Short Summary:
In the article author explains provisions of Section 164 and 167 of Companies Act, 2013 related to Disqualification of Director. Author further explains how a director get rid from status of disqualification, if any to enable them to be eligible to appoint as director or continue as director in other Companies.
Introduction:
As Directors were enjoying picnic from the long time by non compliance with the provisions of Companies Act. They have created the Companies but not complied with the legal formalities to run the Company. Government has struck off such Companies and disqualified the Directors (By blocking of DIN) being new appointment or continue as director in existing Companies. Such Disqualified Directors are spending sleepless nights.
Ministry of Corporate Affairs along with Ministry of Finance has taken actions against the Shell Companies in other words the Companies which has not filed the Financial Statement and Annual Return with ROC. MCA has identified 106,578 Directors for disqualification under section 164(2)(a) of Companies Act, 2013 as on 12th September, 2017.
Legal Provisions for Disqualification of Directors:
Section 164(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so
Section 167(1) The office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.
Remedy to Remove Disqualification of Director
At present, subsequent to disqualification of Directors by Government, Corporates/ Directors going through following troubles like:
i. Directors can’t use their DIN
ii. No e-form can be file in any Company with the DSC of such Director.
iii. A Company (Complied with the provisions of the Act and Active) where there are only 2 directors and one of them is disqualified that company not able to file its e-form with ROC, not able to conduct the Board Meetings, not able to comply with the provisiosn of the Act due to only one director on the Board.
iv. Such person not able to incorporate new Companies.
Pursuant to above mentioned troubles Directors / Companies are looking for the way out to remove the Disqualification under Section 164(2). Professionals / Corporates having many questions pursuant to removal of disqualification like:
i. Whether disqualification can be eliminate by COMPOUNDING?
ii. Whether disqualification can be eliminate by “REVIVAL OF COMPANY”?
iii. Whether disqualification can be eliminate by “NCLT” or Whether disqualification can be eliminate by filing of DIR-10 by Central Government?
A. Whether disqualification can be eliminate by COMPOUNDING?
As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability.” This definition thoughtfully represents the concept of Compounding as a Settlement Mechanism, a settlement by paying the penalty in lieu of facing the prosecution for the offence committed.
Power of Compounding given u/s 441 of Companies Act, 2013. As per Section 441 Any Offence punishable under this Act is compound by Tribunal. As a result, compounding option available for offence conducted by the Directors/ Company.
Disqualification u/s 164(2) trigger because of non filing of financial statement u/s 137 and non filing of annual return u/s 92. Compounding can be done for section 137 and 92 after making default good.
Disqualification of Directors given u/s 164 however, no penalty / prosecution provide under Section 164 except one that such director shall be disqualified for 5 year. After completion of 5 year he becomes eligible to apply for removal of disqualification.
Therefore one can opine that first no punishment/ penalty/ fine is prescribed under section 164 and 167, Second Disqualification is not an offence. If it is not an offence and no penalty / fine is prescribed then it can’t be compound under Section 441. Hence, disqualification can’t be removed by compounding of offence.
B. Whether disqualification can be ELIMINATING by “REVIVAL OF COMPANY”?
This question has already been discussed by the author in an another Article series No. 274 available on Link: https://taxguru.in/company-law/disqualification-director-remove-restoration-company.html/
Extract of one paragraph of such write-up:
“one can opine that “Revival of name of Company in the record of ROC is not a criteria for removal of disqualification of director.” Even Name of Company is restored in the record of ROC still directors shall be continued as disqualified u/s 164(2) for appointment and reappointment and liable for vacant office in other Companies u/s 167(1) until unless there is any amendment in the provisiosn of Companies Act, 2013 or any clarification issued by the Central Government”.
C. Whether disqualification can be eliminate by “NCLT” or Whether disqualification can be eliminate by filing of DIR-10 by Central Government?
As per the NCLT Rules nowhere under the rules power / process is given to NCLT for removal of disqualification of Directors u/s 164(2). Hence until unless there is any amendment in the provisiosn of Companies Act, 2013 or any clarification issued by the Central Government Hon’ble NCLT don’t have any power to remove the disqualification of director.
Power of Central Government:
As per The Companies (Appointment and Qualification of Directors) Rules, 2014 contain a provision pursuant to “application for removal of disqualification of directors shall be made in Form DIR-10.”
Rule 14(5) states that, “Any application for removal of disqualification of directors shall be made in Form DIR-10.” However this is physical form required to be file with other form with the appropriate authority.
As per study of Section 164(2) and Rule 14 simultaneously “one can opine that disqualification of Directors can be eliminating by filing of application in DIR-10 with Central Government. However, such application in DIR-10 can be made only at the end of the tenure of five years post his disqualification.”
Therefore, Filing of DIR-10 before completion of 5 year is not a way out for removal of disqualification of director or to get rid from the status of disqualified Director.
CONCLUSION:
It can be conclude at present, since there seems to be no remedy available as per the Companies Act, 2013, a Writ Petition can be made by the aggrieved director under Article 226 of the Constitution of India in the absence of any alternate remedy available.
On September 21, 2017, the Madras High Court has passed an interim order staying the RoC Chennai’s order of disqualification of Bhagavan Das Dhananjaya Das as the director of Birdies and Eagles Sports Technology, a private company..
Therefore, it can be said that once a director is disqualified u/s 164(2) he shall continue disqualified for FIVE financial years. In the Active Companies promoters have to appoint new directors for smooth working of the Company.
(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore, Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.
Author Bio
Where Directors are availed EES/FTE, is that fair to bring their name in the list of directors disqualified?