Personal Hearing prior to Disqualification of Directors

The Madras High Court in the case of Bhagavan Das Dhananjaya Das versus Union of India and Anr. [2018] has ruled that a director ought to be given an opportunity of personal hearing, before he/she is declared as disqualified under Section 164 (2)(a) of the Companies Act, 2013 (“Act”).

Background:

The petitioner in this case was a director of a private company (Birdies), which was issued a show cause notice by the Registrar of Companies (“ROC“) under Section 248(1) of the Act, for striking-off its name from the register of companies for non-filing of annual returns for a continuous period of three financial years. Birdies had no objection to such strike off; consequently, Birdies was struck off from the Register of Companies by the ROC. Additionally, a separate list was also released by the ROC disqualifying even the directors of Birdies (including the petitioner) under Section 164(2)(a) of the Act.

The Madras High Court accepted the petitioner’s arguments that before disqualifying inter alia the Petitioner, the ROC ought to have observed the principles of natural justice, that notice of personal hearing ought to have been issued to the Petitioner; and the Petitioner should have been heard. This is primarily on the ground that such disqualification takes away the ability of a director to be a director of other companies as well, even if such companies are compliant in its filings – hence extinguishing the corporate life of such director.

Critical Analysis:

This ruling of the Madras High Court is significant. The Act does not require any personal hearing to be given to any director who stands disqualified. In fact, a reading of the provision indicates that the disqualification is by operation of law and thus, automatic. All that the ROC does is publish a list of those directors who stand disqualified inter alia on account of defaults/omissions on the part of the companies with which they are associated. But, the Madras High Court, by  holding that the ROC ought to have given an opportunity of personal hearing to the directors before disqualifying them, appears to have created a statutory right in favour of directors, who otherwise stand disqualified under Section 164(2)(a), to contest their potential disqualification; and in the meantime, keep their disqualification at bay. Moreover, this ruling in a sense widens the ROC’s powers/functions with regards to disqualification of directors, which otherwise was limited to publishing the list of directors who stand disqualified under the aforesaid provisions. By requiring the ROC to hold personal hearings prior to disqualification, quasi- judicial functions have now been conferred upon the ROC on this issue of director disqualification, although the statute does not provide so.

While it is difficult not to empathise with directors who face automatic disqualification (which affects their directorship in other companies also) on account of defaults by companies with which they are associated (especially non-executive/independent directors), the construct of Section 164(2) does not give any ability to such directors to ward off such disqualification by arguing extenuating circumstances. Hence, the right of personal hearing would perhaps only enable such directors to continue to be eligible, until their disqualification is decided; which arguably would run counter to the objective of this provision. The decision of the Madras High Court could also potentially open the floodgates to new arguments such as that a distinction should be drawn between independent directors, executive directors and non-executive directors, and that the provisions of Section 164(2)(a) should not be applied to non-executive directors, since they are not in conduct of the operations and management of the company.

It does not appear that this decision of the Madras High Court has been challenged in the Supreme Court. Hence, until there is a contrary decision by another High Court or by the Supreme Court, the right of personal hearing will have to be deemed to be inherent in Section 164(2) of the Act.

Author:
Anoj Menon, Partner

Date: January 16, 2020