Disqualified Directors? Ray of Hope!
The news of Ministry of Corporate Affairs (MCA) taking stringent action against erring companies has created ripples in the financial world. In September 2017, more than three lakh companies were struck off, in turn leading to as many Directors losing their DIN (Director Identification Number). The most obvious reason being that the defaulter companies have failed to file returns for three years consecutively.
Such negligence by Companies give an impression that they are fraudulent or shell companies which may be involved in money-laundering or/and utilizing black money.
Therefore, these strict actions by the MCA is looked upon as an act of cleaning the financial sphere. The Govt. wants the corporate sector to follow ethical practices with full transparency.
Understanding ‘STRIKE OFF’
The Registrar of companies (RoC) reviews and assesses all registered companies and based on the findings takes punitive action in accordance with the section 248 of Companies Act 2013.
Those Companies which are defaulters, hibernating or lack due diligence are struck off.
This action of the RoCs has a cascading effect on the Directors working in these Companies. They are disqualified under Section 164(2) of Companies Act and debarred not only from that company but from all other companies in which they may have been on Board of Directors.
Consequence #1: These companies, from the date of issue of the notice by the RoCs can’t operate any further.
Consequence #2: Their accounts are frozen and no transaction can take place. However, the liabilities and dues of the company will not be absolved.
Consequence #3: Their Directors stand disqualified and their DINs suspended.
Consequence #4: Penalty imposed in accordance to the provisions provided under the Act and the Rules prescribed thereunder.
Implications for the Directors
Implication #1: The Directors lose their DIN and their career is jeopardized.
Implication #2: The disqualified directors are barred along with the defaulting companies.
Implication #3: They cannot operate the company’s account as they are frozen.
Implication #4: If they are on the Board of Directors of any other company then they will have to discontinue there too.
In this way, indirectly many companies are affected.
“The data analysis of year over year gives an insight that 2017 saw a catastrophic jump in the number of ‘strike off’ Company: this year will see even more strict
measures by the regulators!!”
Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)
Concerns over Restoration:
- This huge scale ‘strike off’ by the Ministry of Corporate Affairs (MCA) came as a shock and as the number of people affected was great, lots of protests, questions and apprehensions started pouring in.
- Section 164(2), has a very wide-ranging implications and as per this law ALL DIRECTORS of defaulting companies are disqualified.
- The defaulter Directors cannot operate the defaulting company’s accounts
- There was a lot of confusion as to the implication on non-executive/independent Directors who otherwise under section 149(12) of the are supposed to enjoy immunity.
- They were hit hard as they were forced to exit all other companies, even if those companies were fully complying with the law.
- This decision of MCA brought around legal complications and was challenged by many of them individually in various courts.
A Ray of Hope for Disqualified Directors: CODS Scheme
Looking at this scenario, the MCA decided to give a fair chance to the aggrieved Directors and Companies to resolve their issues and announced ‘CONDONATION OF DELAY SCHEME, 2018’ through the circular number 3/2018 dated 27.4.18.
Provisions Under the CODS Scheme:
- This scheme is for all defaulters except those companies whose name has been struck off by the RoCs under section 248(5) of the Act.
- The disqualified Directors will have to fill-up the prescribed forms and submit it along with the required fees.
- The DINs which were de-activated will be temporarily re-activated so that they may be able to file the documents of the defaulting company.
- Once all required documents are duly filled, the company will apply for Condonation of Delay by filing of form e-CODS and depositing a fee of Rs 30,000/-
- The defaulting companies who have not filed e-CODS and will be found to be disqualified by the end of duration of the scheme, their director’s registration will be de-activated again.
- There are some companies which have been de-registered under section 248 and have filed application for revival under section 252 of the Act, their director’s DIN will be re-activated only after order from NCLT (National company Law Tribunal).
The MCA through various circulars has tried to give extensive guidelines towards restoration and re-activation if DINs.
“The provisions are in place and the need of the hour is for the companies and directors to act swiftly and diligently towards revival/restoration.”
Shweta Gupta (Founder and CEO, MUDS)
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