A Case Study Explaining Directors’ Disqualification Removal through Writ Petition
With the implementation of the Companies Act 2013 the Ministry of Corporate Affairs applied strict norms on companies defaulting on the set compliances mentioned in the act. The Companies Act 2013 had many changes compared to the old Act of 1956. The new Act comprised of strict provisions for non-complying companies which included directors; disqualification. The Act says if any company fails to meet the compliance standards set by the government, then the Registrar of Companies can remove their names from its list of regularised and also, order disqualification of directors for five years.
In this article, we will understand
- The situations in which companies are considered defaulters.
- Why and for how long the directors are disqualified?
- What are the ways to remove the director’s disqualification?
- Judiciary’s perspective on cases of removal of director’s disqualification thorough a case from Allahabad High Court.
We will also understand the process of removal of a director from the perspective of a directors’ disqualification removal case in Allahabad High Court. This will help us understand the general viewpoint od judiciary on cases related to the removal of directors’ disqualification.
Rules for Companies to fall in Defaulter’s List
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.
Grounds for Disqualification of Directors
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.
- 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.
- If the directors fail to inform about their respective shares in any company held by them alone or in collaboration.
- 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.
- 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 the company has failed to repay the deposit made to it or pay interest on those deposits.
- If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending.
- If any Court confirms that the director is not of sound mind.
Ways to Remove Directors’ Disqualification
During the initial few years of introduction of the new Companies Act, it was a common understanding that there was no remedy available for directors who are disqualified by RoC. It was thought that waiting for the five years exile period to end is the only way to resume directorship work. However, there was another option which encompassed the revival of the disqualified company after struck off from RoC. Once the company is revived, its directors could also apply for the revival of their role. 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.
Remedies Applicable for Directors’ Disqualification Cases after CODS
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. Either they should apply in the National Companies Law Tribunal and hope to get company revival order. Once the company was revised, 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. But this procedure could only be followed if the companies wanted revival, 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.
Drafting a Concise 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.
Understanding Judiciary’s View on Writ Petitions through a Case
Let’s understand how filing a Writ Petition can help in the removal of directors’ disqualification and how Allahabad High Court quashed cancellation of DIN of 161 directors by RoC Uttar Pradesh.
In this case, the petitioners were directors of companies which defaulted on submitting their yearly financial statement continuously for a period of three years. The resulted in RoC applying Section 164(2) of the Companies Act leading to company’s name being struck off from RoC and disqualification of their directors. The directors were also disqualified from the directorship of other companies (which were not defaulters). The petitioners also alleged that no show-cause notice was served to them before disqualification and RoC didn’t verify any facts before ordering the cancellation of their DINs for five years. It was argued by petitioners that the ruling of Section 164(2) that disqualifies directors from the directorship of other non-defaulter companies is an irrational and unreasonable violation of the fundamental rights mentioned under Article 19 (1) (g). With these and other arguments, the petitioners asked for the removal of disqualification from directorship and also asked the court to order RoC to reactivate their DIN numbers.
Order of Allahabad High Court (Disqualification of Directors)
In its orders, the Allahabad High Court’s bench of Justice Rajeev Mishra and Justice Sudhir Agrawal quashed cancellation of DINs of directors and allowed writ petitions partly. The court said,
“The above discussion leads to the consequence that all writ petitions have to be allowed partly and action of respondents in deactivating DIN of petitioners is to be quashed. We accordingly allow writ petitions partly. We also quash the list published by ROC, declaring petitioners in all these writ petitions as disqualified to be Directors of companies and debarment of being Director for a period of five years. Uttar Pradesh ROC, now, shall be at liberty to give notice to petitioners to verify and establish the facts whether disqualification alleged to have been suffered by petitioners-Directors so as to attract Section 164 (2) of Act, 2013, actually exists or not. After giving them the opportunity and being satisfied that such disqualification has occurred, it will proceed further in accordance with the law.”
The above order is a welcome sign for all the directors who are looking for removal of their disqualification from Allahabad High Court. This order could pave 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. The case has also led the way for directors who were working in multiple companies but removed from directorship just because one of their company defaulted.
Why Do You Need 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 favorable 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. 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.