judicial overreach

About the Author

Dhanya Sree is an Associate with Magus Legal LLP, Kochi, Kerala. She focuses on Corporate and Commercial Laws, Compliance Management and Intellectual Property Rights. She can be reached at [email protected] or at www.maguslegal.com

The above article was originally published on www.faizallatheef.com, the personal blog of Faizal Latheef, a business attorney in Dubai, UAE.

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During September, 2017, the Ministry of Finance (Ministry) issued a notification disqualifying directors associated with shell companies for a period of five years. It took the corporate world by surprise. Many representations were made before various Registrars of Companies (ROC) and numerous cases were filed in High Courts throughout India. After more than three months, now, the MCA have come up with the Condonation of Delay Scheme, 2018, offering a much needed relief to the corporate world. This article intents to provide an overview of the different facets of the subject including particulars of the notification, objective behind the action and Condonation of Delay Scheme, 2018.

As we all know, the aforementioned notification on disqualification was perceived in awe by the corporate world. It abruptly resulted in the disqualification of over 300,000 directors owing to their association with shell companies. The Ministry carried out this mass disqualification, relying u/s. 164(2) of Companies Act, 2013 read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. In clearer terms, those directors who acted as directors in such companies which failed to file their financial statements and annual returns for 3 consecutive years and have not cured the default cannot act as directors in other companies too. Also, they are restricted from using their Director Identification Number (DIN) for any further filing purposes. It is believed that this restriction is part of a structured crack down on illegal transactions.

Shell companies are not defined under the Companies Act, However, it is generally perceived that these are companies which adhere to the basic elements of company laws, with their main intention being avoidance of taxes or legislations. Earlier, around 220,000 shell companies were frozen, and they were barred from carrying out any operations. This disqualification saga should be seen as furtherance to that, more in the form of a constructive action to trace black money and ensure compliance. Resultantly, many prominent figures including politicians, business tycoons and celebrities were disqualified from acting as directors.

This is an action with wider magnitude. The said disqualification not only affects the respective boards, but also the directorship of such directors in every other company they associate with. Around 20-24 ROCs have released list of disqualified directors, and more lists are to be published. This makes it clear that the ministry targets around 300,000 directors of shell companies. Again, as a step towards better compliance, it was perceived that the ministry is likely to initiate action against many professionals including Charted Accountants, Company Secretaries and Cost Accountants who are associated with such shell companies. The government clarified that the prime intention is to curb money laundering activities carried out under the cover of these companies. The silver lining of this action is that, it ensures better compliance. More importantly, it will ease doing business in India and protect the interest of stake holders in a better manner.

Under the Companies Act, there is no provision to redress the disqualification, whereas, Companies (Appointment and Qualification of Directors) Rules, 2014 authorizes the ROC to lift the disqualification. That being the case, there is no specific procedure laid down by the statute to be followed by the ROC while removing the disqualification.

The condonation scheme permits companies which are active on the records of MCA which failed to file annual returns and as a result whose directors have been disqualified to condone the delay from 1st of January, 2018 till 31st March, 2018 initially, which was further extended till 30th of April, 2018 following compelling request from the part of stakeholders. Accordingly, within these three months such companies can file their annual returns, compliance certificates and auditor’s appointment form for all the defaulted period. For this purpose, the DIN of concerned directors will be revived temporarily, and all those forms can be filed with additional fees up to a maximum of 12(X) times the normal fees. Further after the aforementioned filing, companies must file a form to condone the delay, paying a fee of INR 30,000. Once all these forms are filed and approved the DIN will be revived permanently, and thus the disqualification will be cured.

It is welcoming that MCA have been lenient by giving a second chance to the defaulting companies to revive, by implementing this scheme. We can only hope that this will act as a lesson, though a hard one, for such companies and their management. Let’s also hope that this will bring in a new era where the corporate sector will look forward to embracing better governance and compliances practices.


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