Director Disqualification & Non-Compliance! Understanding Section 164(2), 167(1)

Defining ‘STRIKE-OFF’:

Strike-off means removal of a registered company, by the Registrar of Companies, from the register or roll.

Defining ‘Non-Compliance’:

Non-compliance means not complying/obeying the set of rules and laws prescribed under the Companies Act.

Defining ‘Disqualification’ of Directors:

The ‘Disqualification’ of Director means his Director Identification Number(DIN) is deactivated by the Authority.

Reasons that Led to ‘Mass Strike-Off’:

In 2017, the MCA dropped a bombshell when it announced the de-registration of 2.4 lakh companies and 3.09 lakh Directors.
Stated below are the different reasons for this punitive action-

Companies Act, 2013:

The newly implemented Companies Act, 2013, which came into effect from 01.04.2014, is much more comprehensive and detailed when compared to the Companies Act, 1956.

All the anomalies, ambiguities and discrepancies, the lawmakers have tried to deal with but still in the flow, it’s difficult for businesses to interpret the intricacies of the clauses and amendments.

Section 248:

The Registrar of Companies under section 248 of the Companies Act,2013, can ‘strike off ‘companies if they are found to be erring. Consequently, the directors’ disqualification shall also take place from the date of the publication of the General Notice.

Section 164:

This section of the Companies Act, 2013 deals with the disqualification of Directors.

Section 164(1):

Under this section a person is not eligible to be appointed a Director if-

  • he has been declared by the court of possessing unsound mind
  • he is an undischarged insolvent
  • he is adjudicated insolvent and his application is pending
  • he has been convicted by a court and given punishment for more than six months
  • he has been ordered disqualified by a court or tribunal

Section 164(2):

Under this section a person who is a director, cannot be re-appointed in that or any other company, for the next five years if-

  • the company has not filed Financial statements and/or Annual Returns for 3 years in continuation
  • the company has failed to pay depositors or shareholders their dues; defaulted for more than a year

Impact:

Most of the companies were deregistered for non-compliance and hence all the Directors of such companies, under section 164(2) of the Companies Act, were disqualified for 5 years from the date of issuance of the notice.

Section 167(1):

Under this section a director’s office will become vacant if he incurs any disqualification specified u/s 164
If a person continues to hold the post of Director, even after being disqualified, then he will be liable to punishment. He can be imprisoned for a period up to one year and/or fine up to 5 lakhs.

Confusion Over Interpretation:

When both these sections, 164 & 167 are read together, the conclusion is automatic vacation of the office of Director. This is contradictory as the provisions u/s 164(1) & 164(2) are two very distinctly different clauses, yet section 167 mentions only 164, ignoring 1 and 2.
On one hand, 164(1) incurs disqualification in his personal capacity whereas 164(2) is implied when a company defaults on specified grounds; therefore, the two cannot be equated.

Certain provisions in the Companies Act, 2013, are so loosely drafted that the companies are struggling with the correct interpretation.
Isha Malik (Company Secretary, MUDS Management Pvt Ltd)

Other Factors:

Political Factors:

  • Modi govt. which took charge in May 2014, had set its priority to wage a war against corruption and black money.
  • It wanted to fulfil its poll promise of making India corruption free and convey a message of ease-of-doing business.
  • First step in this direction was Demonetization which was done in November 2016.
  • Second step was identifying fake, shell, hibernating, fraudulent companies and barring them from the space hence restricting black money.
  • It was desirous of ensuring due-diligence and compliance by the companies and their Directors.
  • The govt. gave a clear message to the concerned authorities to penalize those who had done big transactions during Demonetization without transparency.
  • To fulfill all these ambitions, the second step towards clean money drive was ‘Mass Strike-off’ of companies and its Directors.

Social Factors:

  • The lax attitude of the previous govts. gave people the perception that all businesses are fraudulent.
  • Authorities and Regulators were toothless tigers; no intention to penalize or punish the defaulters.
  • Modi with his poll promises gave a hope and his emphatic win was a proof that people wanted action.

Media Pressure:

  • Media had highlighted Modi’s pre-poll rhetoric taunting the then govt. for inaction; after winning, the Media’s expectation rose.
  • Media propagated all actions taken against corruption, thus extending support to the govt and its authorities.
  • Highlighting these significant steps, improved India’s image globally.

Herculean Task for the Govt.

  • The preparation for the action was a mammoth task in itself.
  • Various departments, under the guidance of MCA, cooperated, collected and collated the data and then only they were able to take this action.
  • Post demonetization it was easier to find out about fraudulent, shell companies.

Impact of Strike-Off:

Impact 1#: The companies were de-registered from the date of the concerned Notice, creating insurmountable problems.
Impact2#: All Directors were removed and were barred for 5 years, not only from these companies but all other companies, even if they were active and legitimate.
Impact 3#: All the bank accounts were frozen, aggravating their problems manifold.
Impact 4#: Liabilities and dues continued to be in the name of the company and their Directors.
Impact 5#: Fines and penalties were levied as per the provisions.

The companies and the Directors, who are adversely affected by strike-off, need to act swiftly and sensibly towards a solution.
Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)

OVERCOMING THE OBSTACLES; AVAILING THE OPTIONS:

The Companies Act has specific provisions for aggrieved companies.

Option 1#: Can appeal to The Tribunal u/s 252(3) of the Companies Act, 2013. An aggrieved company or its member or creditor or workman can appeal to the Tribunal by the way of filing an application within three years of the name being struck off. The Tribunal has the power to restore the Company and its Directors if it’s satisfied by the explanation and evidence.

Option 2#: Apply to The National Company Law Tribunal, under rule 27(A), 2017. An application can be filed by the affected company or its members or workmen with the NCLT within twenty years of publication of notice. Due documents must be submitted, affidavit verified, and stipulated fee submitted. The Tribunal will then hear the case as per the specified Act. At the end, if the Tribunal is satisfied by the documents and evidence, it will revive the company.

Option 3#: As a legal option they can always file a Writ Petition in the concerned court.

Option 4#: The sheer number of the defaulters created a hue and cry in the industry and as a result, exercising its powers granted under sections 403, 459 and 460, the Central Govt. took the step to introduce a scheme by the name of Condonation of Delay Scheme(CODS), 2018. This is a one-time settlement window for those companies which have been struck off due to non-compliance. Hence, in the present context the COD scheme is the best way out for the companies and Directors.

Explaining the Need for CODS, 2018:

  • Although the MCA had acted as per the provisions of the Companies Act yet there was a big uproar over the ‘Mass-disqualification’ of Directors.
  • The Industry, the defaulters and the affected people appealed to the govt. to find a solution for fast redressal.
  • Some of the defaulters filed writ petitions begging instant relief.
  • Exercising its powers granted under sections 403,459 and 460, the Central Govt. took the step to introduce the COD Scheme, 2018.
  • The main aim of the Govt. was to provide an opportunity to the defaulters to rectify their mistake.

Eligibility Criteria:

All companies, except those which have been removed u/s 248(5) of the Act, can avail this scheme.

Definitions:

  • ‘Act’ means the Companies Act, 2013/1956
  • ‘Overdue’ documents refer to Financial Statements and Annual Returns of the defaulter company.
  • ‘Company’ refers to company as defined in clause 20 of section 2 of the Companies Act, 2013.
  • ‘Defaulting Company’ means a company which has not filed its Annual Returns or Financial Statements.
  • ‘Designated Authority’ refers to the Registrar of Companies.

Procedure:

  • Restoration of DIN of the defaulting Directors will be reactivated temporarily, so that they may file the overdue documents. Unless it is filed, removal of Directors disqualification will not be possible.
  • The defaulter company will have to pay the filing fee and the additional fee applicable under section 403 of the Companies Act.
  • After filing the documents, they can seek condonation of delay by filing e-CODS, 2018 and pay a fee of 30,000 rupees prescribed under the Companies Rule, 2014.
  • Forms to be duly filled
    (a) Form No. 208/MGT-7
    (b) Form No. 21A/MGT-7
    (c) Form No. 23
    (d) Form No. 66
    (e) Form No. 238/ADT-1
  • The DINs of the Directors of the defaulting companies that have not done the needful and their record does not exist on MCA 21 portal and if they are found disqualified at the end of the scheme, then they will be deactivated once again on the expiry of the scheme.
  • Those companies, which have been removed under section 248 and have applied for revival under section 252 of the Act, restoration of
  • DIN of disqualified Directors shall be applicable only after NCLT order of revival. Thus, leading to removal of Directors disqualification.
  • Those companies which have not availed this scheme, the Registrar shall act in accordance with the provisions of this Act.

Benefits:

  • By filing the overdue documents, the companies will have regularized the pending documents.
  • The Company and their Directors shall not be prosecuted for non-compliance.
  • Most importantly, the company, directors will save lot of time and money.

Need of the Hour:

Future Course of Action by the Govt. –

  • As is evident by Mr. Modi’s recent interviews, he has the conviction to continue this drive against shadow economy in full earnestness.
  • Gradually all the concerned departments and regulators have come together to net errant companies.
  • The Serious Fraud Investigation Office (SFIO) has been empowered to deal with criminal offences.
  • Another initiative of the govt. which is underway is developing a state-of-the-art software application which will have an ‘Early Warning System’(EWS).
  • A National Financial Reporting Authority(NFRA), an independent body is being set-up to keep tab on financial statements and accounts of companies.
  • A Special Task Force(STF) has been constituted by the Prime Minister’s Office, with joint Chairmanship of Secretary, Revenue and Secretary, Corporate Affairs. Along with other agencies, this Task Force will enforce action against erring companies.
  • ‘Dummy Directors’ is another major concern for the govt. To counter this menace, the MCA has plans to seed DIN with PAN and
  • Aadhaar at the time of application for DIN.

Companies Action Plan:

  • Companies need to have ethical and straight forward approach.
  • They should implement self-regulation with complete sincerity.
  • Accounts and fund flows should have transparency and clarity.
  • Due diligence and compliance should be ensured at all times.
  • Pre-emptive measures should be in place.
  • A ‘no tolerance policy’ towards any wrongdoing is must for all.
  • Directors should be conversant about the legalities of Companies Act.
  • Directors should lead from the front and be a role model.
  • A stitch in time saves nine’; any problem should be dealt with immediately.

Conclusion:

Behind any achievement there are many factors which ensure success and open up new avenues. A step by step working towards defeating the ‘monster’ of corruption and black money has done wonders. Cautious, yet concrete steps have been taken by various agencies and together with the help of modern technology they are on the verge of achieving their goal.

Companies have read the writing on the wall and they are now extremely cautious and alert. As more and more fraudulent companies are written off, the genuine businesses are flourishing. Now the economy is on the right track and even the foreign investors are taking interest in our markets.

India is in league with fastest developing countries and with its resources it can forge ahead of others. The economic measures, the ease-of-doing business, removal of red-tapes-all have worked wonders in regaining confidence of the people in the country as well as outside.

To keep themselves safe from penalization, the Companies and their Directors should ensure complete compliance and due-diligence!

Shweta Gupta (Founder and CEO, MUDS)

Author:
FCS Shweta Gupta
Company Secretary
Muds Management Private Limited
Mobile no: +91-9599653306
Email id: shweta@muds.co.in

*The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article

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