate the DIN and DSC of the petitioners. Court also clarified that petitioners would continue to be liable to pay penalties as prescribed under the Act. [Mukut Pathak v. Union of India, WP (C) 9088 of 2018 & CM Appln. No. 35006 of 2018, decided on 04-11-2019]

Case BriefsHigh Courts

Karnataka High Court: B.A. Patil, J. while allowing the appeal set aside the Judgment of the trial court with a direction to recall the witnesses who have not been cross-examined.

Asif Hussain, the appellant/accused in the instant case preferred this appeal against the judgment and order of his conviction and sentence for the offence punishable under Section 397 of Penal Code, 1860 passed by the Additional City Civil and Sessions Judge, Bengaluru City.

Sirajuddin Ahmed, Counsel for the appellant submitted that the trial court did not give full opportunity to the accused to cross-examine all the witnesses and passed the impugned order erroneously. 

In consonance to the Counsel for the appellant, M. Divakar Maddur, High Court Government Pleader submitted that the evidence of PW7 was not fully chief examined and for this no reason was assigned. 

The Court after analyzing the evidences given in the trial court observed that witnesses were examined. But, after the Public Prosecutor was done with the examination-in-chief, counsel for the accused took time for preparation. However, the court below rejected the prayer without any justifiable reasons and took that there is no cross examination. Moreover, PW7 was examined-in-chief in part. The cross examination of PWs 9 and 10 was not even recorded. The material witnesses who were examined before the Court were also not cross-examined. Thus, it was clear that principles of natural justice were not followed. 

The Court remitted back the matter and directed the trial court to expeditiously dispose of the case.[Asif Hussain v. State, 2019 SCC OnLine Kar 1600, decided on 04-09-2019]

Case BriefsHigh Courts

Patna High Court: A Single Judge Bench comprising of Anil Kumar Upadhyay, J. quashed an office order issued against a delinquent employee ruling that the disciplinary authority had not assigned reasons for the said order and had also not given an opportunity of hearing to the employee.

The instant petition was filed having been aggrieved by an office order inflicting upon him major punishment of stoppage of two annual increments with cumulative effect, censure, non-payment of salary for the period of suspension and punishment that he shall not hold the post of Headmaster-cum-Drawing & Disbursing Officer in future.

The Court noted that the petitioner had been proceeded against on the basis of charges submitted by the District Superintendent of Education, Munger. After enquiry report, second show cause notice was issued to him in the form of impugned office order. The said second show cause notice which recorded a finding different from that of the enquiry officer did not accord reasons for order and no opportunity of hearing was provided to the petitioner.

The Court placed reliance on dictum of  Apex Court in Punjab National Bank v. Kunj Behari Misra, (1998) 7 SCC 84 and observed that while the finding of enquiry officer is not binding on the disciplinary authority, but while differing with the finding disciplinary authority is required to assign reasons and provide opportunity of hearing so that the delinquent may have an opportunity to persuade it in respect of favourable finding of the enquiry officer. Further, Rule 18 of the Bihar Government Servants (Classification, Control & Appeal) Rules, 2005 made it obligatory for the disciplinary authority to follow the principles laid down in the Kunj Behari case.

In view of the above, the petition was allowed and impugned office order was quashed for being issued without following principles of natural justice and for being a non-speaking order.[Yogendra Paswan v. State of Bihar,2018 SCC OnLine Pat 2108, decided on 22-11-2018]

Case BriefsHigh Courts

Himachal Pradesh High Court: A Division Bench comprising of Sanjay Karol, acting CJ. and Ajay Mohan Goel, J., decided a letters patent appeal, wherein the Court quashed the order passed against the appellant by the learned Single Judge, on grounds of violation of principles of natural justice.

Earlier, a writ petition was filed before the learned Single Judge directing the appellant to release certain compensation and benefits to the writ petitioner therein. However, it remains an undisputed fact that the appellant was not arrayed as a party by the writ petitioner in the writ proceedings. Before filing the instant appeal, the appellant had also filed a review petition before the learned Single Judge, which was dismissed.

Considering the facts and circumstances of the case, the High Court was of the view that this was a classic case where the petitioner was condemned unheard. The order was passed against the appellant without notice and without inviting his comments or reply. The Court held that in such a situation, principles of natural justice and audi alteram partem in particular, stood violated. The Court was of the view that the said order of the learned Single Judge was liable to be quashed on this ground alone.

Accordingly, the order of the learned Single Judge condemning the appellant unheard was quashed by the Division Bench. [NTPC Ltd. v. Gopal Dass, LPA No. 66 of 2010, order dated 2.2.2018]

Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench of the Delhi High Court emphasized on the importance of Natural Justice. The Court expunged the remarks which were made in a judgment by the trial court in which the petitioner was a supervising officer for a period but not for the entirety of the investigation.

The petitioner had filed the petition against the order of the Special Judge, CBI to the Director, CBI to take disciplinary action against erring CBI officials responsible for improper investigation and supervision, specifically naming the petitioner.

The Court held that the remarks and order were completely unnecessary as no person should be condemned unheard. Moreover, the passing of such remarks were bad in law when there is an option of prosecution under Section 211 of the Penal Code, 1860 available. The Court also observed that the investigation was under the supervision of the petitioner for a period and not for it’s entirety, hence, putting the blame on the petitioner was baseless when the remarks were not substantiated by mentioning the specific points in the investigation where the errors were made. The appeal was accordingly, allowed and disposed of. [Anil Kumar v. CBI, 2017 SCC OnLine Del 9792, decided on 10.08.2017]