Disqualification of Directors

Article explains Reasons for : Striking Off Companies & Disqualifying Directors, Circumstances Under Which A Director is Disqualified, Consequences of Disqualification and Remedies Available For Removal Of Disqualification.

THE BOMBAY HC HAS TAGGED ALONG ALL THE PENDING WRIT PETITIONS WITH RESPECT TO DISQUALIFICATION & PLACED THEM FOR HEARING ON 10TH JULY, 2019.(1)

I. Reasons for : Striking Off Companies & Disqualifying Directors

After winning the 2014 election in a landslide on the promise of tackling corruption and improving the ease of doing business, the Government has been taking measures to prevent money laundering, counterfeiting, hoarding and tax evasion.(2)

> In November, 2016 the Prime Minister of India withdrew 86% of currency on circulation aiming to crackdown on unaccounted wealth by way of demonetization of high currency notes of 500 & 1000 denomination and put an end to India’s vast shadow economy

> In an Independence Day speech on 15 August, Government claimed the move had unearthed over 300,000 shell companies and accordingly in September, 2017 the Ministry of Corporate Affairs (MCA) struck off names of around 2.17 Lakh Companies, indicating that such companies have not been carrying on business activities for a long period and could be operating as shell companies.

Simultaneously, the MCA struck off the names of around 3.19 Lakh Individuals who have failed to comply with the regulatory requirements and disqualified the directors on board of these companies from resuming directorship in any other Company.

II. Circumstances Under Which A Director is Disqualified

Section 164 of the Companies Act, 2013(3) provides the circumstances under which a Director can be disqualified :

“(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) … ;

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.”

Explanation:

• 164 (1) lists reasons which are individualistic in nature and therefore the disqualification under this is wholly on the acts committed by the director himself, be it insolvency, crime, unsound mind, etc.
• 164 (2) in contrast, triggers director disqualification altogether due to the non-compliance on part of the company.

III. Consequences of Disqualification:

Once a person is disqualified as a Director u/s 164:

• he/she will not be eligible for being appointed as Director of that company or any other company for a period of 5 years from the date on which the company failed to comply with the provisions of the Companies Act.
• he/she will have to vacant the offices including the office of Company which has made non Compliance.
• his/her DIN will be deactivated and hence would not be able to discharge his duties

Consequences if Disqualified Director if he continues to act as Director:

i. If there is only Two Director in Company one Disqualified – All the Board Meetings shall be invalid

ii. If disqualified Director Signing the Financials- Such financials shall be considered as void.

iii. Any documents, Resolution signed by disqualified Director shall be considered as invalid/ void

• Contravention on continue as director even after attainment of disqualification

he / she shall be punishable with the imprisonment for a term upto 1 year or with fine of Rs. 1 lac to Rs. 5 Lacs or with both.

IV. Remedies Available For Removal Of Disqualification

Situation I: When status of the Company is ‘struck off’ and the Director intends to revive the Company and remove his disqualification. An appeal for revival of the Company has to be filed before the National Company Law Tribunal (NCLT)*. Once the order for revival is passed by NCLT, the appellant shall comply with the requisites to revive the Company. If revival of the Company is denied by NCLT, the Company can appeal before the Appellate Tribunal (NCLAT) for revival.

Situation II: When status of the Company is ‘struck off’ and the Director doesn’t intend to revive the Company but wants to remove his disqualification. Writ petition for removal of disqualification shall be filed before the High Court* / Supreme Court. Once the interim and/or final order against such disqualification is received, the Petitioner shall comply with the requisites to removal his disqualification.

Situation III: When the status of the Company is ‘active’ but all the Directors are disqualified and intend to remove disqualification. In certain situation, where the Company is active but either one or all directors is/are disqualified because of any reason, such person shall opt for situation II. In certain other situations, when there is a deadlock in the Company it is advisable to appoint to new Directors in the Company the status of which is ‘active’.

Situation I: Filing Of Revival Petition Before NCLT

♦ PROCEDURE & FAQS :

1. WHO CAN FILE AN APPLICATION?

Under the provisions of Section 252(1), an appeal can be made by anyone, within 3 years of strike off. Section 252(3) mandates that an application to revive the Company can be made by the company itself or a member or creditor or even a workman but should be done within 20 years.

2. PREPARATION OF THE PETITION(4)

The petition under Section 252(3) shall be filed with the NCLT in Form No. NCLT-9. Relevant documents to be submitted along with the required fee.

3. SUBMISSION OF THE PETITION

A copy of the petition shall be served on the Registrar of Companies and on such other persons as the Tribunal may direct, not less than 14 days before the date fixed for hearing of the application.

4. HEARING BY THE TRIBUNAL

After hearing the petitioner and the respondent, the Tribunal shall revive the company if it is satisfied with the reasons provided by the company.

5. ORDER OF THE TRIBUNAL

If the Tribunal makes an order restoring the name of a company in the register of companies, then relevant directions shall be given to the company regarding compliance.

6. FILING THE COPY OF THE ORDER WITH ROC

The Company shall file the copy of the order in form INC-28 with the ROC within 30 days from the date of the order. (4) mailto:advocate.dishashah@gmail.com

7. PUBLICATION IN OFFICIAL GAZETTE

The order shall be published in the Official Gazette in the name and seal of the ROC.

8. FILING OF DOCUMENTS WITH ROC

Pending financial statements and annual returns shall be filed with the ROC by the company.

THE CONDONATION OF DELAY SCHEME, 2018 – Boon for disqualified directors and struck off companies.(5)

The Government had introduced the Condonation Of Delay Scheme which provided one-time settlement option within the scheme. This scheme gave a new lease to the career of directors by providing a one-time settlement option. An application was to be filed before the NCLT under the CODS scheme which would activate the DIN of the directors temporarily so that the overdue documents were filed. This would eventually result in changing the status of the company from “Strike-Off” to “Active” and would result in removal of disqualification.

Those companies which could not avail the benefit of CODS can now file(4) a ‘Petition’ before the NCLT to Revive the Company.

A DUAL BENEFIT : THE REVIVAL OF THE COMPANY SHALL RESULT IN A DOUBLE ADVANTAGE!

These eight steps shall not only revive the company but at the same time open up the way for the restoration of DINs of disqualified directors of the said company.

Situation II: Filing Of Writ Petition Before High Court

♦ FACTUAL BACKGROUND / CIRCUMSTANCES UNDER WHICH A WRIT PETITION CAN BE FILED:(4)

◊ Name of the petitioner has been mentioned in the list of Disqualified Director issued by the Registrar of Companies(6)

◊ The Company has not carried out business for past three years.

◊ Company’s Bank Account is not in operation for past three years.

◊ The petitioner did not file the requisite returns as required under Companies 
Act, 2013.

◊
 The petitioner is disqualified u/s 164(2)(a)

◊ The Company is not in position to seek revival, since admittedly the Company has 
not carried out any business and was liable to be struck off from the ROC

◊ In fact company, would voluntarily seek dissolution of the Company u/s 248(2) of the Act, if it has opportunity to do so.

♦ GROUNDS FOR REMOVAL OF DISQUALIFICATION:  

I. THE PRINCIPLE OF NATURAL JUSTICE

II. AGAINST THE PROVISIONS OF COMPANIES ACT, 2013.

• Section 164 – Disqualifications for Appointment of Director
• Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014
• Section 167 – Vacation of Office of Director
• Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014
• Section 92- Annual Return
• Section 137- Copy of Financial Statement to be Filed with Registrar
• Section 403- Fee for Filing, etc.

III. RETROSPECTIVE IMPLEMENTATION

The Courts took a strong stand that when the Companies Act, 2013, was implemented from 1 April, 2014, and was a prospective one, therefore, applying any provision retrospectively was unjustified. The Apex Court in the case of Keshavan Madhava Menon Vs. The State of Bomb(7) held that that every statute is presumed to be prospective. Therefore, the financial years that should be covered for determining the filing status under the said section are:

• • 1st April, 2014 to 31st March, 2015,
  • 1st April, 2015 to 31st March, 2016 &
  • 1st April, 2016 to 31st March, 2017

and the last date for filing the financial statements were 30th October, 2017 (with regular fees) and 27th July, 2018 (with additional fees and additional period of 270 days as provided under Section 403)

Therefore, the impugned action of the ROC in disqualifying the petitioners without giving opportunity of hearing was illegal and premature more particularly when the statute is silent about giving opportunity of hearing, and when the respondent authorities have to follow a fair procedure consistent with the principles of natural justice.

DECISIONS OF THE HON’BLE HIGH COURTS:

It is decided by various High Courts that the impugned list published by the RoC to disqualify the Directors to be set-aside and the purported disqualification to be removed in so far as it is concerned to the Petitioners / directors who exercised their right under Article 19 (1) (g) Read with article 226 of the Constitution to sought relief.

DELHI HIGH COURT
Order Dated: 02/02/2018
W.P.(C) 981/2018(8)

• (The impugned list of disqualified directors insofar as the petitioners were concerned were stayed till 31.3.2018 or till the respondents seek a final decision in the matter which is later.

BOMBAY HIGH COURT
Order Dated: 22/03/2018
W.P.No.148 OF 2018 (9)

• (The Bombay High Court had directed the RoC to accept physical documents of these struck-off companies and treat them as applications for voluntary striking off. This would essentially mean that the directors of these companies, who had been disqualified by the MCA, would no longer be considered disqualified. The operation of the impugned list, in so far as it concerns the petitioners, will remain stayed till 31/3/2018 or till such time the respondents take requisite decision with regard to the request of the petitioners made to them in consonance with the provisions under Section 248(2) of the said Act, 2013 and accordingly the Registrar of Companies was directed to activate the petitioners’ DIN and DSC)
• Pursuant to an order dated 19th June, 2019, the BOM HC has tagged along all the pending Writ Petitions on 10th JULY, 2019.

GUJRAT HIGH COURT
Order Dated: 18/12/2018
R/SPECIAL CIVIL APPLICATION NO. 3367 of 2018(8)

• Section 164(2) of the Act, 2013 would have prospective effect and not retrospective effect and therefore, the default in filing the financial statements or the annual returns shall be counted from the F.Y. 2014-15.
• Even after a company has been struck off, the statutory liabilities/obligations of such struck of company and its Directors would still remain to be discharged, in view of Section 250 of the Act, 2013.
• The respondents could not have deactivated the DINs allotted to the Directors under Section 154 of the said Act, except under the circumstances mentioned in Rule 11 of the said Rules.

PATNA HIGH COURT
Order Dated: 30.04.2018
Civil Writ Jurisdiction Case No.8139 of 2018(9)

• (The petitioners were given liberty to furnish the relevant annual statements, returns and relevant documents through their two Directors, whose DINS were also said to be operative, before the Registrar of Companies, Patna.)

MADRAS HIGH COURT
Order Dated: 03/08/2018
W.P.No.25455 of 2017(10)

• (Relief was granted to over 200 Petitioners who had filed the writ petitions as the Madras HC took a stand that – Corporate Life of the Directors was being Extinguished Without Being Heard)

SUPREME COURT
Order Dated: 06.08.2018
W.P.No.148 OF 2018
Last date of hearing: 26.04.2019
Status: Pending for orders(11)

• (The Supreme Court on 06.08.2018 admitted a special leave petition of the Ministry of Corporate Affairs (MCA) and stayed a Bombay High Court order dated 22.03.2018 supra, which gave relief to directors of the companies struck off by the Registrar of Companies (RoC) last year.
• As a result of the Supreme Court order, other similar orders issued by various high courts in around 2,000 cases pertaining to disqualification of directors stand stayed)

CONCLUSION: 

As per Rule 14 (5) of the Companies (Appointment and Qualification of Directors) Rules, 2014, the director shall make an application in form DIR – 10 to the RoC for removal of disqualification and the said application can be made only at the end of the tenure of five years post his disqualification

It is therefore opined that if any director who wants to remove the disqualification, can file a writ petition before the Hon’ble High, as the Supreme Court may decide on the matter anon and the relief can only be availed by the directors, who have filed the Writ Petition as the law comes to the assistance of only those who are vigilant with their rights, and not those who sleep on their rights. (Vigilantibus Et Non Dormientibus Jura Subveniun.)

Sources:

(1) https://bombayhighcourt.nic.in/ordqrywebcase_action.php

(2) https://economictimes.indiatimes.com/markets/stocks/news/crackdown-on-india-shell-companies-unearths-1-billion-cash/articleshow/61198230.cms?from=mdr

(3) http://ebook.mca.gov.in/default.aspx

(4) mailto:advocate.dishashah@gmail.com

(5)https://economictimes.indiatimes.com/news/company/corporate-trends/govt-mulls-one-time-settlement-for-minor-non-serious-company-law-offences-to-help-nclt/articleshow/65266215.cms?from=mdr

(6) http://www.mca.gov.in/MinistryV2/roc_mumbai_164.html

(7) https://indiankanoon.org/doc/582652/

(8) https://www.casemine.com/judgement/in/5ac982834a9326331c6215da

(9) https://bombayhighcourt.nic.in/ordqrywebcase_action.php

(10) https://taxguru.in/company-law/hc-quashes-mca-order-publishing-list- disqualified-directors-deactivating-din.html

(11) https://indiankanoon.org/doc/103143862/

(12) https://indiankanoon.org/doc/135069664/

(13) https://www.sci.gov.in/case-status

Advocate Disha Shah.
NCLT, Mumbai Bench & Bombay High Court.
Contact Details: +91 9167688370
Email ID: advocate.dishashah@gmail.com