Removal of Directors Disqualification
In September 6, 2017, the Ministry of Corporate Affairs expressed that the government will soon take steps against the directors of the shell companies which have not filed returns for three or more years. Post this, the Registrar of Companies of the respective states started issuing the list of disqualified directors u/s 164 (2) (a) of the Companies Act, 2013.
In September itself; the MCA had disqualified more than 3.09 lakh directors of companies which failed to submit annual filings for last 3 years. With this effect, the Disqualified Directors had to step-down from all those companies in which they were acting as a director and their Director Identification Number (DIN) were also deactivated. This article explains the different provisions under the Act.
Disqualification of Directors under Companies Act, 2013
The Companies Act has linked Section 164 to Section 167 leading to an impression that disqualification of directors under Section 164 leads to automatic vacation. This may seem logical if one were to be disqualified under Section 164(1), for example, become an undischarged insolvent or is declared as being of unsound mind by a Court. Most certainly such a person cannot continue as a director. These refer to personal disqualifications. However, Section 164(2) is on a different footing as it specifies about disqualification arising due to corporate default.
Removal of Directors Disqualification under Section 164
The provisions Under Section 164 of the Act include that:
1. A person shall not be eligible for appointment as a director of a company, if:
- He is of unsound mind and stands so declared by a competent court;
- He is an undischarged insolvent;
- He has applied to be adjudicated as an insolvent and his application is pending;
- He has been convicted by a court of any offence, and sentenced to imprisonment;
- An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
- He has not paid any calls in respect of any shares of the company held by him;
- He has been convicted of the offence dealing with related party transactions;
- He has not complied with sub-section (3) of section 152.
2. No person who is or has been a director of a company which—
- Has not filed financial statements or annual returns for a period of three years; or
- Has failed to repay the deposits accepted by it or pay interest, debentures, and dividends, under certain conditions for one year or more, Shall be eligible to be re-appointed as a director for five years from the date on which the said company fails to do so.
Director Disqualification Remedial Measures
There are some remedial measures available for Removal of Directors Disqualification if such disqualified directors contend that their names have wrongly been removed.
- Under section 252 of the Act, any person aggrieved by such decision is empowered to file an appeal with the Tribunal (National Company Law Tribunal). The decision of the Tribunal is discretionary.
- Along with the application filed before the Tribunal, an additional prayer may be made seeking the removal of disqualification of the director or/and restoration of his appointment in the defaulting company.
- Alternatively, an interim application soliciting the said prayer may be made. The Tribunal at its discretion under Rule 11 of the National Company Law Tribunal Rules, 2016, may allow or reject the application.
Appeal the Decision to Disqualify
- At present, there seems to be no remedy available as per the Companies Act, 2013.
- However, under Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, an application for removal of disqualification can be made by the defaulting company.
- A Writ Petition can be made by the aggrieved director under Article 226 of the Constitution of India in the absence of any alternate remedy available.
Restoration of DIN legal provisions
- After MCA issued the list of approx 309,614 Directors, who were disqualified and who’s DIN has been blocked by the MCA, there were a lot of representations seeking an opportunity for the defaulting companies to become compliant and normalize operations. Considering the requests from various stakeholders and in view of giving an opportunity to the Companies, the MCA notified Condonation of Delay Scheme, 2018 providing a window to Defaulting Companies to file all the annual forms with the RoC.
- Condonation of Delay Scheme 2018 is a Way out for Restoration of DIN of disqualified Directors; prescribed for Removal of Disqualification of Directors. According to this scheme for Restoration of DIN, a person by availing this scheme and if made compliance according to the scheme his Disqualification shall be removed by the ROC. Eligible Companies to avail the benefits of the Scheme are only the existing Defaulting Companies, within the effective period. The Defaulting Companies can file only the eligible forms which are due for filing under the Scheme.
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