Can Director Disqualification Due to Non-Filing of Financial Statement be Removed?
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 director disqualification removal 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 removal of director 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 director 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 director 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 director 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?
- 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).
- 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.
- 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 for Removal of Director Disqualification
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.