Rejection of NDH-4 Without Show Cause Notice Is Illegal — Bombay High Court Quashes MCA Order Against Nidhi Company

“Natural Justice Cannot Be a Casualty — NDH-4 Rejection Without Notice and Ignoring Covid Extensions Is Unsustainable”:  In a landmark decision Bombay High Court (Nagpur Bench) quashed the rejection of Form NDH-4 by the Ministry of Corporate Affairs (MCA), holding that “rejection of NDH-4 without issuing a specific show cause notice amounts to gross violation of principles of natural justice and is contrary to the Nidhi Rules, 2014.”

A bench comprising Justice M.S. Jawalkar and Justice M.W. Chandwani categorically ruled that “before taking such drastic steps of rejection, an opportunity of explanation, as well as an opportunity to rectify deficiencies, is mandatory.”

The Court observed, “If Rule 3(A) of the Nidhi Rules is perused, it makes it abundantly clear that rejection of Form NDH-4 has wide and wild repercussions, including the inability of the company to raise deposits or function. Such a grave consequence cannot follow without strict adherence to procedural fairness.”

“Covid Extensions Were Binding — MCA Cannot Ignore Its Own Circulars to Reject NDH-4”

The High Court minced no words in rejecting the first ground cited by MCA — alleged delay in filing Form NDH-1. The Court emphatically stated, “It appears that there is no consideration for extension of period in view of the outbreak of Covid-19 pandemic. The time was extended till 31.12.2020, and the Petitioner has submitted NDH-1 on 22.12.2020. Thus, ground No.1 for rejection does not survive.”

The bench remarked, “The rejection based on alleged delay ignored valid extensions granted by MCA Circular No.12/2020 and Circular No.30/2020. There is no provision under the Nidhi Rules that authorizes ignoring government-issued extensions.”

“Rejection Cannot Be Based on Events Post Notice — Subsequent Non-Filing of NDH-3 Is Irrelevant to NDH-4”

The Court found the second ground for rejection equally untenable. It was based on non-filing of half-yearly returns NDH-3 for the periods ending 30.09.2022 and 31.03.2023, which were long after the MCA’s only generic notice dated 16.04.2021.

The Court observed, “It is to be noted that alleged notice was issued on 16.04.2021 by way of e-mail. As such, these subsequent events of non-filing for the half-years ending on 30.09.2022 and 31.03.2023 cannot be the reason for rejecting the Form NDH-4.”

It added, “The purpose of notice is to call for an explanation from the concerned party. If there is no specific notice issued, the ground of rejection cannot survive.”

“Natural Justice Is Not Optional — No Show Cause Notice Makes Rejection Invalid”

In unequivocal terms, the Court stated, “There is no specific notice to show cause issued to the petitioner pointing out any compliance that remained to be fulfilled. The rejection violates the very foundation of natural justice.”

Referring to Rule 23 of the Nidhi Rules, the Court reiterated, “Even while appointing a Special Officer under Rule 23, the law mandates an opportunity of being heard. Then how can a far graver consequence — the rejection of NDH-4 — occur without any opportunity?”

“Rule 3(A) Has Wide and Wild Consequences — Must Be Strictly Followed with Procedural Fairness”

The Court highlighted the severity of consequences under Rule 3(A) proviso, stating, “Rejection of Form NDH-4 renders the company unable to raise deposits or provide loans to its members. Moreover, it cripples the functioning of the company since it cannot file any other forms or reports online after rejection.”

The bench made it clear that, “When the consequence is that the company virtually ceases to function, adherence to the principles of natural justice is not merely procedural formality but a mandatory requirement.”

The Court held that the grounds of rejection regarding delay in NDH-1 and non-filing of NDH-3 do not survive. On the third ground — non-filing of the auditor’s certificate with Form AOC-4 — the Court granted the petitioner an opportunity to cure the defect within four weeks, directing the MCA to reconsider the NDH-4 application accordingly.

Declaring the MCA’s rejection as unsustainable, the Court ordered, “The impugned communication dated 23.10.2023 is hereby quashed and set aside.”

The ruling decisively affirms that “Rejection of NDH-4 cannot be an automatic mechanical process. It must comply with the statutory framework, particularly natural justice, procedural fairness, and the legitimate expectations arising from government circulars like those issued during the Covid-19 pandemic.”

Date of Decision: 11 June 2025