This article is written by Ayushi Sinha who is pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from Lawsikho.
Ideally, a serving director in a company can be disqualified for non-filing of financial statements on two conditions in line with the provisions of the Companies Act, 2013 (hereinafter ‘Act’) (a) if the financial statements or the annual returns have not been filed for a period of three consecutive years or (b) in case the director has been unable to repay the accepted deposits or the interest thereof or debentures or its interests, failed to redeem Dividend declared continuously in all the aforesaid cases for one year or more from the due date or have defaulted on any other suchlike disbursement(s). Further, with such disqualification under Section 164 of the Companies Act, 2013, the office of the director is stated as vacant. This article explores the disqualification of such directors incurred due to the concerned director having not filed the necessary financial declarations for a consecutive period of three years and the circumstances under which the Director, whether or not, can be disqualified and removed from his office.
Cause of disqualification
If a company has not filed financial statements or annual returns for consecutive three financial years, the director of such a company shall not be entitled to be re-appointed as a director of that company or appointed in other company for a five-year period starting from the date of default. Upon disqualification of a director u/s 164(2)(a), he is required to vacate the office from all other Companies as well in which he is acting as director as a vacation u/s 167(1). Further, The financial statements are to be filed by every Company including consolidated financial statement along with all the documents which are needed with the financial statements, with the Registrar, within thirty days from the date of AGM.
Similarly, if in the immediately preceding two financial years, a company is not carrying on any operation or business and has not applied for the status of a ‘dormant company’ under Section 455 of the Companies Act, 2013, the Registrar of Companies(ROC) will assume that the business is closed and shall strike off the company from the list of registered companies. The position of Directors too invariably gets impacted in such cases as well.
It has also been clarified that the status of Company being active or not doesn’t have any bearing on the issue of disqualification of the concerned Directors. Even if a defaulting Company is active, Directors of the Company may still be disqualified. Conversely, company shall be inferred to be disbanded where DIN of all directors has been disabled after they are disqualified in terms of sec 164(2).
Under the sub-section 2 of Section 164 of the Companies Act, 2013, the clause disqualifying the Director is generally read in conjunction with the Section 167 of the Companies Act. The latter stipulates the bases due to which the office of a director may be affirmed as vacant and consequently the director of a company can be debarred from his position. This can happen at the time of appointment of the Director or in course of his/her occupying the office and failing to adhere post appointment.
Ministry of Corporate Affairs (MCA) has been firmly implementing these provisions of the Companies Act since 2017 and even the names of the disqualified Directors have been published in the MCA portal.
Judicial opinion on such disqualification
The aggrieved person may file an appeal under section 252 of the Companies Act before the National Company Law Tribunal (NCLT) before expiry of three years from the date of order of the registrar and if in the opinion of the Tribunal that removal of the company name from the ROC was not defensible in view of the lack of any basis on which the order was passed by the Registrar, NCLT may order restoration of the company name in the ROC and consequential impact on the directorships.
In case the Director continues to hold the position which has fallen vacant despite having defaulted, he can be penalised as per the Act with imprisonment and/or monetary penalty ranging from Rupees one lacs to five lacs. The Ministry of Corporate Affairs (MCA) had issued a notification on September 12, 2017 and on examination could list over three lakh directors who had defaulted under Section 164(2) of the Act. It was also being debated whether the provisions of the Act should be implemented with retrospective effect.
NCLT had pronounced in the case Vikram Ahuja v. Greenstone Investments Pvt. Ltd. that the start date of the penal provisions will be applicable from the date of default in filing the return. This decision was litigated and the noteworthy query that the Hon’ble High Court was to consider and adjudicate was if the disqualification of directors is to be applied retrospectively under Section 164(2) of the Act? The Act came into being w.e.f. April 01, 2014, and the director’s disqualifications were based on failure to file annual returns for the Financial Year 2013-2014. The High court judgement clearly spelled out that no statute would normally apply retrospectively unless the enactment itself provides for it or it is required by implication. Further, retrospective action on a statute cannot be justified just because it impacts existing rights or certain requisites for enactment is just because it impacts current rights which is arrived at from the time prior to its passing. The High Court went on to say that The Companies Act, 1956 also prohibits non-filing of financial statements or annual returns and the same prohibition has been provided for under Section 164 of the Act and as such applying retrospectively would be of no significant adverse effect on the rights of the defaulting companies.
Therefore, the Court adjudged to operate all defaults under Section 164(2) of the Act prospectively. However, such prospective process would involve considering into account failure to file for the Financial Year ending March 31, 2014 on or prior to October 30, 2014 as regards the financial statements or annual returns. Under Section 164(2) of the Act, the penalty would not encompass the failure to pay committed defaults prior to April 01, 2014.
It will be in place to mention here that there are numerous cases where the legal route has been adopted to abrogate such disqualification and reinstate the Director Identification Number (DIN) of the concerned director. Further, Hon’ble High Courts had considered the amendments of 2018 and maintained that Sections 164(2) and 167 of the Companies Act, 2013, shall not operate retrospectively.
On occasions, the respondents have been instructed by the Hon’ble Supreme Court to reactivate the DIN and DSC of the petitioners. The Court had observed that the Central Government having created the rules postulating the circumstances in which a DIN may be annulled, cannot terminate the same on any other basis and devoid of allusion to such rules.
Respite against such disqualification
The MCA through its notification of 29.12.2017 introduced a COD Scheme (Condonation of Delay). The defaulter directors were given an opportunity under the scheme framed by MCA, to submit documents or file the returns within the stipulated period. The Company Law Settlement Scheme, 2014 was precursor to this scheme but could not serve the purpose. A period of 3 months is granted to the defaulting directors for filing the documents. During this period, the DIN of the disqualified directors is restored to enable him to file the documents. The MCA21 Portal was available for the disqualified Director to e-file under COD scheme along with the statutory fees. There have been number of cases where applications were filed for resumption of the company.
The defaulting director may file an application before the National Company Law Tribunal under Section 252 of the Act in order to seek revival of the name of the company. The said appeal can be filed within three years of the date when the name of the company had been struck from the ROC. On favorable consideration, the disqualified directors may then file in Form DIR-10 for restoration of directorship. However, more often than not, NCLT has imposed punishments in addition to dismissing such petitions.
Article 226 of the Act provides for filing writ petition before the High Courts to seek judicial reprieve. In contrast to NCLT, this has been the fruitful method in some cases for the Directors to have their disqualification rescinded. The claims were based on the transgression of Article 19(1)(g) of the Constitution of India.
There have been numerous revolutionary High Court rulings setting aside the disqualification. The case of M/s. Dr. Reddy’s Research Foundation & Ors. vs. Ministry of Corporate Affairs & Anr where the High Court of Hyderabad in its judgement gave reprieve to the disqualified directors by ordering Registrar of Companies to restore their DIN numbers and ensure revival. After the orders for restoration of struck off company & reactivation of DIN is passed by the controlling organizations of NCLT and Hon’ble High Court, the appellant is required to file the Legal documents with ROC for restoration of disqualified DIN. Further, annual returns of the last three years need to be filed with Income-Tax Authority as well.
As and when a director is disqualified for having defaulted for filing the financial returns, revival of the company and reinstatement of the Directors is rare and wearisome. The number of delisting from ROC on account of failure to file returns is a testimony to the fact. The appeals before the NCLTs have also been mostly in vain. However, the only possible reprieve is available on petitioning before the judiciary under Article 226 for getting the disqualification under Section 164(2) of the Companies Act, 2013 set aside.
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