What Is the Most Effective Solution to Directorship Disqualification by ROC?
Have you ever contemplated what could be the best way to remove directors’ disqualification? if you are a director, then you must be wondering what you can do to remove your disqualification and what will be the most suitable way?
Of course, it depends on what you want out of your career. If you want to remain a director of the old company, then you might need to revive the company first. if you just want to remove disqualification and continue directorship in other firms then there are other ways. Let us find out what is the most suitable way to remove director disqualification for any director.
Rules 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 the Companies Act. The act considered the director of the company responsible for the actions of the company and so, has a policy of strict actions against them in case their company defaults.
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,
- Any directors of the company who have 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 offense by the Court and sentenced to imprisonment for more than 6 months.
- If the organization 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.
Analysing Court’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 Karnataka High Court responded to such petition through the case of Yashodhara Shroff v. Union of India, WP No. 52911 of 2017.
In this case, the High Court Said, “the directors of the struck-off companies under Section 248 of the Act do not per se get disqualified. But, if the said company has also not complied with Section 164(2)(a) of the Act, then the said company being a defaulting company, the directors of such a company get disqualified.”
Order of Karnataka High Court:
- Where the disqualification of the petitioners is based on any financial year “before 01-04-2014 as well as subsequent thereto” while reckoning the continuous period of three financial years under Section 164(2)(a) of the Act, irrespective of whether the petitioners are directors of public companies or private companies, such a disqualification was considered bad in law, and the Writ Petitions are allowed in such cases.
- For cases whose disqualification occurred under the provisions of Companies Act 1956 for directorship in Public Companies, the disqualification stands.
- The DINs of directors whose disqualification has been removed by the court should be reactivated.
- If the director is disqualified by considering financial years before 2014 and for private companies only, the disqualification will not be removed.
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.
Remedies for 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.
This year, the Ministry of Corporate Affairs (MCA) has introduced Companies Fresh Start Scheme, 2020 or CFSS The scheme 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 to Avail in Companies Fresh Start Scheme
Revival of any struck-off company with a complete fee waiver on the application and no penalty for non-compliance.
An immunity period of 6 months (with Immunity Certificate) for the company from the date of closure of CFSS, 2020 i.e., 30 September 2020.
The companies will only have to pay the normal fees prescribed by Companies Rules, 2014 to file for the MCA-21 registry.
Once the company is revived, its disqualified directors can apply for removal of disqualification and reactivation of their DINs. This is currently the most preferable method for directors’ disqualification removal for those who also want to restart their old company.
There were many directors and company owners who could not get advantage from the 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 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.
How to Draft an Impeccable 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.
Hire 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 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 some cases.
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 to be 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.
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.