Director Disqualification: A Speed Breaker in Directors’ Career
Have you ever thought if not disqualified how good your career as a director would have been? Or how to remove this speed breaker from your career without letting it slow you down? One question that every director have in their mind is, if facing disqualification, what is the best way to deal with it or what can be the best way to get the director disqualification REMOVED?
The answer to this question depends on the choices made by the director: whether he just wants to continue his career as a director, or he wants to be the director in the old company? If he chooses the latter one, he might need to revive the company first, and if he chooses to continue with his directorship in other firms, then there are other ways, to get his disqualification removed. We will discuss those other ways in detail in this blog.
Before understanding how to remove the disqualification lets first understand the concept of it:
Under the Companies Act Of 2013, every registered company is required to provide annual returns or financial statements of the company to ROC for three years consecutively. If any company fails to do so, then the director of that company gets disqualified for the period of five years from being a director in that company or any other companies.
The new version of Companies act has a stricter policy for defaulters than the previous ones, as the director is held responsible for the smooth and regular functioning of any company. Hence, they are considered responsible for the actions taken on the behalf of the company that leads to the failure in complying with the directions of the government, and strict actions are taken against them.
As we discussed earlier, there could be two types of removal of disqualification, one where the revival of the company is required and one where the only the disqualification of any director is removed. It is essential to understand that these two follow different procedure and they fall under jurisdictions of different regulatory bodies, i.e. the power of reviving the companies lies with the National Company Law Tribunal (NCLT) and the power to decide upon cases of removal of director disqualification lies with Hon’ble High Courts.
Grounds on Which Director Might Get Disqualified
- If a person has been declared of unsound mind by any competent court.
- Any director who has undischarged insolvent can be disqualified by the court and if that insolvency has been applied for but the application is still pending.
- If that person has already declared disqualified by court/tribunal.
- If a person is sentenced to imprisonment for not less than six months or has been convicted by a court in an immoral offense.
- When the director fails to obtain Director Identification Number (“DIN”).
- When the company in which that person is director fails to file their annual returns or financial statements to ROC for a running period of three years.
- When the company fails to pay a dividend that was declared for over a year.
- If the company for over a year fails to redeem debentures or pay interest on debentures.
- When the company for over a year fails to pay interest on/ repay the deposits.
- If any director holds shares in any company be it alone or in collaboration and he fails to inform about it.
Different Ways of Seeking Relief from Director Disqualification:
In the beginning, when the new companies act was just introduced there were no such remedies available for directors who were disqualified by the ROC, according to them the only way was to wait for five years exile period before resume directorship. Though one way available to directors was to revive the company from ROC and then they could also apply for their directorship.
Ministry of Corporation Affairs [MCA] axed around 2.4 companies in 2017. At that time there was no such way of reviving the companies without paying heavy penalties and directors started looking for the ways in hope of getting their DINs reactivated.
In 2018 MCA came up with a scheme, i.e. CONDONATION OF DELAY SCHEME 2018, it was a chance for the directors to revive their companies and to then apply for removal of their disqualification without paying heavy penalties.
This year again MCA launched another scheme Companies Fresh Start Scheme, 2020 or CFSS, this scheme gives an opportunity to the struck-off companies to get another chance. Let’s understand CFSS in detail,
This scheme came into force on 01-04-2020. Under this scheme company that was at default will be permitted to file documents that it failed to file for three consecutive years.
Benefits of Companies Fresh Start Scheme, 2020
For the Defaulting Companies:
- No additional fee is required to be paid and only a nominal amount is charged to the companies for miscellaneous expenses.
- Gets immunity against any prosecution or proceedings that arose due to delay in filing of documents.
- Six months’ immunity is given to the company (with an immunity certificate) from 30-09-2020 i.e. the date of closure of CFSS.
- Directors can apply for the removal of their disqualification once the company has revived.
- MCA also provided extended time from 01-04-2020 to 30-09-2020 to directors, to reactivate their DIN, filing DIR-3KYC/DIR-3KYC-Web and the filing fee i.e. Rs 5000 will not apply.
For Inactive Companies:
- Defaulting inactive companies can use the benefit of CFSS 2020 to file the due documents.
- Under section 455 of the Companies Act, 2013 an application for Dormant status can be submitted.
- ‘Active non-compliant companies can file e-form ACTIVE in the extended period of 01-04-2020 to 30-09-2020 provided by MCA.
- An application to strike off the name of the company from ROC can be submitted.
OTHER IMPORTANT REMEDIAL MEASURES
Many directors failed to take advantage of CODs and that is why they missed the chance they had to revive their company and revive their career as directors by the removal of their disqualification. So now the question that comes to our mind is what are the other remedies by which any director can get their disqualification removed and how can they avoid that speed breaker of their career? So there are 2 options available with the directors and those are as follows:
- The first option that is available with directors is to consult NATIONAL COMPANIES LAW TRIBUNAL and hopefully get a revival order for the company. Once the company is successfully revived, directors can then apply for removal of their disqualification and for reactivation of their DINs. RoC verifies the order and all other relevant documents, once NCLT has passed the order before reactivating the DINs. But in this case, whether directors’ disqualification can be removed or not depends upon their choice to revive the company.
- Another option available with directors that do not depend upon whether they want to revive the company or not is filing a writ petition. If any director only wants his/her DIN to be reactivated without reviving his/her company, then he/she will have to file a writ petition in the high court. The filing writ petition in the high court is a constitutional right under Article 226 of the constitution.
How to file a WRIT PETITION?
- Any disqualified director can undertake his/her constitutional right of filing a writ petition in high court under Article 226 of the constitution. The high court in which writ petition is to be filed must be decided or chosen according to the area of the company and it comes under which jurisdiction. Here is the information a petitioner needs to provide in the application,
- The dates and events of disqualification are to be listed.
- With a notice of motion and urgent application is to be affixed.
- Reasonable justification for not filing the statutory documents to ROC on time due to which the company got disqualified needs to be mentioned to court.
- Provide the court with the current status of the company and about its director seeking relief.
- Companies in which the petitioner plays the role of director should be listed out to the court.
- The list of the names of the disqualified directors issued by ROC in the press release or by notice.
- Personal information of petitioner such as name, address, and designation of each memo of parties.
- The petitioner should attach a prayer cause requesting the court to dismiss the publication issued by ROC under Companies Acts’ Section 164(2).
- High court after hearing the options for reactivation of DIN of directors, issues orders and the copy of that orders along with other statutory documents needs to be filed by directors to RoC and it then continues with the process of registration.
- Petitioner requires to provide documents and pay some penalties and once he/she does that that RoC starts with the process of reactivation of DIN.
Delhi High Courts’ view on Director Disqualification:
Case no. W.P. (C) 5490/2020 & CM APPLs 1977-80/2020
Decided on 02.09.2020
SANDEEP AGARWAL & ANR vs. UNION OF INDIA
In this case, there were 2 directors who were working in 2 companies as directors and on 30th June 2017, one of those companies was struck off from the register of companies.
Considerations for Judgement:
In this case, there were two companies involved, one was struck off and the other was still active as the petitioners were directors of two companies. So here. availing remedies under the CFS scheme in respect of the active company might get hindered by the disqualification of another company or cancellation of DINs.
The Companies Fresh Start Scheme was launched by MCA while considering the situation of pandemic (COVID-19) out there so it needs to be given full effect. It is common for directors to be part of different companies holding the same position, of the director. In this case, permanent cancellation of DINs and disqualification could render the scheme itself nugatory.
In order to enable the directors of an active company i.e. the petitioner herein, to continue the business of the active company considering, it was not at default and also considering the judgement in Mukut Pathak (Supra) the disqualification of the petitioners i.e. directors were set aside and DINs/DSCs of petitioners were directed to be reactivated within three working days.
Why do you need legal help?
As we know one needs to file a writ petition to get disqualification removed and it is not easy for any normal person or a businessman to have knowledge of working of law or courts. To draft a writ petition for filing in the high court one would need legal help. By hiring a representative from a legal firm would make it easy for you to file the writ petition as prescribed under law and he can also represent you in court. If you hire a professional from a reputed firm, he/she will give arguments in court accordingly making it easier to ask for relief from disqualification. Once he has helped you out in getting the relief and the court has passed the order, the expert can help you file the required necessary documents to RoC.
It is very common for people to think, it is not easy to file a writ petition and get the disqualification removed but as you have seen in the earlier case and in many other cases the judgement has been in favor of the directors and disqualification has been removed easily by filing a writ petition and with the help of legal firms or professionals.
On some points court is in general agreement with the petitioners, they are as follows:
- In the previous act of companies act and the new act some contradictions are found as the companies act of 156 did not have the regulations for private companies and their directors, so imposing new act on them in 2017 is objectionable in the eyes of the high court.
- In many cases, directors were not given any notice before the order about the director disqualification which took away their chance of clarifying the reason to the High Court for not being able to submit the financial statements or annual return. This is against the constitutional rights of the petitioners as one should be allowed to show the cause of his/her actions and this is why sometimes orders of RoC are against natural justice.
- It has been noticed in some cases that the act is being applied retrospectively for the disqualification of directors and has not been entertained by the court
So, you can understand how the judiciary gives favorable decisions to directors who provide valid reasons for defaulting. Considering this in mind the directors who are confused related to filing a writ petition might get hope and understand that filing a writ petition with professional help can work in their favor and can help them in getting their director’s disqualification removed.