Golden opportunity for Defaulting Companies to clean their slate under CFSS-2020 and also opportunity to disqualified directors to make active their DINs and DSC

[Sandeep Agarwal & anr vs UOI & anr dated 02nd September, 2020 in W.P.(C) 5490/2020 & CM APPLs. 19779-80/2020 before Hon’ble Delhi High Court]

In the captioned matter, the Hon’ble Delhi High Court has set aside the disqualification of directors to enable them to continue the business of an active company in pursuance of the Companies Fresh Start Scheme, 2020 (‘CFSS-2020’). This order was passed by a Single Judge Bench of Hon’ble Justice Prathiba M Singh. As the benefit of the Companies Fresh Start Scheme, 2020 was given to the petitioner in the said matter, therefore, first, we would like to mention about CFSS-2020.

Companies Fresh Start Scheme (CFSS) 2020

The Ministry of Corporate Affairs (‘MCA’) had, in the Circular No. 11/2020, dated 24th March, 2020, inter alia other relaxations/special measures provided in view of the Covid-19 pandemic, indicated regarding providing immunity to the Companies and LLPs with respect to delayed filing of forms.

MCA has received representations from various stakeholders requesting for grant of one-time opportunity, so as to enable them to complete their pending compliances by filing necessary documents in the MCA-21 registry including filings without being subject to a higher additional fee on account of any delay.

The Companies Act, 2013 (‘the Act’) requires all companies to make annual statutory compliance by filing the Annual Return and Financial Statements. Apart from this, various others statements, documents, returns, etc. are required to be filed on the MCA-21 electronic registry within prescribed time limits, filing fees for filing such statements, documents, returns, etc is governed by section 403 of the Companies Act, 2013 read with Companies (Registration offices and Fees) Rules 2014.

In furtherance of the Ministry’s Circular No. 11/2020, dated 24th March, 2020 and in order to facilitate the companies registered in India to make a fresh start on a clean slate, MCA has decided to take certain alternatives measures for the benefits of all companies.

In order to give such an opportunity to the defaulting companies and to enable them to file the belated documents in the MCA-21 registry, the Central Government in exercise of powers conferred under section 460 read with section 403 of the Companies Act, 2013 has decided to introduce a Scheme namely, “Companies Fresh Start Scheme, 2020 (CFSS-2020)” condoning the delay  in filing the above mentioned documents with the Registrar, in so far as it relates to charging of additional fees, and granting of immunity from launching of prosecution or proceedings for imposing penalty on account of delay associated with certain filings. Only normal fees for filing of documents in the MCA-21 registry will be payable in such case during the currency of CFSS-2020 as per the provisions of section 403 read with Companies (Registration offices and Fees) Rules 2014 and section 460 of the Act.

In addition, the scheme gives an opportunity to inactive companies to get their companies declared as ‘dormant company’ under section 455 of the Act by filing a simple application at normal fee. The said provision enables inactive companies to remain on the register of the companies with minimal compliance requirements.

Accordingly, this Scheme, though rolled around the same time when several other relaxations are being provided amid the lockdown to contain the spread of Covid-19 virus, however CFSS-2020, apparently is not rolled out as a measure amid Covid-19 only, in fact it is an Amnesty Scheme of the MCA to help long defaulting companies to complete filing related compliance without any additional fees/ penalty / prosecution.

Total 9 pager Circular No. 12/2020 dated 30th March, 2020 contain the provisions with respect to CFSS-2020 as to who can avail the scheme, who cannot, for what non-compliances, until when etc; the form to avail the scheme and the proforma of the immunity certificate to be granted to companies on availing of the scheme.

The said CFSS-2020 is applicable between the 1s of April, 2020 and the 30th of September, 2020. Not only to the Companies, the MCA has also given a bit of relief spree to the LLPs by making certain necessary changes to the LLP Settlement Scheme, 2020(issued on March 04, 2020 under Circular No. 6/2020) under Circular No. 13/2020, dated 30th March 2020.

The said Scheme CFSS-2020 is a golden opportunity for the defaulting companies to clear their slate and to make good any filling related defaults, irrespective of the duration of defaults, without any additional fees/ penalty / prosecution and make a fresh start as a fully compliant entity. The key objective of this Scheme includes the following:

  • Condone the delay in filing documents in relation to charging of additional fees and grant immunity from launching of prosecution or proceedings for imposition of penalty on account of delay associated with such filings;
  • Additional time of 120 days will be allowed to file appeal for those cases where the last date for filing appeal under section 454 of the Act falls between 01.03.2020 and 31.05.2020
  • Permit the inactive companies to declare as ‘Dormant Companies’ under section 455 by filing e-form MSC-1 at normal fee on said form; or
  • Apply for strike off under section 248(2) of the Act after clearing backlogs

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Sandeep Agarwal & anr vs UOI & anr dated 02nd September, 2020

In the said matter, it was mentioned that the Petitioners were directors in two companies namely Koksun Papers Private Limited and Kushal Power Projects Private Limited. The name of Kushal Power was struck off from the Register of Companies (‘ROC’) in June 2017 due to non-filing of financial statements and annual returns. Being the directors, the Petitioners were also disqualified with effect from November 1, 2016 for a period of five years under Section 164(2)(a) of the Companies Act, 2013. Consequently, the Petitioners’ Director Identification Numbers (DIN) and Digital Signature Certificates (DSC) were cancelled and they were disabled from carrying on the business and file returns etc in the Active Company, Koksun Papers.

Challenging their disqualification, the Petitioners submitted that in view of Mukut Pathak & ors judgement dated 4th November, 2019, disqualification proviso under Section 167(1)(a) of the Act came into effect only on May 7, 2018, and thus, in respect of the companies, in which the Petitioners were already directors, a conjoint reading of Section 164(2) and 167(1)(a) of the Act would show that the disqualification would not apply in a retrospective manner.

It was also stated that while Koksun Papers was entitled to take benefit of the Companies Fresh Start Scheme (CFSS) 2020, since the Petitioners’ DINs and DSCs were deactivated, it was not able to avail the benefit of the same.

After considering the submissions made by the parties, the Court noted that the judgment in Mukut Pathak & ors. insofar as the merits of the case was concerned, was squarely applicable in the present case. The said judgment clearly holds that the proviso to Section 167(1)(a) of the Act cannot be read to operate retrospectively. It was further held that the said proviso, being a punitive measure with respect to the rights and obligations of directors, cannot be applied retrospectively unless the statutory amendment expressly provides so.

The operative portion in Mukut Pathak & ors judgment is set out herein below:

98. In view of the above, the petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company.

xxxx

113. As discussed above, the Scheme of Section 164(2) and Section 167(1)(a) of the Act was materially amended by the Companies Amendment Act, 2018 by introduction of the provisos to Section 164(2) and Section 167(1)(a) of the Act with effect from 07.05.2018. All directors who incur disqualification under Section 164(2) of the Act after the said date, would also cease to be directors in other companies (other than the defaulting company) on incurring such disqualification. However, the operation of the provisos to Section 164(2) and Section 167(1)(a) of the Act cannot be read to operate retrospectively. The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to matters of procedure – cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication. Therefore, the office of a director shall become vacant by virtue of Section 167(1)(a) of the Act on such director incurring the disqualifications specified under Section 164(1) of the Act. It shall also become vacant on the directors incurring the disqualification under Section 164(2) of the Act after 07.05.2018. However, the office of the director shall not become vacant in the company which is in default under sub-section 164(2) of the Act.

114. As discussed above, there is also much merit in the contention that the DIN and DSC of the petitioner could not be deactivated. Accordingly, the respondents are directed to reactivate the DIN and DSC of the petitioners.”

The Court further observed that the Division Bench’s orders (in Anamika Devi and Gaurav Kumar) cited by Centre itself clarified that the powers of judicial review were discretionary and the question of delay was to be examined in the particular facts and circumstances of each case.

The Court further observed that in the present case, the facts and circumstances show that the Companies Fresh Start Scheme (CFSS) is a new scheme, which has been notified on 30th March, 2020. This Scheme was not invoked before the Ld. Division Bench. The scheme is obviously launched by the Government in order to give a reprieve to such companies who have defaulted in filing documents and they have been allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The Scheme also envisages non-imposition of penalty or any other charges for belated filing of the documents.

Shedding light on the purpose of the Scheme, the Court listed the salient features of the Scheme, which are as follows:

i) It has been launched to facilitate a fresh start, on a clean slate, for companies registered in India;

ii) Alleviative measures under the Scheme are for the benefit of all companies. It gives an opportunity to file belated documents in the MCA-21 Registry in respect of annual filings, without being subject to higher additional fee on account of delay;

iii) It grants immunity from launch of prosecution or of proceedings for imposition of penalty on account of delay associated with certain filings. For the said filings, only normal fee would be payable;

iv) Any defaulting company can file the belated documents, which were due for filing on any given date, as per the Scheme. Normal fee would be payable for such filing by the defaulting company under the Companies (Registration Offices and Fee) Rules, 2014 and no additional fee shall be payable;

v) To the extent that any prosecution has been launched or penalty has been imposed for the delay associated with the filings of belated documents, it provides that the same shall not be launched and immunity has been provided;

vi) Applications can be made for seeking immunity in respect of belated documents. Once the documents are taken on file or approved by the designated authority, such applications would have to be filed within six months from the date of closure of the Scheme;

vii) To avail benefit of the Scheme, the defaulting company would have to withdraw any appeal that it may have filed against prosecution launched or orders passed by a court or adjudicating authority under the Act;

viii) If a final notice of striking off of a company has already been initiated or in certain other situations as enumerated in Clause 6(ix), the Scheme would not apply;

ix) If immunity is granted, the Scheme provides that prosecution shall be withdrawn before the concerned Court and the proceedings for penalties shall also be closed.

x) The Scheme also extends to inactive companies who can file the requisite documents and get themselves declared as dormant companies under Section 455 or apply for striking off the name of the company.

The Court thus observed that when the purpose and intent of the Scheme is to allow a fresh start for companies which have defaulted, the disqualification and cancellation of DINs of the Petitioners would be a severe impediment.

REMARKS:

ROC in September, 2017, 2018 and now in 2019 took an outrageous step and struck off many Companies who had not done their filing for a period of two financial years or more believing that the Companies are not doing any business in accordance with Section 248 (2) of the Companies Act, 2013 and consequently, disqualified its Directors pursuant to Section 164(2)(a) of the Companies Act, 2013. However, many High Courts ruled against this. Recently, the Supreme Court of India has admitted Special Leave Petition of the MCA and stayed a Bombay High Court order, which gave relief to directors of the companies struck off by ROC.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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