In a recent order by the Delhi High Court in the matter of Sandeep Agarwal v. Union of India, the court restored the Director Identification Numbers (“DIN”) and Digital Signature Certificates (“DSCs”) of the petitioners allowing them to discharge their duties as directors in the active companies and avail the Companies Fresh Start Scheme (“CFSS”).  

Brief facts:

The petition was filed by Mr. Sandeep Agarwal and Ms. Kokila Agarwal, both of whom were directors in two companies namely Koksun Papers Private Limited (“Koksun Papers”) and Kushal Power Projects Private Limited (“Kushal Power”). The name of Kushal Power was struck off from the Registrar of Companies (“RoC”) on June 30, 2017, due to non-filing of financial statements and annual returns. The petitioners, being directors of Kushal Power were also disqualified with effect from November 1, 2016 for a period of five years till October 31, 2021 under Section 164(2)(a) of the Companies Act, 2013 (“Act”). Pursuant to their disqualification, their DIN and DSC were also cancelled. By the present petition before the Delhi High Court, the disqualification was challenged. The directors also sought to quash the impugned list of disqualified directors.

Findings of the court:

i.    No retrospective operation of Section 164(2) and Section 167(1)(a) of the Act

In the present case, Koksun Papers was struck-off by the RoC on June 30, 2017. As a result, the petitioners were also disqualified from acting as directors of any other company by virtue of Section 164(2)(a) of the Act. Though, the provision for disqualification for non-filing of annual return was added vide the Companies Amendment Act, 2018 and was effective only from May 7, 2018, the disqualification was applied on the petitioners retrospectively. Therefore, one of the issues which arose for consideration was whether disqualification prescribed under Section 164(2) and 167(1)(a) of the Act would be applicable with retrospective effect.

The court held that the judgment in the matter of Mukut Pathak v. Union of India, 265 (2019) DLT 506, insofar as the merits of the case is concerned, is squarely applicable in the present case. The said judgment clearly holds that the proviso to Section 167(1)(a) of the Act cannot be read to operate retrospectively. It was further held that the said proviso, being in the nature of a punitive measure with respect to the rights and obligations of the directors, cannot be applied retrospectively unless the statutory amendment expressly provided so. 

ii.    Status of disqualified directors vis-à-vis active companies

Another pertinent issue which arose for consideration before the court was whether disqualification  due to non-filing of return for one company would lead to the director being disqualified from all other companies where he was previously serving as a director especially, in light of the CFSS being notified on March 30, 2020.

The CFSS was launched by the Government in order to give a reprieve to such companies who have defaulted in filing documents and that the companies, were allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The CFSS also envisaged non-imposition of penalty or any other charges for belated filing of the documents.

The court held that CFSS provides an opportunity for active companies who may have defaulted in filing of documents, to put their affairs in order. It thus provides directors of such companies, a fresh cause of action to also challenge their disqualification qua the active companies. Given the fact that CFSS is a new scheme, the disqualification and cancellation of DINs would be a severe impediment for the directors in availing remedies under the CFSS, in respect of the active company. The purpose and intent of the CFSS is to allow a fresh start for companies which have defaulted. In order for the CFSS to be effective, directors of these companies ought to be given an opportunity to avail of the CFSS. The launch of the CFSS itself constitutes a fresh and a continuing cause of action. Thus, in the present case, where the petitioners are directors of two companies i.e. one, whose name has been struck off and one, which is still active, disqualification from acting as director with respect to active company would not stand.

It was further held that to give full effect to CFSS, if the directors are disqualified permanently and are not allowed avail of their DINs and DSCs, the objective of the CFSS scheme would be rendered ineffective and nugatory. 

iii.    Ratio of earlier judgement not applicable

The Delhi High Court earlier in the case of Anamika Devi v. Union of India. & Anr. W.P.(C) 4356/2020, order dated July 20, 2020 and Gaurav Kumar v. Union of India & Anr. W.P.(C) 4357/2020, order dated July 20, 2020 had refused to quash the disqualification of director. However, the court held that the earlier decisions were inapplicable to the issue at hand as the court did not delve into merits of those cases and the applications were rejected merely on the procedural ground of delay in approaching the court.  In the present case, the question of disqualification arose in the light of the CFSS which was not under consideration in the earlier matters. 
 

This update has been contributed by Pooja Chakrabarti (Partner) and Kiran Sharma (Associate).