The Delhi High Court recently passed an order for removal of directors’ disqualification of petitioners who were directors of Kushal Power Projects Private Limited (struck-off) and Koksun Papers Private Limited (Active). They were disqualified due to the retrospective application of the Companies Amendment Act 2018, in June 2017. The Court also considered the role of Companies Fresh Start Scheme 2020 (a scheme allowing the revival of struck off companies without penalties). The Court observed that a fresh cause of action has arisen for petitioners due to this scheme which is valid till 30 September 2020.
What Did the Court Say in Its Judgement?
The petitioners, in this case, were directors of the company’s names Kushal Powers Projects Private Limited and Koksun Paper Private Limited. When Kushal Powers was struck off from Registrar of Companies due to non-filing of annual returns and financial statements, both directors were disqualified for five years under Section 164(2). Subsequently, their DIN and DSCs were also deactivated for the said period. The disqualification was affected under retrospective application of Companies Amendment Act 2018. Commenting on the Companies Amendment Act 2018, the Court said in a previous verdict that it cannot be applied retrospectively as it can impair an existing right and create more disabilities and obligations. The court used the case of Mukut Pathak & Ors. v. Union of India & Others (2019) that had stated that such disqualification under the Companies Amendment Act, 2018 shall not have a retrospective effect and shall only apply from 07th June 2018 onwards. Concerning the retrospective application of the Companies Amendment Act related to the Mukut Pathak Case, the Court had clearly observed that,
The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations – otherwise than in regard to the matters of the procedure – cannot be applied or is required to be so construed by necessary implication.
This court also rejected the Government’s contention that the disqualification removal petition by the directors is belated. The Court observed that a fresh cause of action has arisen for petitioners due to CFSS, 2020 as it provides remedies to the petitioners due to their currently active company Koksun Papers. The Court said,
“The Scheme has been launched by the Government to give a reprieve to such companies who have defaulted in filing documents and they have been allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The Scheme also envisages non-imposition of penalty or any other charges for belated filing of the documents.”
The court clarified that the intent and purpose of the CFSS is to allow a fresh start for defaulted companies and the directors of these companies should be allowed to avail the scheme to ensure its effectiveness. The Court observed that,
“The Petitioners are Directors of two companies – one whose name has been struck off and one, which is still active. In such a situation, the disqualification and cancellation of DINs would be a severe impediment for them in availing remedies under the Scheme, in respect of the active company. The purpose and intent of the Scheme is to allow a fresh start for companies which have defaulted. For the Scheme to be effective, Directors of these companies ought to be given an opportunity to avail of the Scheme. The launch of the Scheme itself constitutes a fresh and a continuing cause of action. Under such circumstances, the question of delay or limitation would not arise.”
The Court stated that in light of the COIVD-19 Pandemic, the scheme should be given full effect and the disqualification of directors could render the scheme nugatory.
Finally, the Court relied on the judgement given in Mukut Pathak Case and ordered the Ministry of Corporate Affairs to allow the petitioners to continue working in the active company Koksun Papers. The disqualification of directors was removed, and it was ordered that their DIN and DSCs should be activated within three working days. Now, let us understand more about why the directors’ disqualification takes place.
Why Directors Face Disqualification?
With the implementation of the Companies Act 2013, the Government bought some changes in the companies used to operate in India. There were stricter norms introduced for companies defaulting in following the standards set by the Government. Other major changes included considering all the directors of the companies (working full time or part-time) in the category of “Officers”. It also allowed a company to have any numbers of directors. The provisions for erring directors and companies were made stricter as the directors were laid responsible for companies defaulting on the set norms.
The Companies Act 2013, laid down the following reasons which Can lead to disqualification of director from his/her company.
“Section 164(2) enumerates that no person who is or has been a director of a company which-
- has not filed financial statements, or annual returns for a continuous period of three financial years; or
- has failed to repay the deposits accepted by it, or pay interest thereon; or
- to redeem any debentures on the due date or pay the interest due thereon; or
- pay any dividend declared and such failure to pay or redeem continues for one year or more,
shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.”
The conditions mentioned above also lead to the deactivation of DIN of directors.
How to Remove Disqualification of Directors?
Many people are in the wrong notion that the Companies Act has no remedy for people who do not want to wait for a period of five years to end their exile. If a company is struck off from the RoC and its directors want to restore their deactivated DIN before five years, then they could do so by invoking rights bestowed by Article 226 of the constitution to file a Writ petition. The Writ Petition is filed in the respective high court of jurisdiction to seek relief from disqualification. Now, the question arises, how to file a Writ Petition? It is recommended that directors should take professional help to draft a clear writ petition and file it in the high court. There are a lot of small details that should be kept in check while drafting Writ petition for the removal of director disqualification and hence only an experienced professional can help in this case. Also, if any experienced advocate is hired to represent the case then he/she will not only represent your case efficiently in the court but also help you in the documentation and follow up work post the Court’s orders. This includes filing of all the pending compliances and helping in reactivation of the DIN.
Role of Companies Fresh Start Scheme and its Provisions
Now, many of you might be wondering what the provisions of this new Company Fresh Start Scheme 2020 are which led to the Court consider it before deciding on the removal of directors’ disqualification. Many people in business crave for a second chance at the revival of their old business. In India, all the companies that are registered under RoC or Registrar of Companies must comply to some RoC norms failing which their name could be struck off from RoC under section 164 of the Companies Act, 2013. If the name of the company is struck off from RoC, then it loses the right to continue its business and the directors of the company are deemed disqualified.
The revival of a company after striking off requires payment of hefty penalty due to failure to meet the required standards. These penalties for non-compliance could cost a lot and therefore, many companies fail to revive their business or chose not to revive the business due to financial reasons after being struck off from RoC.
What Is CFSS, 2020 that the Court Considered in the Judgement?
The Government of India recently came up with a scheme that allows the owners to apply for the revival of their struck off company from RoC without paying any penalty. This scheme has been brought due to the alarming economic slowdown created by the COVID-19 situation. The government is looking to boost the economy and this scheme is a major step taken in that direction. Now, let us understand what is CFSS and how you can revive your business under this scheme.
The Companies Fresh Start Scheme, 2020 or CFSS is brought by the Ministry of Corporate Affairs (MCA) via its General Circular No. 12/2020 dated 30.03.2020. The scheme is valid from 1 April 202 to 30 September 2020 and offers companies struck off from RoC a one-time opportunity of applying for condonation of their failure to comply by the norms (delay of filling the various documents, forms, returns etc. with the Registrar). Let’s understand the benefits offered under this scheme,
Benefits of Companies Fresh Start Scheme (CFSS)
If the revival application for companies is filed under CFSS, then the companies will be entitled to benefits like,
- Complete fee waiver on the application and no penalty for non-compliance.
- An immunity period of 6 months for the company from the date of closure of CFSS, 2020 i.e., 30 September 2020.
- An immunity Certificate to the company issued by the designated authority valid for the said period.
Procedure to Revive Companies under CFSS, 2020
- To avail the benefits offered under the CFSS Scheme brought by MCA, you must follow the following procedure
- Approach the National Companies Law Tribunal for revival.
- Once NCLT revives the company, you must file the eForm INC-28 with a copy of the order from NCLT, to the RoC.
- Post this, you can apply for benefits under CFSS, 2020 for the revival of business.
The MCA has come up with a detailed set of FAQs to give complete clarity about the CFSS. For example, a question asked if a company that has been closed for some time now and has been automatically struck off by ROC because of non-filing of Annual Returns, can avail the benefits under this scheme, the MCA clarifies;
The struck off companies must approach the NCLT for reviving their companies first and a copy order of NCLT approving for such revival under section 252 of the CA 2013 to be filed in Form No. INC-28. Later, they can take the benefit of this scheme.
IS Filing a Writ Petition for Removal of Directors Disqualification Worth It?
The sceptical business owners might think that applying for removal of directors’ disqualification removal is not an appropriate measure. As the decision to removal disqualification lies in the hands of the court, people tend to believe that the outcome might not be favourable. However, the reality is quite different as people might think. The good news here is that there are plenty more example like the cases mentioned in the sections above which had a positive outcome. In many cases, directors got interim relief from the High courts and sometimes the Court quashed the order of Roc. What courts generally observe in the cases related to the review of director disqualification is.
- Retrospective Implementation of a Prospective Act: The Courts found it unjustified that some Sections of the Act were applied retrospectively.
- Against Natural Justice: As most of the companies and their directors never got any Notice from the ROC therefore, they could not clarify their stand nor were able to fulfil the compliances. This goes against the constitutional right of an individual.
- Contradictory Provisions in Both Acts: The judges found it objectionable that as the provisions of the Companies Act 1956 did not have these regulations for the private companies and their directors, then the new Act could not impose it on them in 2017.
The end of CFSS is near and considering how the Court is giving weightage to its role, it could be a high time to apply in the high court for directors’ disqualification removal. Find an ideal legal firm that can offer trustworthy services in this matter is necessary. It is recommended that if you are facing directors’ disqualification then you must find a good legal company and bring a conclusive closure to your exile at a reasonable cost. Till the time CFSS 2020 is there, applying for the revival of the company won’t be a bad option either. This will obviously revive the company and without paying a hefty amount for non. Compliance and have a favourable impact on the case of disqualification removal for its directors.
“The beginning is always today.”