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. 

Other Remedies

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?

1. 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).

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. 
3. 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.

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The Delhi High Court recently passed an order for the removal of directors’ disqualification of multiple directors. In the hearing of Yatin Wadhwa v Ministry of Corporate Affairs & ANR, The bench of Justice Naveen Chawla considered the role of the Companies Fresh Start Scheme 2020 (a scheme allowing the revival of struck-off companies without penalties) and the results of Mukut Pathak & Ors. v. Union of India & Others (2019) to order the removal of disqualification. The Court observed that the directors must be allowed to avail the benefits of Companies Fresh Start Scheme 2020 (CFSS) and for removal of directors’ disqualification is necessary.

What Did the Court Say in Its Judgement?

The petitioners, in this case, were directors who faced disqualification by the RoC. After approaching the Court to put stay on their disqualification, they managed to get an order of stay on their disqualification. But after the stay, the RoC approached the court to remove the stay and let the disqualification commence. In a recent hearing via video conferencing, the petitioners argued that they wanted to avail the CFSS 2020 but could not do so until the disqualification is in place. Therefore, their disqualification must be removed so they can take advantage of the scheme and give a fresh start to their companies and career. 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. The Court also favored the petitioners on the argument that there is no use of Companies Fresh Start Scheme if the stay on the director’s disqualification is removed. The court observed that the disqualification should be removed to ensure that the directors are able to avail the benefits of CFSS 2020 and do not get affected by the Retrospective effect.

The Companies Fresh Start Scheme was launched by the Government to give a respite to companies who have defaulted in filing financial documents and statements for three years and hence been struck off from RoC. These companies have been allowed to file their requisite documents and regularize their operations. The directors of such companies could also apply for DIN reactivation once their company is revived by this scheme. 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 in light of the COIVD-19 Pandemic, the scheme should be given full effect and the disqualification of directors could render the scheme useless. 

Finally, the Court relied on the judgment given in Mukut Pathak Case and ordered the Ministry of Corporate Affairs to take the necessary steps to remove the disqualification of petitioners. The hearing also affirmed why taking legal help in the removal of director disqualification is important. The technicalities of such cases can only be handled by a legal professional. 

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Now you can raise fund through investors in Stock Exchange. Yes, stock exchange are no exclusive engine for Tatas, Birlas or Ambanis to take their business to next level. Stock Exchanges in India have introduced separate platforms to support SME’s.

SME are differentiated platforms opened by stock exchanges in India to help SMEs raise funds in the stock market.

Following are 2 SME platforms of India’s most preferred stock exchanges:-

● BSE (India’s oldest stock exchange) offers a platform called BSE SME for SME’s
● NSE (India’s largest stock exchange) offers a platform called EMERGE for SME’s

Interestingly, 80 companies raised staggering Rs.811 crore through IPO’s in 2016-17. This is more than 2x jump from the preceding fiscal where 46 companies tapped the IPO route and garner Rs.304 crore in 2015-16.

Top 3 reasons why funds are being raised include:-

1. Business Expansion Plans
2. Working Capital Requirements
3. Other General Corporate Purposes

While Delhi contributed 3 SME listings. Gujarat dominates the chart with 33 companies, followed by 15 from Maharashtra, 10 Rajasthan and 4 from West Bengal. SME IPO has slowly gained interest from the industry. Is it really worth it ?

Funding Benefits through SME IPO :-

1. Ready access to Capital and Financial Opportunities
2. Premium Valuation of the company
3. Entry & Exit Platforms for PE / Other Investors
4. Efficient Risk Distribution for Investors
5. Utility as M&A Currency

Tax Benefits of SME IPO:-

1. Zero Long Term Capital Gains Tax
2. Zero Tax on Fresh Equity Infusion in the company
3. Zero Tax on Distressed Business Purchase

Other Benefits:-

1. Company Profile Building
2. Incentive Mechanism for Employees
3. Benchmarking Fair Value of SME businesses

Economic Times reported in June 2017 that SMEs outshine the main companies. While IPO index has risen by 42% in last 12 months, SME platform has risen 52%. Thus, SMEs from the following 8 industries should explore this option which dominated the charts in past 2016-17:-

1. Finance
2. Media & Entertainment
3. Real Estate & Infrastructure
4. Manufacturing
5. Agriculture
6. Aquaculture
7. Food & Processing
8. IT & IT-enables service

With such visible benefits in front of us, annual fees worth minimum Rs. 25,000 or 0.01% of full Market Capitalization (whichever is higher) should not hurt the SMEs who are eligible.

Eligibility Criteria for SME IPO (SEBI Guidelines)

● Maximum post issue capital should be Rs 25 crores.
● Minimum number of members required for issue should be 50.
● Minimum application and trading lot size should be Rs 1,00,000/-
● Post listing, no minimum number of members required to be continued
● Minimum 3 years of period is required for Market Making
● 100% Underwriting with Merchant Bankers to underwrite 15% in their own accounts

Eligibility Criteria for SME IPO (BSE Guidelines)

● Net Tangible assets of minimum INR 3cr in accordance to latest audited financial results
● Net Worth of minimum INR 3cr in accordance to latest audited financial results (excluding revaluation reserves)
● Track record of distributable profits for minimum 2 years out of immediate preceding 3 financial years (excluding extraordinary income) in accordance to Section 123 of Companies Act 2013

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS MANAGEMENT is recognized among the most-respected, knowledgeable and yes, pocket-friendly as well. Why not give them a call right now at +91 9599653306 and start a conversation immediately.

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