Procedure for Removal of Director Disqualification
The New form of Companies Act introduced in 2013 had many changes compared to the old Act of 1956. The new Act consisted of strict provisions for non-complying organisations and their directors. According to the Act, if any company fails to comply with the rules of operations set by the government, then the Registrar of Companies can remove their names from its list of regularised and also order its directors’ disqualification for five years.
In this article, we will understand
- What was the impact of these new provisions in the act?
- On what grounds directors are disqualified from the organisation?
- What are the ways to remove the director’s disqualification
We will also understand the process of removal of a director from the perspective of a directors’ disqualification removal case in Kolkata High Court. This will help us understand the general viewpoint of the judiciary on cases related to the removal of directors’ disqualification.
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.
“Any company can have one or more number of directors working full-time or Part-time. All these directors will fall under the category of OFFICERS and strict actions will be taken against them if their companies fail to abide by the set rules.”
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 the Government. The following points will give information on rules or issues which can lead to directors’ disqualification,
- 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.
- Any director of the company who has been convicted under section 188 by the Court regarding party transactions during the 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.
How 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 striking 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.
New Ray of Hope! The Condonation of Delay Scheme, 2018
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 the 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 documents with the RoC to get their DIN activated temporarily.
- The documents are submitted with the statutory fee prescribed in the 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.
What about the Companies not Using CODS?
There were many directors and company owners who did not use 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 a 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. But this procedure could only be followed if the companies wanted revival in the first place. 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.
Courts Perspective on Writ Petitions
Let’s understand how filing a Writ Petition can help in the removal of directors’ disqualification and how Kolkata High Court responded to such petition through the case of Mukul Somany v. Registrar of Companies, West Bengal, 2018.
In this case, the petitioner was in the list of disqualified directors released by the RoC. The petitioner’s company was defaulter because of which he was disqualified from directorship. According to the Act, the petitioner could also not continue as director of other companies which were not defaulters. The removal of directorship came as some companies under the directors incorporated in the year 2010 were not filing annual returns for 3 years as they had not received the certificate of commencement of business. Hence, the directors were disqualified from the post of directors in any company they were working with. The order was effective from the 1st November 2016, under section 164(2) of Companies Act.
any company they were working with. The order was effective from the 1st November 2016, under section 164(2) of Companies Act.
View of Kolkata High Court:
The petitioners contended relying on the case of Arun Seth v. Union of India, that Section 164(2) of the Companies Act came into force since April 1, 2014, and so, it cannot be applied to incidents before the FY 2013-14. The respondents form the government said that the Section was brought to penalize defaulters from any period and not necessarily the defaulters after the Act came into force. Considering both arguments, the Kolkata High Court upheld petitioners’ arguments saying that the retrospective application of the Companies Act is unjustified. Further, the court said that the directors shouldn’t be removed from the directorship of companies which are working according to the guidelines of RoC. The Court in its final order stayed the disqualification of directorship of petitioners from the active company and allowed them to continue in them. However, the relief was not meant for the directorship of companies which were struck off.
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.
Procedure to File 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 the court for not filing the statutory documents that led to the disqualification of the 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.
Why Taking Legal Help is Necessary?
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 the director’s disqualification has been removed after hearing a Writ petition filed by them. The judiciary has granted interim relief to many directors and quashed orders of RoC in such cases.
The Court is in general agreement with the aggrieved petitioners on the following points:
- Retrospective implementation of the Prospective Act: In some cases, the Court also found the act being applied retrospectively for disqualification of directors. The Courts deemed this kind of application to be unjustified.
- Contradictory Provisions in Acts of 1956 and 2013:: 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.
- Ruling orders of RoC are 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.
Based on these points you can safely assume that a well-drafted writ petition and representation in court by an expert advocate can lead to the removal of disqualification. Now the only problem here is to keep a positive outlook about the case and find a good legal firm to help in disqualification removal. Pick a reliable and trustworthy firm after thorough research to avail services related to disqualification removal.