As per the provisions mentioned in the Companies Act 2013, an director of a company can be disqualified for five years from the directorship of his/her company and also banned to join any other organization as a director if his/her current organization fails to submit their financial statement for a period of three years consecutively. Now the obvious question is whether this disqualification can be removed or not? And if it can be removed what are the ways to do it. To answer all these questions we have explored various aspects of the removal of director disqualification in different sections of this article. By the end of the article, you will be able to understand,

• On what grounds directors are disqualified from the organisation?
• Hyderabad High Court’s perspective on such cases
• What was the impact of these new provisions in the act?
• What are the remedies for disqualified directors?

We will also understand the process of removal of a director from the perspective of a directors’ disqualification removal case in Hyderabad High Court. This will help us understand the general viewpoint od judiciary on cases related to the removal of directors’ disqualification. 

Different Grounds for Directors’ Disqualification

The Companies Act of 2013 required companies to furnish documents related to their finances and operations every year. Defaulting on submission of these documents for a continuous period of three years had stricter provisions of punishment compared to the previous version of Companies Act. The act considered the director of the company responsible for actions of the company and so, has a policy of strict actions against them in case their company defaults. 

The directors of the company are responsible for the smooth operation of the company and therefore they are responsible for any action taken by the company that leads to failure in complying with the directions of Government. The following points will give information on rules or issues which can lead to directors’ disqualification,

• Any directors of the company who has been convicted under section 188 by the Court regarding party transections during last five years. 
• If the directors fail to inform about their respective shares in any company held by them alone or in collaboration. 
• If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending. 
• If the director is convicted in any offence by the Court and sentenced to imprisonment for more than 6 months.
• If the organisation fails to redeem any debentures on their due date or fails to pay the interest due.
• If the company of the director has not filed its financial statements and annual returns for three years consecutively. 
• If the company has failed to repay the deposit made to it or pay interest on those deposits. 
• Failure to pay the declared dividend and continuing so for one year or more could also lead to disqualification of the company’s director. 

• If any Court confirms that the director is not of sound mind. 
• The Court also has the authority over the disqualification of directors’ who are undischarged insolvent. 
• If any court or tribunal has earlier ordered the disqualification of the director. 

Analysis of Hyderabad High Court’s Order 

Ever since the norms for director disqualification have come into place the high Court’s throughout India are using flurry of writ petitions being filed for relief. Let’s understand how filing these Petitions have helped the petitioners in their cases through a case study of M/s. Dr Reddy’s Research Foundation & Ors. Vs. The Ministry of Corporate Affairs & Anr. 

“In this case, it was argued by the sides that the action of disqualification was considered due to non-filing of financial statements from April 01, 2014. The three years from 2014 were about to be completed only on 31 March 2017 but the date for filing of annual financial returns for the said years was 30 October 2017. The court thus, director the MCA to reactivate the DINs of the directors and allowed them to file their financial statement of their defaulting company from 2011 to 2016.”

This case paved the way for other directors to file for relief in the High Court if they want to remove disqualification without the revival of their company. Even after the CODS was over, filing of the Writ petition to remove directors’ disqualification is still the proven way to end the exile for directors. 

Ways in which Directors Can Seek Relief from Disqualification

During the initial few years of introduction of the new Companies Act, there were about 2.4 companies that were axed by the Ministry of Corporate Affairs (MCA) using the Companies Act in 2017. These companies started exploring the options for their revival and the directors hoped to get their DIN reactivated. When the MCA came up with the Condonation of Delay Scheme 2018, the company’s directors hoped to get their company revived without paying heavy penalties and apply for their disqualification removal.

It is the responsibility of the company’s director to file all the financial details of the company with the Ministry of Corporate Affairs every year as per the Companies Act. If the directors fail to submit these details for three consecutive years, then the Ministry could go on to remove the company from RoC and deactivate its directors’ DIN for five years. In the year 2018, the Central Government came up with Condonation of Delay Scheme (CODS) where directors could file the relevant document to get their DINs reactivated. The scheme involved the payment of a moderate fee and condonation of hefty penalties due to defaulting on a payment. Many companies at that time used this scheme for revival and removal of directors’ disqualification. This is how this scheme worked:

• The disqualified directors were needed to submit all the statutory document with the RoC to get their DIN activated temporarily.
• The documents are submitted with the statutory fee prescribed in Section 403 of the Companies Act. 
• The small fee needed was only 30000 Rs. With an e-CODS form and so saved companies form hefty penalties. 

Present Day Remedies for relief

There were many directors and company owners who could not get advantage from CODS Scheme to revive their business and thus, their directors also missed the chance at the revival of their careers. The directors’ who failed to use this scheme for the removal of disqualification were left with two options.  

• Apply in the National Companies Law Tribunal and hope to get company revival order. Once the company was revived, they could apply for the removal of their disqualification and reactivation of DIN. In this case, when the NCLT passed the order of company revival, then RoC used to verify this order and relevant documents of the directors. This procedure could only be followed if the owners of the companies wanted to revive it. 
• The other option for directors who just wanted to activate their DIN without applying for the revival of their company was to apply for removal of disqualification in the respective High Court through a Writ Petition. The option of writing a Writ Petition to High court is attributed to constitutional rights conferred by Article 226 of the constitution to seek relief. 

How to Create a Writ Petition?

1. The disqualified director must undertake to use his constitutional right to file the Writ Petition under Article 226 of the Constitution in the respective High Court. The High Court should be chosen according to the area of jurisdiction of the company. In the application, the petitioner should include the following information,

• List of date and events of disqualification.
• Affix an urgent application with a Notice of Motion. 
• Should give reasonable justification to court for not filing the statutory documents that led to the disqualification of company and removal of its name from RoC. 
• Inform Court about the current status of the company and its directors seeking relief. 
• List out the companies in which the petitioner is serving as a director. 
• File a copy of the impugned Press Release or Notice issued by the RoC that lists out the names of the disqualified directors. 
• Personal information such as name address and designation of each Memo of parties should be mentioned in the petition. 
• A prayer cause should be attached to dismiss the publication issued by the RoC under Companies Act’s Section 164 (2).

2. After this, the High Court issues orders after hearing the option for reactivation of the DIN of directors. The directors need to file the copy of the order and all other statutory documents to the RoC to continue with the process p0f registration. 
3. Once the defaulter petitioner fulfils all the required documents and completes payment of all the penalties, the RoC will start the process of reactivation. 

Hire an Experienced Representative 

Taking legal help to file a Writ Petition in the High Court is necessary considering the technicalities involved in the process. There are lots of details that should be considered before drafting the petition and only an experienced professional can handle this kind of job. Also, an expert professional from a legal firm will not only help you in the filing of the petition but also help in representing your case in the Court. An advocate from a reputed firm will attend all the hearing of the Court and put arguments effectively to ask for relief from disqualification. Once the Court grants a favourable order, the expert will help you in following the complete procedure mentioned in the order. He will also help you file all the necessary documents in RoC before activation of DIN. 

If you are worried about the outcome of filing a Writ petition in high Court or confused whether it will bring positive results, then this should serve as good news to you. There have been many instances across High Courts from all over the country where director’s disqualification has been removed after hearing on Writ petition filed by them. The judiciary has granted interim relief to many directors and, quashed orders of RoC in some cases. 

The Court is in general agreement with the aggrieved petitioners on the following points:

• Retrospective Application of Companies Act: In some cases, the Court also found the act being applied retrospectively for disqualification of directors. The Courts deemed this kind of application of act as unjustified. 
• Contradictory Provisions in the Previous and New Act: The High Court finds it objectionable that the provisions of the Companies Act of 1956 did not have these regulations for the private companies and their directors, and so the new Act should not impose it on them in 2017.
• Order of RoC is Against Natural Justice: In most cases of directors’ disqualification, the aggrieved petitioners have mentioned that they never got any notice regarding their removal from RoC before the orders. Therefore, they never had a chance to clarify to RoC why they were not able to meet all the compliance standards of RoC. This is against the constitutional right of any individual as it doesn’t allow one person to show the cause of their actions and passes the order unilaterally. 

So, you can safely assume that the judiciary generally gives a favourable decision to directors who give valid reasons for defaulting. This should serve as a ray of hope for disqualified directors who are sceptical of filing writ petition for disqualification removal of their directorship. Just select an experienced legal firm that can represent your case efficiently and hope for a positive outcome.  

The post 5 Reasons Why Removal of Directors’ Disqualification is Necessary appeared first on MUDS.

DIN surrender has become a heated issue in the present time. The matter became buzzword when Regional Director, Noida issued a show-cause notice to approximately 2.4 lakh directors for surrender of duplicate DINs. Once the directors received show-cause notice, and then was the rise of flames. There were many directors who did not receive show cause notice but they were in possession of multiple DINs, so as a precautionary measure such directors were advised to suo moto surrender the multiple DINs in their possession prior to receving any official Show cause notice for the same.

Before diving directly to the details of surrendering of DIN, there are various facets that need to be known regarding surrender of DIN.

Who is Required to Surrender DIN

The directors if attracts any of the below-listed conditions then in such a situation he would be required to surrender back his DIN mandatorily after following the prescribed procedure for surrendering DIN. The condition which if satisfied would require the director to surrender DIN are as follows:

• Having Multiple DIN’s
• DIN was obtained in a wrongful manner or by fraudulent means
• Death of the concerned individual
• DIN holder is declared as a person of unsound mind by the competent court.
• Concerned Individual has been adjudicated as insolvent
• DIN holder is/was not associated with any company/LLP

How to Surrender DIN

The director who is required to surrender DIN is required to do so by adhering and complying with the procedure prescribed for the surrender of DIN. The Director while surrendering DIN is required to file various eforms which are prescribed in the Companies Act 2013 and the rules made thereunder, which are mandatory for surrendering DIN. Only filing of eforms is not sufficient but the concerned director would also be required to file an application for compounding of offence with the National Company Law Tribunal (NCLT) or Regional Director (RD), as the case may be. The process flow for surrender of DIN is as mentioned below :

Once the above-mentioned process flow is complied by the defaulting director , then the Central Government shall verify the details submitted by the defaulting Director with its electronic records. On successful verification of details with electronics records, the Central Government shall deactivate the concerned DIN .

Recent Updates

The Ministry of Corporate Affairs (MCA) vide public notice dated 21st June 2018 deployed a new eform to be called “E Form DIR 5”. This e form is to be used for surrender of DIN.

After deployment of this eform any director intending to surrender DIN shall file the online DIR 5 eform for surrender of DIN. Through this amendment MCA has waved off the physical DIR 5 form w.e.f 21st June 2018 and has substituted the same with the online version of DIR 5 which shall now be used for surrendering of DIN. Also with the advent of this amendment now eform DIR 5 shall be filed individually no requirement exist for attaching it with RD 1 as was the scenario prior to deployment of electronic version of e form. From 21st June 2018 now three individual e forms are required to be filed for surrender of DIN i.e eforms DIR 5( Application for surrender of DIN) ; RD 1(Intimation to Regional Director); GLN 1 (Application for compounding of offence).

Effect of the Amendment

The effect of this amendment is that this amendment is a big relief granted to the defaulting directors. Prior to this amendment, the surrendering of DIN was a tedious task. At one point of time surrendering of DIN had become a nightmare because of the complexities involved the process of surrendering DIN. Many innocent directors had several sleepless nights particularly during the demonetization period, due to the fear of misuse of their DIN.

After 21st June the process of surrendering DIN has gained robust speed. This is due to the main fact that the essential form for surrendering DIN has now been updated from physical version to electronic version which has in a way provided ease in surrendering DIN and reduced the pendency time in processing of the application for surrender of DIN.

With the amendment becoming effective the process of DIN surrender has become speedy as now no compliances are required to be made in physical form but now following the footsteps of Digital India drive, compliances are being migrated from physical to electronic form. The effect of such transition is that ultimately process will become more transparent, speedy, and contribute to faster disposal of the surrender of DIN.

Therefore the above amendment was a must for directors because with the fast-moving steps of technology and upgradation of central Government offices towards digitalization there arised the need of the hour to roll out the physical compliances and substitute them with an electronic version of the same thereby to facilitate easy and convenience to the directors. In other words, the process of surrendering DIN which was once a tedious task will now become easy and speedy after the advent of this amendment.

Hope this article was informative and served your needs relating to the surrender of DIN. Stay connected with MUDS for more updates

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The Ministry of Corporate Affairs (MCA) is currently proactive in relation to directors. MCA is taking stringent steps against fake companies and their concerned directors. The motive behind these moves is to curb fraudulent transactions, control the network of shell companies, remove non-compliant companies and their defaulting directors. The government believes that shell companies and bogus directors are key channels for generating black money. Funds are routed through a web of companies, whose real ownership is not easily available. This step is a clearance drive where MCA is performing sorting to retain compliant companies and their directors and remove the other non-compliant companies.  This move will reduce the regulatory monitoring burden of the MCA and will bring in transparency. Through this move, only sincere companies will be allowed to run their business with the full support of the MCA and other regulators.

In order to effectively carry out monitoring drive, MCA has become vigilant and has taken various steps to infuse transparency.

The above are the recent traces of the steps MCA has taken to regulate and perform Cleanliness drive against the companies registered. As a result of the above moves, many companies and their concerned directors have been removed from MCA records. A massive drive was recently carried out by MCA wherein it struck off around 2.5 Lakh shell companies along with their concerned directors for the reason of non-filings of annual accounts and returns as are required to be filed by the companies. By this move such companies were frozen from carrying out any business; making transactions from a companies bank account, entering into transactions for buying and selling of assets & liabilities.

The strike-off move by MCA can be categorized or nicknamed as “Demonetization of companies”. The companies falling under the ambit of strike-off were in similar panic situations like that of the individuals at the time of demonetization. The concerned directors were in trouble to get the disqualification removed anyhow because ultimately they were majorly affected by this drive. Due to non-filings in a single company, which ultimately was declared struck off, the directors holding directorship in multiple companies had to suffer because of that non-compliant company in the other active companies.

The directors were not able to get their disqualification removed or were in the process of getting the disqualification removed when MCA vide notification dated 21st June 2018 brought an e form for surrendering DIN. The MCA following the path of digital India launched an online version of DIR 5 for surrendering DIN. Earlier the DIR 5 was a physical form that was attached with RD 1 eform. The online DIR 5 will facilitate the directors in surrendering their DIN easily and quickly. All those directors who were in possession of multiple DIN were required to surrender all the DIN except one.

Later MCA clarified the issues arising in the surrender of multiple DIN. MCA clarified that the directors if in possession of multiple DIN shall retain with themselves the oldest DIN and surrender back all the other DINs. All the companies associated with the multiple DINs where DIN has been used or not with regard to any company shall be mapped to the retained DIN. This was a must-required step because there were many directors who intentionally or unintentionally were in possession of multiple DINs. Through this eform the directors have got a way out to surrender their multiple DINs. The Regional Director, Noida issued show-cause notices under section 266 to approximately Two lakh directors to surrender their multiple Dins. Directors in possession of multiple DINs abut did not receive show cause notice were also advised to surrender the multiple DINs except one.

Following the parallel track of KYC for Individuals, MCA came up with the KYC for Directors. A new eform i.e. DIR 3 KYC was brought for all the directors whether they are active or disqualified directors. Through this form, MCA verified the details of directors with that in its database and also for updating the same in its registry. The form was a means of verifying the personal details of the directors. Accordingly, every director who had been allotted DIN on or before 31st March 2018 was mandatorily required to file form DIR 3 KYC on or before 31st August 2018 without payment of a fee. After the expiry of the due date the respective DIN even if approved was to be marked as “Deactivated” for non-filing of DIR 3 KYC. Till 31st August, which was the deadline for filing the eform only a few directors complied with the requirements of MCA.

As a result of which MCA in order to invite more eforms from the remaining directors had to extend the due date of filing the said eform without payment of any penalty. The deadline for filling the form without penalty was extended to 15th September after which a penalty of Rupees 5000 was to be attracted for filing the said form. By 15th September only 1.2 million directors out of 3.3 million directors filed their DIR 3 KYC. The scenario now was that the remaining 2.1 million directors would have to file their DIR 3 KYC along with a penalty of Rupees 5000 for reactivation of their DIN.

MCA on 16th September removed DIR 3 KYC for filing purposes and started preparing a list of directors who did not file their KYC form for deactivating their non-compliant DIN. The ministry was not seen to be liberal in extending further the due date. The motive for the DIR 3 KYC drive was to free and clean the boards from drivers, domestic help, and other persons present on the board without the knowledge of the other board members. The Times of India in its edition dated 16th September mentioned that “As part of cleaning up the board, the non-compliance for the KYC could be due to a large number of ghost directors. Weeding out ghost directors is part of a crackdown on shell companies.”

The morning of 16th September was a buzzing one because directors were in the expectation that the window for filing KYC without penalty would be kept open by the government. A senior official expressed his views stating that “We are looking at the option of either providing a reopen of the window for 15 days or reducing the late fee amount of Rupees 5000. The situation has been reviewed by the Corporate Affairs Minister Mr. Arun Jaitley. There were many genuine directors who could not complete their process”. The Institute of Chartered Accountants of India and several other corporate bodies had also made representations to the ministry, requesting them to extend the period of filing by another 15 days. “The website wasn’t functioning properly between 13 to 15 September. Also, there were glitches in uploading the digital signatures,” ICAI President Naveen ND Gupta wrote in a letter to the ministry.

MCA was in the process of deactivating the non-compliant DIN on account of non-filing of DIR 3 KYC when vide notification dated 20th September amended the Companies (Appointment and Qualification of Directors) Rules, 2014 to be called the Companies(Appointment and Qualification of Directors) Sixth Amendment Rules,2018 whereby the due date for filling KYC form was once again extended by another 15 days. The window is once again reopened from 21st September till 5th October. Along with the extension of due date, MCA also amended the Companies(Registration Offices and Fees)Rules, 2014 to be called the Companies (Registration Offices and Fees)Fifth Amendment Rules,2018 whereby it reduced the penalty of Rupees 5000 which was to be levied after the extended due date of filing the said eform. Now vide the amended rules a penalty of Rupees 500 shall be paid for filing made between 21st September to 5th October. After 5th October i.e. from 6th October, the filing fee for said form would be once again as initially prescribed of Rupees 5000.

Abhishek Jain at MUDS is of the opinion that “MCA’s intention behind the extension of the due date of filing the said eform is to facilitate the directors to provide their data for updating in the MCA registry. The motive is not to earn money by imposing a penalty because had that been the motive then extension that to twice in the due date of filing along with a reduction in penalty would not have been granted to the remaining directors. There were views that the MCA is supporting the Modi Government for 2019 elections as the penalty of Rupees 5000 collected from 21 lakh directors will go into the pockets of the government. The main intent behind the DIR 3 KYC move was to weed out fake names being listed as genuine directors. This was also a part of the government’s larger strategy to clamp down on shell companies.”

Once the defaulting companies are removed then automatically the active companies will only remain.
Stay connected with MUDS for such healthy informative updates.

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