Disqualification of Director Remedy
January 9, 2018 by Akshay Kapoor
The Companies Act, 2013 has been enacted for the purpose of promoting the good corporate practices, greater transparency and effective stakeholder management. In order to achieve the core objectives of the Act, it provides regulators with enormous powers. Recently two major steps have been taken by the Registrar of Companies in this respect. More than 200,000 companies have been struck off to remove the inoperative companies from the Records of the Register of Companies and more than 3,00,000 Directors have been disqualified by deactivation of their DIN (Director Identification Number). In order to understand the Concept of strike-off of Companies and disqualification of Directors, firstly one needs to understand the Connectivity between the two that is the term “Defaulting Companies”.
“Defaulting Company” is nowhere defined under the Act, but in general terms mean a company who has made a default with respect to filling of financial statement or Annual return with the Registrar of Companies under the provisions of the Companies Act 2013 and 1956.
Strike off the Name of the Company
“Strike-off” is an action initiated by the Registrar of Companies by which name of the Company has been struck-off from the Register of Companies and the company shall stand dissolved. Such measure of strike off is taken in cases where Registrar is satisfied that company is not carrying on any business or operation for a period of two immediately preceding financial years. The recent actions with respect to striking-off of the name by the ROC were based on the defaulting status of Companies, prima facie presuming that these Companies are not carrying on any business operations.
Disqualification of Director and Vacation of Office
When a Company defaults in filing its Financial Statements or Annual Return for a continuous period of three years, the Director of such defaulting Companies will not be eligible to be re-appointed in that Company or appointed as Director in other Companies for a term of five years and his office shall be liable to be vacated in all the Companies where he is Director immediately on the occurrence of disqualification (Section 164 read with Section 167 of the Companies Act, 2013).
Following the disqualification by Ministry of Corporate Affairs, disqualified directors have been barred from using their Director Identification Number (DIN) to file any document with ROC. The MCA issued two lists in this regard:
Linkage b/w the strike off of Companies and disqualification of Directors
As explained above, the term defaulting companies is common linkage in both the situations where the name of the companies had been struck-off and de-activation of DIN of Disqualified Director by the Registrar of Companies. Government, through its sources, had reasons to believe that many of these defaulting companies (shell or inoperative companies) were used for money laundering during demonetisation. The Registrar of Companies, to curb the operations of Shell Companies and Money Laundering, struck off 209,032 companies and 309,614 Directors. There has been chaos in the Industry and as a result there have been a spate of representations from industry, defaulting companies and their directors seeking an opportunity for the defaulting companies to become compliant and normalize operations.
Small window to remedy disqualification of Directors
With a view of giving an opportunity to the non-compliant, defaulting Companies to rectify the default, the Ministry had come up with Condonation of Delay Scheme 2018″ [CODS-2018] on 29th December, 2017 which is to be effective from 01st January, 2018.
Condonation of Delay Scheme 2018 [CODS-2018]
The scheme will be effective from 1st January, 2018 and shall remain in force till 31st March, 2018. This scheme is applicable only to the defaulting Companies which fall under one of the following two categories:
- Companies whose status is still active but DIN of the Directors have been deactivated by the ROC.
- Companies which have been struck off by the ROC but Restoration applications under Section 252 of the Act were pending before the National Company Law Tribunal (NCLT) up to the date of this scheme. This is however, subject to order of revival by the NCLT.
Procedure for availing the benefits granted under COD scheme
- DIN of the Disqualified Directors of such Defaulting Companies will temporarily be activated during the validity of the scheme to enable them to file the overdue documents.
- Companies shall be required to file the overdue documents (financial statements or the annual returns or other associated documents).
- The defaulting Companies needs to pay statutory filing fee and additional fee payable as payable under the provisions of the Act.
- Companies after filing overdue Documents needs to file eform CODS and the fees for this form will be INR 30,000/- (Thirty thousand only).
- Once the COD scheme is over, the companies who have not availed themselves of this Scheme and continue to be in default in filing the overdue documents, the Registrar shall take all necessary actions under the Companies Act, 2013 against them.
We suggest that Directors of the defaulting Companies need to opt for this opportunity and must avail the benefits of CODS-2018.
For Companies not eligible to go for COD Scheme:
The companies which remain untouched or on whom the “Condonation of Delay Scheme 2018″ is not applicable, may get relief from NCLT or High Courts. These Companies will be classified as follows:
- Companies which have been struck off but were carrying on any business or operation on the date of becoming struck off may approach NCLT for restoration of their name under the provisions of section 252 of the Act. For more information on Restoration of Company, please visit our blog on Restoration Of Name Of A Struck Off Company Under Companies Act, 2013.
- For Companies which have been stuck off and the Directors have been disqualified but the Promoters of such Companies have no intention of restoring the name of the company. The Directors of such Companies, for removal of Disqualification, may file writ petition in the High Court.
The powers exercised by the ROC by striking off the defaulting Companies and deactivating the DIN of the Disqualified Directors is to alarm the Promoters and Directors who are lax in compliances. This step will definitely help in breaking the robust network of shell Companies and fighting against Black Money.
Recent changes made in the Companies Act 2013 by way of Companies Amendment Act 2017 and other notifications issued by the Ministry, it can be concluded that there will be no scope for the defaulting Companies to remain registered under the provisions of the ACT.