Judicial Remedy to Disqualified Directors
May 10, 2018 by Mayank Verma
In 2017, more than 200,000 companies were struck off to remove the inoperative companies from the Records of the Register of Companies and more than 3,00,000 Directors were disqualified by deactivation of their DIN (Director Identification Number). These stringent measures were taken by the Government in respect of companies which were in 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.
Consequences of disqualification:
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, other than the company which is in default, where he is Director immediately on the occurrence of disqualification (Section 164 read with Section 167 of the Companies Act, 2013). Also, as a result of their disqualification, DIN of Disqualified Directors are de-activated by the Registrar of Companies. Read more about disqualification of directors.
MCA came out with Condonation of Delay Scheme (CODS) for relief to certain companies: MCA (vide General Circular No. 16/2017 dated 29.12.2017) came out with CODS for those companies which are currently active but their directors are disqualified because of default of section 164(2) (Non-Filing of Financial Statements). The purpose of CODS was to give relief to the defaulting companies and disqualified directors by giving them an opportunity to make their default good and also get the default condone by the MCA. To read more about CODS.
Judicial pronouncements by different High Courts in India:
Ever since the Government came out with the notification, there has been spate of writ petitions seeking relief from disqualification. In one of the very well-known cases, the Hon’ble High Court of Judicature at Hyderabad has passed an order dated October 6, 2017 in Writ Petition (M/s. Dr. Reddy’s Research Foundation & Ors. Vs. The Ministry of Corporate Affairs & Anr). It was argued that the new regulation disqualifying the directors of the company if it fails to file annual returns for three financial years, as per Section 164 of the Companies Act, 2013, came into effect only on April 1, 2014. The three years from April 2014, would fall only by the end of March 31, 2017 and that the last date for filing annual return for the fiscal 2016-17 is October 30, 2017. The Court finally directed to restore the DIN number of the directors to enable such directors to submit annual returns in respect of the defaulting company for the years 2011 and 2016.
More Case Laws:
- Hon’ble Delhi High Court in the matter of in the case of Trilokchand M. Kothari & ors. V. Union of India & Ors. (P.(C) No. 11381 of 2017): Petitioners were unable to take the benefit of CODS because the companies in which they were director were struck off and they didn’t wish to revive the same then. The Hon’ble HC passed an order on 21.12.2017 as follows:
- In case the Company is non-operative i.e. has neither commenced its business nor active for past 3 year and not holding assets – The petitioners will be given a final opportunity to avail of the CODS-2018 and the Company will file hard copies of all requisite documents / application with the Registrar of Companies in relation to the aforesaid companies to avail of CODS-2018. It will submit an application in sub-section 248(2) (i.e. voluntary striking off) along with an affidavit and ROC will scrutinize the same and if the same are found to be otherwise in accordance with Section 248(2) of the Act, the petitioners would be granted benefit of CODS -2018 in respect of those companies. Further, the removal of the aforementioned companies from the Register under Section 248(1) (mandatory striking off) of the Act would be deemed to be under Section 248 (2) of the Act and petitioners’ application under Section CODS-2018 would be sympathetically considered by the Registrar.
- In case the Company was operative and holding assets for 3 years – The petitioners shall approach the NCLT under Section 252 of the Act for revival and post revival, will do the filing pursuant to NCLT order.
- Hon’ble High Court of Bombay in the various writ petitions related to disqualification of directors, filed in year 2017 and 2018 endorses the order passed by Hon’ble Delhi High Court and stated the following statement in its order dated 22.03.2018:
- The petitioners to take immediate steps in consonance with the provisions under Section 248(2) of the said Act, 2013 and under the CODS 2018, in any case within a period of seven days from that day.
- Hon’ble Delhi High Court Division Bench in the various writ petitions related to disqualification of directors, filed in year 2017 and 2018 passed the following order on 21.03.2018:
- The petitioner(s) whose DIN numbers have not been activated despite interim orders in their favor, shall inform ROC and the respondents shall forthwith activate the DIN number;
- the petitioner are entitled to avail the CODS-2018 Scheme, stand permitted to file the compliances under the CODS-2018 Scheme as hard copies with the Registrar of Companies and deposit (excluding petitioner(s) who have deposited fee through Demand Draft with ROC and the same is accepted) the fee and other charges payable for CODS with supporting calculations in court registry as fixed deposit and such deposit made in this court shall be deemed to be compliances and deposits having been effected in due compliance with the requirements of CODS 2018 Scheme with the respondents of course subject to making good any shortcomings which may be pointed out by the respondents;
- The deposits under the CODS2018 Scheme have to be made by and on behalf of the Company concerned. As such, the payment or deposit by any one director shall be treated to have been made for and on behalf of the company.
- Hon’ble Rajasthan High Court in the matter of Niranjan Kumar and Mohan Lal Mahavar V. Union of India and ROC (Jaipur)P (C) 8899 of 2018, passed the following directions:
- Companies shall file the requisite returns, documents and application under CODS 2018 with Registrar of Companies in hard copies;
- The petitioners may continue to hold the post of director in the defaulting companies as well as in other companies so that they may be able to avail the benefit of CODS, 2018 during the pendency of the writ petition;
- The petitioner would also make a necessary application under CODS-2018 along with the requisite charges. (CODS form with fees Rs. 30,000/-).
The last date to avail benefit under CODS was 01.05.2018. Now, disqualified directors of the struck off companies which have failed to take benefit of CODS, are left with either of the following remedies:
- Revival of the Company:
Restoration of the name of the company by NCLT – If an operative company has been struck-off by the ROC due to its non-filing of Annual Return and if directors/promoters willing to continue the operations of the Company, then the directors / promoters of that company should apply to NCLT for restoration of its name. They can avail the benefits of relief given under the order of the NCLT. Read more about Restoration of name of the company.
- Removal of Disqualification without reviving the Company.
File writ with High Court – In case of an in-active company which is struck-off , the disqualified directors should file writ petition with the jurisdictional High Court. The High Court may provide the following reliefs to the petitioner company:
- permitting the company to file its Annual documents in hard copies,
- allowing the company to file an application under Section 248(2) (Company can file an application voluntarily with the Registrar of Companies for Striking off the name of the Company)
The defaulting directors can get their disqualification removed after complying with all the above directions of the Hon’ble high court.