Introduction:
Directors are considered to be officers of a company who manages the affairs of the company. They are registered under the Companies Act and appointed by the company for the direction and management of the company’s business. They may work in the roles of agents, managing partners, or trustees. The Companies Act, 2013 provides that a director can be disqualified if (i) they have failed to file annual returns for three consecutive years or (ii) been unable to pay back deposits accepted, interest, or other such payments. Once the director incurs disqualification under Section 164, the office is declared to be vacant. this article illustrates the provisions relating to disqualification of directors of companies, removal of said disqualifications, and restoration of the DIN with reference to the Companies Act of 2013 and the Companies (Appointment and Qualification of Directors) Rules of 2014.
Disqualification under the Companies Act
Section 164 of the Companies Act of 2013 provides for the grounds of disqualification of directors from their post. This provides for two situations (i) when the appointment of the director is being made and (ii) when the director fails to comply with the requirement post such appointment. Section 164 (1) states grounds that render a person ineligible for the position of a director- being an undischarged insolvent, being unsound of mind, application of adjudication of insolvency being pending, being convicted of an offense or a specific order of a court disqualifying him, etc. Section 164 (2) states that a person cannot be appointed or reappointed as a director in a company that has failed to file annual returns for three financial years or has defaulted in repaying deposits, interest, or redeeming debentures or dividends for more than a year. The disqualification under 164(2) is to be read with Section 167 of the Companies Act which provides that the office of the director will be declared vacant once he/she incurs the disqualification under Section 164. Section 167 also states that the director shall not be eligible for appointment as director in any company for five years from the date of default in filing returns, once disqualified under Section 164(2).
Furthermore, the Companies Act provides that if a director continues to hold his position after its vacancy even after being aware of his disqualification, he/she will be penalized with a fine or imprisonment, or both. The retrospective applicability of the disqualification provision in Section 164(2) has also been highly debated. In the case of Vikram Ahuja v Greenstone Investments Pvt. Ltd.[1], the National Company Law Tribunal held that the provision would be applicable from the time when non-filing started. It also observed that there was no contention of the provision being applied prospectively or retrospectively and applicability would only be calculated from the time of non-filing. The High Court stated that no statute could be applied retrospectively unless it was specifically or impliedly provided by the enactment. Similarly, one cannot justify retrospective action on a statute merely because it has an impact on existing or current rights. The Court also opined that non-filing of annual returns is prohibited by the Companies Act and hence applying Section 164 retrospectively would not harm the rights of the companies who had defaulted. Several other precedents also confirmed that Sections 167(1) and 164(2) would not be applied retrospectively.
Once a director is disqualified under 164(2), he has to vacate his office from all companies including the one in which he is acting as a director as a vacation under Section 167(1). Additionally, if a company does not apply for a status of “dormant company” under Section 455 of the Companies Act, even after not carrying on business or operations for a period of the last two financial years, it is struck off from the list of registered companies and is assumed to be a closed business by the Registrar of Companies. The position of directors is affected by this as well. Directors of a company may be disqualified even if the company defaulting is still active. When all directors of a company are disqualified under Section 164(2) and their DINs are disbanded, the company is inferred to be disbanded.
Removal of Disqualification
The following measures can be taken in case directors are disqualified:
Appeal against Disqualification
If one or more directors of a company are disqualified, they may seek judicial relief by filing a writ petition under Article 226 in the High Court. This provides a temporary stay against the order and provides the director with time to take appropriate measures or correct defaults. Such precedents see claims being made based on violation of the right enshrined under Article 19(1)(g) of the Constitution and have also proved to be an effective method of removing disqualification of directors. Notably, in the case of M/s Dr. Reddy’s Research Foundation & others v The Ministry of Corporate Affairs & another[2], the Registrar of Companies was directed by the Hyderabad High Court to restore the DIN of the disqualified directors.
Appointment of Temporary Directors
A company may appoint new directors to take control if all its directors are disqualified. This ensures that statutory and regulatory compliances are observed. In this manner, the Director Identification Number (DIN) and Digital Signature Certificate (DSC) of new directors can be used to submit pending forms when there are returns overdue or outstanding compliances.
Application for Revival of Company
An application may be filed with the National Company Law Tribunal (NCLT) under Section 252 of the Act for restoring the “Active” status of a company due to failure of complying with filing returns. The requisite documents need to be given to the Registrar of Companies and NCLT for clearing the status of “strike-off” within a period of three years. A practicing professional represents the company at the hearing, laying forth the facts of the case. The clearance of “strike-off” status is ruled upon the satisfaction of the NCLT. Consequently, the DINs of directors are initiated once the “active” status of the company is reinstated and clearance received. However, for directors to file Form DIR-10 for removal of disqualification it is mandatory that the company must be in operation. However, at times the NCLT may also impose penalties while rejecting appeals.
Companies (Appointment and Qualification of Directors) Rules, 2014
Rule 14 of the Companies (Appointment and Qualification of Directors) Rules provides for the disqualification of Directors under Section 164(2). It states that all applications to remove the disqualification of Directors need to be made in Form DIR-10.[3]
COD Scheme
Every company is mandated to file annual returns with the Registrar of Companies. The company is liable to be disqualified if it fails to file an annual return for three consecutive years. When such a situation occurs, the directors of the defaulting company are liable for disqualification, and the companies which commit such defaults are given a status of “Strike off” instead of “Active”. The COD or Condonation of Delay Scheme operated from 1st January 2018 to 30th April 2018. As per this scheme, by filing the necessary documents, directors who were disqualified, could apply for activation of their DIN. If they did not do so, they would have to suffer disqualification for the next five consecutive years.
Under the COD Scheme of 2018, overdue documents could be filed by the disqualified director by temporary reactivation of the DIN. This was done with an aim to remove the disqualification of Directors and restore the Director Identification Numbers. The applicant company who had defaulted was required to pay additional prescribed fees as under Section 403 of the Companies Act, apart from the filing fee. Consequently, the companies had to seek Condonation of Delay by submitting the requisite fee and filing an e-CODS. Though annual return filing forms which were overdue were filed under this scheme, several companies were disqualified and Directors removed since the companies failed to complete the requisites before the scheme ended. Those registered entities who appealed for revival under Section 252 saw the reactivation of Directors after the order of the National Company Law Tribunal. Though the action was taken by Registrars against companies who had failed to comply, several companies were found to benefit from this scheme.
The Delhi High Court was also observed to provide clarification on the status of companies who had failed to benefit under the opportunity provided by the COD Scheme as they were not willing to revive themselves. It stated that since the companies had been inactive for the last three years, they would be considered to be voluntarily struck off and the e-CODS form too would be considered appropriately. In the case of Mukut Pathak & others v Union of India & another[4], the Court considering the amendments of 2018, opined that Sections 167 and 164(2) would not be applied retrospectively.
Conclusion
The Ministry of Corporate Affairs has been keenly observing statutory and regulatory compliances of directors after the rally of mass disqualification in 2017 vide its notification dated 12th September 2017 wherein more than 3 lakh directors were disqualified under Section 164 of the Companies Act. A person may be disqualified for varying periods depending on the grounds of his disqualification. The names of disqualified directors are published on the MCA portal and the Registrar of Companies deactivates their Director Identification Number or DIN. Hence, disqualification of Directors leads to their career being jeopardized and bars them for a period of five years from the date on the date the companies are deregistered. Such Directors are also not allowed to operate the accounts of the company. They are disqualified not only from companies in which they hold a position on the board of directors but also from those companies which have failed to comply with the rules and regulations prescribed. This decision has thus proved to be severely harmful and disadvantageous to several companies.
References:
[1] 2016 SCC OnLine NCLT 281
[2] Judicial Remedy to Disqualified Directors, B. SAMRISH & CO. https://www.bsamrishindia.com/tag/dr-reddys-research-foundation-ors-vs-the-ministry-of-corporate-affairs-anr/
[3]http://ebook.mca.gov.in/Childwindow1.aspx?pageid=18089&type=RU&ChildTitle=Chapter%20XI%20The%20Companies%20(Appointment%20and%20Qualification%20of%20Directors)%20Rules,%202014
[4] Disqualification of Directors, INTERNATIONAL LAWYERS NETWORK (Dec 13, 2019), https://www.ilntoday.com/2019/12/disqualification-of-directors-an-update/
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