In 2017, in order to eliminate the shell companies from the system, the Ministry of Corporate Affairs initiated a ‘striking-off’ drive whereby the Registrar of Companies had exercised its powers under Section 248 to strike off the name of the Companies “defunct” and thereby marking their Directors disqualified also cancelled their DINs.
Since this move has created a lot of disturbance to the corporate sector, there was a chaos amongst the professionals also. We all were in a dilemma as to what steps could we take under the law to save the Directors from getting disqualified. This write up is all about the disqualification, striking off & cancellation of DINs in order to reflect a clearer picture of the provisions and consequences of the same.
DISQUALIFICATIONS OF DIRECTOR – SECTION 164
The provisions of disqualifications of director is contained in Section 164 of the Companies Act, 2013, the scheme of this disqualification can be divided into two parts, one is disqualifications owing to inability of the Director and second is owing to default of the company due to non-filing of annual forms or non-redemption of deposits/debentures and interest thereon or non-payment of dividend declared on shares.
Disqualification owing to inability of the Director – sub-section (1) of Section 164:
The sub-section (1) of Section 164 contains grounds owing to the inability and uncompetitiveness on the basis of which the Director gets disqualified as follows:
- he is of unsound mind and stands so declared by a competent court;
- he is an undischarged insolvent;
- he has applied to be adjudicated as an insolvent and his application is pending;
- he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
- an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
- he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
- he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
- he has not complied with sub-section (3) of section 152 (not having DIN).
- he has not complied with the provisions of sub-section (1) of section 165. (occupying directorships exceeding the permissible limit of 20 companies at a time)
It is very much clear that the above grounds of disqualification is based on the inabilities of the individual occupying the position of the Director. Once disqualification incurred under sub-section (1) of Section 164, one of the essential features is disqualification can not be cured, unless the orders/convictions are appealed and disposed off in favour of the petitioners in case of points 4, 5 & 7.
Disqualifications owing to default of companies – sub-section (2) of Section 164:
Sub-section (2) provides that any company having defaulted in filing the annual statutory forms and non-repayment of deposits or debentures or non-payment of declared dividend. The text of the provision is reproduced below:
(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.
There are few essentials of this Section 164(2), let us analyse:
- Emphasizing on the expression “who is or has been” – the disqualification is not only limited to the existing directors of the company when the default occurred but also covers the past directors. For example, ABC Limited, presently has four Directors Mr. P, Q, R & S, the company is default of filing Forms AOC-4 & MGT-7 since 2016-17, subsequently defaulting in 2017-18 & 2018-19, thereby attracting the applicability of Section 164(2)(a). Also, Mr E was appointed as Director in June 2017 and he resigned from the company’s directorship in December 2019. The disqualification is applied on the existing Directors P, Q, R & S and also on E. Further, Rule 14(2) of Companies (Appointment and Qualification of Directors) Rules, 2014 requires that whenever any company making default in Section 164(2) the company shall furnish the details of name and addresses of all the Directors of the company during the relevant financial years. Here also it is made clear that all the past and present directors would be disqualified if Section 164(2) is attracted.
- Continuance of the default – the applicability of Section 164(2), whether under clause (a) or (b), is based on continuance of the default. In case of clause (a), non-filing of financial statements (Form AOC-4) or annual return (Form MGT-7) the default shall be of continuance of three years, that means, if annual financial statements or annual returns not filed for three continuous financial years, let’s say, filing of Form AOC-4 or MGT-7 is not filed in FYs 2016-17, 2017-18 & 2018-19, would disqualify the Directors. In case of repayment of deposits/debentures or any interest thereon or in case of failure declared dividend and the non-repayment or failure to pay is continued for at least one year from the date of default shall disqualify the Directors, let’s say a company was under obligation to redeem debentures on 24th July, 2019 and the company was unable to redeem on that date and the default in redemption is continued till 23rd July, 2020 would attract Section 164(2).
- Non eligibility for reappointment in same company and appointment in any other company – Once disqualification is incurred in any of the clauses of Section 164(2) would disentitle the director from getting re-appointed in the defaulting company and also getting a new appointment in any other company till 5 years from the date on which the disqualification is incurred. As we all know the reappointment usually applies in case of Public Companies, in which Directors retire by rotation and re-appointed in every AGM. If the defaulting company is a Public Company then, the said disqualified director have to vacate the office if he is retiring, because retirement is an operation of law, and reappointment is made by members’ resolution, and due to Section 164(2) he cannot offer himself for reappointment for 5 years. If the defaulting company is a Private Company, the director will remain a director and his office won’t get vacated even if he is disqualified because, the bar is on “reappointment” and “new appointment”, in Private Company there’s no concept of retirement by rotation, hence reappointment would never occur until the office is vacated by casual vacancy and the disqualified directors would continue to be the directors, in case of Private Companies, even if they’re disqualified.
- Vacancy if disqualification incurred (Section 167) – this question arises to everyone, that once a director is disqualified he has to vacate the office in terms of Section 167(1)(a)? Well, in that case I have two totally opposite opinions. First of all in the above point we discussed the bar is on “reappointment” and “appointment”. Section 167 prescribes the conditions in which the office of the Director gets vacated automatically. One of the conditions in clause (a) of sub-section (1) of Section 167, that in case any director incurs any disqualification under Section 164, his office shall stand vacated. Hence, whether disqualification is under sub-section (1) i.e owing to the Director’s inability or is under sub-section (2) i.e owing to the company’s default. Onwards, 7-May-2018, this interpretation is changed, as the proviso to Section 167(1)(a), which was added by Companies (Amendment) Act, 2017, gets notified. The proviso read as under:
“Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section”
The intention behind adding this proviso would be that the Section 164(2) itself not affecting the Directorship position of the defaulting company, on the basis of which the disqualification is incurred, no other provision should disentitle him to continue as Director of the defaulting company, hence the lawmakers felt and removed this contrast in Section 164(2) and Section 167(1)(a). Hence, in case any Director is disqualified under Section 164(2), occupying the directorships in other non-defaulting company shall vacate all directorships except the defaulting company and if in case disqualification under Section 164(1) then, quite obvious, shall vacate from all the companies.
- Can disqualification under Section 164(2) be cured? – Disqualification under Section 164(2) can not be cured in any manner under the Companies Act, 2013. Rule 14(5) of the Companies (Appointment and Qualification of Directors) Rules, 2014, application shall be filed in Form DIR-10 for removal of disqualification, but it could be possible after the disqualification period is over.
- Disqualification means cancellation of DIN? – No, the cancellation of DIN is governed by the provisions of Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, and in that Rule, disqualification is not a ground for cancellation of DIN. That is why, many disqualified directors have sought writ petitions since the striking off is initiated by the ROC. The Hon’ble High Courts of Allahabad, Delhi, Telangana etc. while hearing petitions on disqualifications contemplated that cancellation of DIN of Disqualified Director on the basis of disqualification under Section 164(2) is not sustainable, similarly, not allowing the usage of DSC in filing is also not maintainable in law. In a recent judgement of Sandeep Agarwal & Anr. v. Union of India & Anr. (DEL), the Hon’ble HC of Delhi has allowed the petitioners to use their DIN & DSC to file the overdue filings under the CFSS Scheme, 2020.
- Strike off and Disqualification? – One must always think on this, any action under Section 248 is how far maintainable that Section 164(2) can be invoked? Both the provisions operate independently, ROC is empowered to issue notices under Section 248(1)(c) does not necessarily mean that Section 164(2) is invoked. Section 248(1)(c) does not imply that non-filing of Annual Forms is a ground for striking off. Non-filing can form the base of opinion that a company is not carrying on operations but it is not a ground and opportunity of being heard is also available with the company under Section 248 if it is served a notice under Section 248(1). Many companies who defaulted in filing annual financial statements and annual returns were served notices and if no response was given to the notice, the ROC has power to strike off. Moreover, the time base is also different in both the sections, two years is under Section 248(1)(c) and three years continuous default must be there under Section 164(2). One can opine that if a company has been served with strike off notice, it doesn’t imply that disqualification will necessarily follow, only if the provisions of Section 164(2) is invoked, disqualification follows. In addition to this, strike off can be cured and company’s name can be restored by filing an application to NCLT under Section 252 but disqualification of 5 years cannot be cured, moreover, a disqualified director can file writ petition in HC if his DIN & DSC is cancelled in disqualification.
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