DIN can’t be automatically deactivated on grounds of automatic vacation of office of director u/s 164 (2) of Cos. Act - 135 taxmann.com 352 (Calcutta)[11-02-2022]

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DIN can’t be automatically deactivated on grounds of automatic vacation of office of director u/s 164 (2) of Cos. Act - 135 taxmann.com 352 (Calcutta)[11-02-2022]

In the instant case, petitioners were aggrieved by cessation of office as directors of M/s. Hahnemann International Pvt. Ltd. The disqualification happened by operation of Section 164 (2) for not filing balance sheets and annual returns for a continuous period of three years from the year 2014-15. The ROC also deactivated the Director Identification Number (DIN) of the petitioner-directors.

The petitioners advanced a three-fold argument challenging such disqualification:

(a) That they were not permitted to avail the benefit of the "Company's Fresh Start Scheme of 2020" despite applying by letter dated 11th November 2020.

(b) That the petitioners were not afforded a prior hearing before the disqualification as a director and were hence denied principles of Natural Justice.

(c) The Registrar of Companies is not authorized to deactivate their Director Identification Numbers (DIN) and such activation of DIN according to the disqualification is not automatic.

The Hon'ble Court viewed that the failure to file balance sheet and the annual returns for three consecutive years amounts to deliberate and willful negligence. A director is a responsible officer of the company and is expected to act with diligence and urgency. The directors could not take the plea that some other person was entrusted to file the financials of the Company. So, there was no scope of condonation or curing the omission.

The Court held that since the disqualification under Section 164 (2) and 167 (1)(a) was automatic, by the operation of law and leaving no discretion on the authorities, the question of application of the principle of natural justice particularly prior hearing does not and cannot arise. The Rules of Natural Justice be read into the process of application and operation of Section 164 (2) and 167 (1) of the said Act.

Relying on the case Yashodhara Shroff v. Union of India [2019] 106 taxmann.com 297 (Karnataka), the Court held that DIN cannot be cancelled on account of a disqualification sustained under section 164(2). The cancellation or surrender or deactivation of DIN is stipulated in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014. Rule 11 does not permit cancellation of or deactivation of DIN on account of disqualification of a director under Section 164(2) of the Act at all but at the same time, the company must comply with the filing Form DIR-9.