The petitioners were people who had their DIN deactivated as a result of failing to file financial statements or annual reports for their respective companies, which was grounds for disqualification under Section 164(2). The petitioners disputed this.
The petitioners asserted that the Directors' personal circumstances—such as insanity, insolvency, criminal convictions, etc.—were what caused them to be disqualified under section 164(1). The incidents that led to disqualification under section 164 were failing to pay dividends, redeem debentures on time, failing to file annual returns or financial statements by a company for a continuous period of three years, and failing to repay deposits accepted or interest payable.
Additionally, it was maintained that natural justice standards should be observed even if the disqualification was the result of legal procedure when the consequences of disqualification were so grave and severe. Due to events beyond the Directors' control, such as pandemics, lockdowns, lack of access to or restrictions on internet services, etc., Annual Returns and Financial Statements may not have been filed. Therefore, the impacted Directors should be given a chance to be heard before being disqualified.
Furthermore, it was argued that given the seriousness and severity of the effects of disqualification, natural justice principles should be followed even if the disqualification was the outcome of legal procedure. Annual Returns and Financial Statements may not have been filed as a result of circumstances beyond the Directors' control, such as pandemics, lockdowns, lack of access to or limitations on internet services, etc. Therefore, before the affected Directors are disqualified, they should be given an opportunity to be heard.
In the instant case titled Zacharia Maramkandathil Mohan Vs. Union of India, the issue raised for clarification before the High Court was:
Whether the disqualification of directors was ultra vires?
With regard to this issue, the High Court of Kerala stated, after considering the facts of the case, that the DIN's ineligibility arises by operation of law. There is hence no requirement for a hearing. It has been asserted that the law does not permit and that there is no clause to permit the disqualification of Directors for failing to file annual returns or financial statements for three years in a row for any reason. The legal power to excuse or waive disqualification due to a violation of section 164 does not exist.
In addition to the aforementioned, the law does not provide an exception for the production of financial statements or annual returns or for disqualification under section 164(2); hence, providing a chance to be heard would merely be a formality. Under the law, directors are held to a high standard of accountability. Furthermore, the five-year suspension that Directors are subject to under section 164 is not a suspension at all. Therefore, it was not ultra vires to disqualify directors for 5 years for failing to submit financials for 3 years.
The Court categorically stated that,
"In other words, only the financial years post-01.04.2014 can be considered to decide whether there is consecutive three years failure in filing Annual Returns or Financial Statements. When so considered, there cannot be any disqualification of Directors pursuant to Section 164(2), till the year 2017. Any retrospective implementation of Section 164(2) would be ultra vires, it was urged".