- On what grounds directors are disqualified from the organization?
- Kerala High Court’s perspective through a recent case law
- What are the remedies for disqualified directors?
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 relief from director disqualification in different sections of this article. By the end of the article, you will be able to understand,
We will also understand the perspective of Kerala High Court which recently granted an order in favor of the petitioner. This will help us understand the general viewpoint of judiciary on cases related to the relief from director disqualification.
Different Grounds for Removal of Director Disqualification
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 Kerala 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. Recently during the hearing of a case, the Kerala High Court’s Judge Justice Nagaresh emphasized that,
“This Court is of the firm opinion that in order for the Scheme to be effective, Directors of the Companies ought to be given an opportunity to avail of the Scheme”.
Through this order, the Kerala High Court directed the Registrar of companies to reactivate the cancelled DINs of directors with their digital signatures to let them avail the Companies Fresh Start Scheme 2020 to revive their struck off companies.
Ways to Seek Relief from Director 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.
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 director 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.
- With the Order of Kerela High Court in place, the directors can also apply for DIN reactivation to take advantage of the latest Companies Fresh Start Scheme 2020 brought by the government to revive struck off companies without paying heavy non-compliance fees.
However, this way would make it compulsory for a director to apply for the company revival. So, to get the DIN reactivated without reviving the company, filing a writ petition is still the most preferred way.
How to Draft 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.
Court’s Perspective on Writ Petition
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.
Hire an Experienced Representative
So far we have understood that the Court generally have a favorable opinion on writ petitions filed by petitioners. If your company is struck off and you want to restart your business, then taking advantage of CFSS 2020 would be the best way to go for it. The added advantage of CFSS is that you can easily get your DIN reactivated, Removal of director disqualification and use this scheme to restart your business. Saving a huge sum of money from penalties is also an advantage of this scheme. Although if you just want to reactivate your DIN then, applying for disqualification removal through writ petition is the perfect option. All these processes are a bit complicated for a common businessman and thus, we suggest that one should always take help of a legal expert to draft the petition or to apply for company revival through CFSS scheme. An expert professional from a legal firm will not only help you in the filing of the writ 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 director 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.