The purpose of this Article is to enlighten upon the remedial measures for the removal of disqualification of Directors by the Ministry of Corporate Affairs (“MCA”). The MCA has displayed lists of directors, who are disqualified for a period of 5 years with effect from 01.11.16 until 31.10.21, on the MCA Portal on the basis of RoC jurisdiction. Before we proceed to the analysis, it is noteworthy to discuss the current provisions of the Companies Act, 2013 (hereinafter referred to as “the Act”), in apprehension of the settled law.
Section 164 of the Act deals with “Disqualifications for appointment of director” entailing the circumstances which attracts the provisions of the Act. The section is stated here under for ready reference:
(1) A person shall not be eligible for appointment as a director of a company, if:
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) 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;
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
(f) 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;
(g) 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
(h) he has not complied with sub-section (3) of section 152.
(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.
(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not take effect—
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or
(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.
Section 164 read with Section 167(1) of the Act enunciates that the director’s office shall become vacant when he incurs any of the disqualifications specified in section 164. The relevant portion is as follows:
Section 167(1): “The office of a director shall become vacant in case-
(a) he incurs any of the disqualifications specified in section 164;”
Hence, the office of a director is deemed to be vacant once he is disqualified under the provisions of the Act. A bare perusal of the reading of the Section 164(2) makes it explicit that it is applicable only for appointment of the disqualified director in another company and for re-appointment of the disqualified director in the defaulting company. However, the position of law in reference to the disqualified director in respect of other companies, which are active, and compliant, is not examined herewith. Also, there is ambiguity as to the interpretation of the computation of continuous period of three financial years as no specific decipher has been made whether the preceding financial years or otherwise. The period for non-filing of financial statements or annual statements is definite, which is demonstrated and affirmed by the subsequent clause providing for a period of one year or more for failure to repay the deposits, redeem debentures or pay declared divided.
In reference to the disqualification of various directors of different companies a notice has also been published on the website of the Ministry. The notice published on the MCA website in relation to the disqualified director is as follows:
“Any person disqualified under section 164(2) of the Companies Act, 2013 [the Act] is advised not to act as director during the period of the disqualification and not to file any document or application with MCA as the same shall be summarily rejected.
However, this shall be without prejudice to the liability of the said person for violation of section 164(2) read with section 167 of the Act including the action under section 448 r/w 447 of the wherever warranted.”
While the notice makes it discretionary for the disqualified director not to file any document or application with MCA, an antinomy is drawn by making it to be summarily rejected. However, the intention of the notice published can be deduced by the inactivation of the Director Identification Number barring them from filing documents with the Registrar among st other actions.
Another endeavor made by the government is striking off of the companies alleged to be shell companies and used as a medium for movement of black money in the economy. Vide the MCA notification for striking off the names of the company exercising its powers under section 248 of the Act, it also had the ramification of disqualifying the names of the directors of the respective companies. Under section 252 of the Act, any person aggrieved by such decision is empowered to file an appeal with the Tribunal (National Company Law Tribunal) within the prescribed time, providing a limitation period of three years or twenty years, as the case may be. The decision of the Tribunal is discretionary depending upon the facts and circumstances of the case. In recent cases, the tribunal has restored the name of the company on account of business in operation at the time of striking off the name of the company, to be proved beyond reasonable doubt, under section 252 of the Act. Along with the application filed before the Tribunal, an additional prayer may be made seeking the removal of disqualification of the director or/and restoration of his appointment in the defaulting company. Alternatively, an interim application soliciting the said prayer may be made. The Tribunal at its discretion under Rule 11 of the National Company Law Tribunal Rules, 2016, may allow or reject the application. An extract of the rule is hereunder:
“Inherent Powers- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”
Therefore, it is requisite for the incumbent professionals to be rational, sagacious and acumen in their conduct to ensure that the clients meets the end of justice and are not deprived of anything they deserve. The compliance with the legal provisions for arriving at the ultimate goal shall be made efficiently acted upon and is the need of the hour wherein the circumstance in the political and economic era are changing by leaps and bounds and requires urgent professionals to look upon such matters.
It is also under scrutiny whether the provisions are enumerated under the Act to authorize the disqualified director to make representation before the Registrar of Companies for removal of his disqualification. Under Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, an application for removal of disqualification can be made by the defaulting company in Form DIR-9 to be filed with the registrar or by the disqualified director in Form DIR-10. However, it has not been made specific to whom this form has to be filed and the nature of filing i.e. physical or electronic. The ambiguity in relation to this stands unresolved. It is also pertinent to mention that DIR-8, DIR-9 and DIR-10 are independent and each having its own significance with respect to the provisions of law.
Another question which arises for consideration is whether the removal of disqualification of directors is automatic after a period of five years from the date of publication of the notification or an application has to be made to concerned authority. When the government is burdened with voluminous work, it is preferred that an intimation shall be made to the registrar for removal of disqualification in the prescribed form. Therefore, in order to ensure revival one must take adequate steps in precaution.
The company is a vehicle to carry on the business driven by the individuals. Therefore, it is necessary that the law shall be laid down clearly and explicitly for the individuals to provide a direction for the running of the operations in a prudent manner. There shall be no scope for deviation and contradiction. The current notification had the impact of creating harassment for the corporate fraternity. For burgeon economy, the law shall be persuasive and not punitive. Efforts shall be made by the government to uphold the interest of all stakeholders and be encouraging towards the compliance measures. The companies shall also take responsibility for compliance of the law. It is based on the legal maxim “Ignorantia juris non excusat or ignorantia legis neminem excusat” which implies that a person who is unaware of a law may not escape liability for violating that law merely because one was unaware of its content. The government and the companies shall work together effectively and efficiently. To clear the ambiguity in law and the confusion created by the publication of the notification, it is perceived that the Ministry will soon publish another notification for clarifications and elucidations. Therefore, adopting an optimistic approach we wait for the relief to be provided by the Ministry.