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

Orissa High Court: K.S. Jahveri, CJ and K.R. Mohapatra, J., partly allowed a writ petition on the ground that the principle of natural justice was not followed by the parties. 

A writ petition was filed against the tender call notice issued by the Executive officer, Jeypore Municipality for grant of licence and underground chamber stall. Even after issuance of the impugned tender call notice, the petitioner’s licence period was continued but the same was cancelled abruptly without issuing any notice to the petitioner. 

The Court after submission by the parties held that order of cancellation of petitioner’s licence was required to be quashed and set aside as it was issued without giving the notice. It was further ordered that the respondents’ were open to issue a notice to the petitioner and thereafter after hearing him, appropriate order may be passed. The Court further submitted that cancellation was made without issuing a notice to the petitioner that too without following due procedure, i.e., in gross violation of the principle of natural justice. Thus, the writ was allowed.[Basanta Kumar Mundra v. Jeypore Municipality, 2019 SCC OnLine Ori 210, decided on 13-05-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): The Coram of Tarun Agarwala, J. (Presiding Officer), Dr C.K.G Nair (Member) and M.T. Joshi, J. (Judicial Member) allowed an appeal against the order of delisting the company as a shell company by Bombay Stock Exchange (BSE) and Securities and Exchange Board of India (SEBI).

An appeal was brought against the order of BSE and SEBI against their order of listing the company as shell companies as directed by the Ministry of Corporate Affairs.

The facts of the case were a list of shell companies was prepared by the SEBI with the request to initiate the necessary action as per the SEBI rules and regulations. Further instructions were given to stock exchanges to place the Companies in Graded Surveillance Measures (GSM) Stage VI with immediate effect, and thereafter initiate a process of verifying credentials/fundamentals of such Companies and appoint an independent auditor to conduct an audit or forensic audit of such listed companies. Moreover, a list of document to be verified during the process was also provided in order to seek the fundamentals of the company.

Ram Upadhyay, counsel for the appellant submitted that appellant was kept in the delisting company against which a representation before the respondent contending that their action in keeping them in the list of the suspected shell companies was wholly erroneous as well as their action in placing them in the GSM Stage VI and consequently requested to take immediate remedial action so that their reputation is salvaged and the hardships caused to the investors are removed.  Despite the entire requirement being fulfilled on time the name of the appellant was not removed, thus an appeal was preferred by the appellant.

Gaurav Joshi, counsel for the respondent argued that the balance sheet of the company did not reflect the true and fair position of the company and considering the fact that the company had suspended its operations the entire assets should be written off. It was further submitted the expenses were marked under the wrong head which created the illusion that the company had a huge asset base which was incorrect.

The Tribunal after the submission held that approach adopted by SEBI as well as by BSE was totally erroneous. The court submitted that direction given by the SEBI to place the companies under GSM stage VI without verifying their credentials was wholly illegal and in violation of the principle of natural justice.  It was further submitted that BSE could not pick holes in the balance sheet nor were they competent to hold whether any expenditure should be revenue expenditure or capital expenditure, for which an independent auditor should be appointed which was not complied with. The court further submitted that “the objective of the SEBI Act is to promote the development of, and to regulate the healthy growth of securities market as well as to protect the interest of the investors. It has the power to issue necessary direction if it is satisfied upon an inquiry that such direction is necessary for the interest of the investors.” Thus allowed the appeal and directed to take the action in accordance with the law.[SVC Industries Ltd. v. SEBI, 2019 SCC OnLine SAT 77, decided on 27-05-2019]

Case BriefsHigh Courts

Delhi High Court: In view of the failure of justice on account of lack of effective cross-examination of prosecution witnesses, Sanjeev Sachdeva, J. quashed the trial court’s order convicting and sentencing the accused (appellant) for offence punishable under Section 6 of the Protection of Children from Sexual Offences Act, 2012.

The appellant had challenged the order of the trial court whereby he was convicted and sentenced under POCSO Act. He contended that the manner in which the trial was conducted showed that the principles of natural justice were violated and he was declined a fair opportunity of being defended.

The High Court found that some prosecution witnesses were not cross-examined and for others, there was very sketchy cross-examination. It was noted that the manner in which cross-examination was conducted on part of the accused by the amicus curiae appointed by the trial court clearly showed that he made no serious efforts to defend the accused. It was observed: “If the Amicus Curiae does not or is not in a position to effectively provide assistance to an accused, the Trial Court is obliged to correct the situation. Even the trial court failed to take any remedial steps. The manner in which the cross-examination has been conducted has clearly led to failure of justice.” Holding it to be a clear case of failure of justice, the Court quashed the impugned order and remanded the matter to the Court of Additional Sessions Judge for re-trial from the stage of cross-examination of prosecution witnesses.

Before departing with the case, the High Court recorded appreciation for the assistance rendered by Adit S. Pujari, Advocate appearing on behalf of Delhi High Court Legal Services Committee and also by Meenakshi Dahiya, Additional Public Prosecutor for the State. [Dev Kumar Yadav v. State (NCT of Delhi), 2019 SCC OnLine Del 8485, decided on 10-05-2019]

Case BriefsHigh Courts

Jharkhand High Court: The Bench of Ananda Sen, J. set aside a punishment order issued against a police constable in departmental proceedings, for being in violation of principles of natural justice.

Petitioner, a constable in the police department, was served with a departmental charge sheet alleging misconduct. In the departmental inquiry was held. In the inquiry, charges against him were held not to be proved. The disciplinary authority, disagreeing with the findings given of inquiry report, punished him with two black marks and withheld his salary on the basis of no work no pay.  The said order was challenged by the petitioner in departmental appeal, which was also dismissed by the appellate authority. Aggrieved thereby, the instant writ application was filed praying for quashing of the said order.

Petitioner’s only submission was that it is well within the jurisdiction and domain of disciplinary authority to differ with the findings of Inquiry Officer, but if the disciplinary authority wants to punish the delinquent, a second show cause notice has to be served and reasons for his differing from findings of the inquiry report must be mentioned in the show cause notice. This process had not been followed before passing the impugned order, and only on this ground, the impugned order could be set aside.

The Court noted that the respondent had not issued second show cause notice to the petitioner, but punished him after differing with the findings of the inquiry report. It was opined that this procedure was in utter violation of the principles of natural justice, as the petitioner ought to have been issued a second show cause notice indicating the ground of disagreement, before punishing him. Thus, the punishment order was set aside for being unsustainable in the eyes of law.[Lalit Oraon v. State of Jharkhand, 2019 SCC OnLine Jhar 279, Order dated 13-03-2019]