An Insight into Disqualification of Directors – Section 164

An Insight into Disqualification of Directors under Section 164 of Companies Act, 2013

With the implementation of the Companies Act 2013, the Government of India bought many changes compared to the previous Act of 1956. The new Act had strict provisions for non-complying companies and their directors. If any organisation fails to meet the compliance norms set by the government, then the Registrar of Companies reserves the right to remove companies name from RoC’s list and order disqualification of directors for a period of five years. This could lead to careers of individuals working as directors for the corporate come to a standstill.

Why Directors are Disqualified?

Director disqualification due to any reason can prove to be a major roadblock in any directors’ career. The Companies act of 2013 had stricter provisions for non-compliance.  One of these provisions about directors can be understood as,

“Any company can have one or more number of directors working full-time or Part-time. All these directors will fall under the category of OFFICERS and strict actions will be taken against them if their companies fail to abide by the set rules.”

The directors of the company are responsible for the smooth operation of the company under their direction and thus they are responsible for any action taken by the company that leads to failure in complying with the directions of Government. Under the Companies Act of 2013, directors can be disqualified on the following grounds,

• If the company of the director has not filed its financial statements and annual returns for a period of three years consecutively. 
• If the company has failed to repay the deposit made to it or pay interest on those deposits. 
• If the organisation fails to redeem any debentures on their due date or fails to pay the interest due.
• Failure to pay the declared dividend and continuing so for a period of one year or more could also lead to the disqualification of the company’s director. 

The other reasons for directors’ disqualification are,

• If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending. 
• If any court or tribunal has earlier ordered the disqualification of the director. 
• If the directors fail to inform about their respective shares in any company held by them alone or in collaboration. 
• If the director is convicted in any offense by the Court and sentenced to imprisonment for more than 6 months. 
• If any Court confirms that the director is not of sound mind.
• Any directors of the company who has been convicted under section 188 by the Court regarding party transactions during the last five years. 
• The Court also has the authority over the disqualification of directors’ who are undischarged insolvent. 

Ways to Remove Directors’ Disqualification

Initially, it was thought that there was no option available for a disqualified director apart from waiting for the five years exile period to end to resume directorship work. However, the other option was that if a company is revived after being struck off from RoC then the directors can also apply for the revival of their role. There were about 2.4 companies that were axed by the Ministry of Corporate Affairs (MCA) using the Companies Act in 2017. These companies started exploring the options for their revival and the directors hoped to get their DIN reactivated. When the MCA came up with the Condonation of Delay Scheme 2018, the company’s directors hoped to get their company revived without paying heavy penalties and apply for their disqualification removal.

Condonation of Delay Scheme, 2018

A company’s director is required to file all the financial details of the company with the Ministry of Corporate Affairs every year as per the Companies Act 2013. If the directors fail to submit these details for three consecutive years, then the Ministry could go on to remove the company from RoC and deactivate its directors’ DIN for a period of five years. In the year 2018, the Central Government came up with Condonation of Delay Scheme or CODS where directors were allowed to file the relevant document to get their DINs reactivated. Many companies at that time used this scheme for revival and removal of directors’ disqualification. This is how this scheme worked:

• The disqualified directors were needed to submit all the statutory document with the RoC to get their DIN activated temporarily.
• The documents are submitted with the statutory fee prescribed in the Section 403 of the Companies Act. 
• The small fee needed was only 30000 Rs. With an e-CODS form and so saved companies form hefty penalties. 

Options for Directors Missing Out on CODS

The directors’ who failed to use this scheme for the removal of disqualification were left in the lurch. The other option for them was to apply in the National Companies Law Tribunal and hope to get company revival orders. Once the company was revised, they could apply for the removal of their disqualification and reactivation of DIN. In this case, when the NCLT passed the order of company revival, then RoC used to verify this order and relevant documents of the directors. But this procedure could only be followed if the companies wanted revival, the directors who just wanted to activate their DIN without applying for the revival of their company were only one option. This option was to apply for removal of disqualification in the respective High Court through a Writ Petition. The option of writing a Writ Petition to High court is available due to constitutional rights conferred by Article 226 of the constitution to seek relief. 

How Writ Petition Can help in Removal of Directors’ Disqualification?

Let’s understand how filing a Writ Petition can help in the removal of directors’ disqualification through the case of Pradeep Jain V/s Union of India and ORS.

In this case, the petitioner was in the list of disqualified directors released by the RoC. The petitioner’s company was not carrying out its business for five years. Also, its bank account was not operational for the previous three years. The company of the petitioner was in no position to apply for the revival of the company. And, he wanted to reactivate his DIN by seeking relief from the disqualification. The petitioner wanted the High Court to let him avail CODS 2018 or allow it to go for voluntary dissolution. 

The decision of the Court:

The Delhi High Court issued the following orders in the case based in the Writ petition of the petitioner. The Court said the company of the petitioner must file the following documents with application fin the RoC. 

• The petitioner may file all the requisite returns concerning the company to avail the CODS-2018. (All the pending documents required to be filed with ROC with additional fees).

• The petitioner would also make a necessary application under CODS-2018 along with the requisite charges. (CODS form with fees Rs. 30,000/-).

• The petitioner may also file the necessary resolutions for voluntarily striking off the name of the Company as required under Section 248(2) of the Act. (Documents of voluntary Strike off Company).

After filing the above documents, the RoC will scrutinize these documents to remove the disqualification of the directors. 

This case paved the way for other directors to file for relief in the High Court if they want to remove disqualification without the revival of their company. Even after the CODS was over, filing of the Writ petition to remove directors’ disqualification is still the proven way to end the exile for directors. 

How Writ Petition is Filed?

If you want to file a writ petition for the removal of directors’ disqualification, then you just follow the following steps. 

1. The disqualified director has to undertake to use his constitutional right to file the Writ Petition under Article 226 of the Constitution in the respective High Court. The High Court should be chosen according to the area of jurisdiction of the company. In the application, the petitioner should include the following information,

• List of date and events of disqualification.
• Affix an urgent application with a Notice of Motion. 
• Should give reasonable justification to court for not filing the statutory documents that led to the disqualification of company and removal of its name from RoC. 
• Inform Court about the current status of the company and its directors seeking relief. 
• List out the companies in which the petitioner is serving as a director. 
• File a copy of the impugned Press Release or Notice issued by the RoC that lists out the names of the disqualified directors. 
• Personal information such as name address and designation of each Memo of parties should be mentioned in the petition. 
• A prayer cause should be attached to dismiss the publication issued by the RoC under Companies Act’s Section 164 (2).

2. After this, the High Court issues orders after hearing the option for reactivation of the DIN of directors. The directors need to file the copy of the order and all other statutory documents to the RoC to continue with the process p0f registration. 

3. Once the defaulter petitioner fulfils all the required documents and completes payment of all the penalties, the RoC will start the process of reactivation. 

Opting for Legal Help in Removal of directors’ Disqualification

Taking help of a professional in filing Writ petition in the Court can prove to be immensely helpful considering the technicalities involved in the same. There are a lot of minute details that need to be considered for drafting a concise and lucid petition that only an experienced professional can handle. Also, if you are opting to take help from a professional legal firm, it will not only help you in the filing of the petition but also help during the representation in the Court. An advocate from a reputed firm will attend all the hearing of the Court and put arguments effectively to ask for relief from disqualification.  Once the Court grants a favourable order, you can take the help of the advocate to follow the respective compliance norms like filing the order to RoC, submitting all the necessary documents in the RoC, and submission of penalties for non-compliance. After all of this is completed, the RoC will activate your DIN to complete the process of disqualification removal. 

Chances of Favourable Outcome

If you are worried whether the outcome of filing a Writ petition in high Court will fetch positive results, then this will serve as good news to you. There have been many instances across High Courts all over the country where director’s disqualification has been removed after hearing on Writ petition filed by them. The judiciary has granted interim relief to many directors and also, quashed orders of RoC in some cases. 

The Court is in general agreement with the aggrieved petitioners on the following points:

• Ruling orders of RoC are Against Natural Justice: In most cases of directors’ disqualification, the aggrieved petitioners have mentioned that they never got any notice regarding their removal from RoC before the orders. Therefore, they never had a chance to clarify to RoC why they were not able to meet all the compliance standards of RoC. This obviously is against the constitutional right of any individual as it doesn’t allow one person to show the cause of their actions and passes the order unilaterally. 
• Retrospective Implementation of the Prospective Act: In some cases, the Court also found the act being applied retrospectively for disqualification of directors. The Courts deemed this kind of application of act as unjustified. 
• Contradictory Provisions in Acts of 1956 and 2013: The High Court finds it objectionable that the provisions of the Companies Act of 1956 did not have these regulations for the private companies and their directors, and so the new Act should not impose it on them in 2017.

Based on these points most of the directors end up getting remedies on their pleas. Now the only problem remaining is to keep a positive outlook on the case and fined a good legal firm to help in disqualification removal. You can pick a reliable and trustworthy firm for yourself as there are many legal firms offering services related to disqualification removal.