Who is considered a Disqualified Director?
Disqualification where, a director:
- for consecutive 3 financial years has failed to file financial statements or annual returns of the company; or
- has failed to pay deposits or interest thereon, this failure has existed for one year or more in relation to payment or redemption;; or
Such disqualified director shall not be eligible for reappointment as a director of such company or any other company from the date of disqualification for a period of 5 years in a row.
What does Director Disqualification mean?
The entire industry was shocked by the Registrar of Companies ' mass disqualification of directors and deactivation of their DINs. The authority had done this to keep enforcement in line and not to obstruct a way. To remove the disqualification of director and restoration of DIN, the authority provided them with different chances, even if the directors do not wish to restart the company or the company is not in operation for any reason.
The Ministry of Corporate Affairs disqualified about 3 lakh directors under section 164(2) and 167(1)(a) of the Companies Act who failed to comply with the specified rules and regulations. Ministry of Corporate Affairs (MCA) subsequently blocked all disqualified directors ' DIN to take preventive action
This authority judgment has left most companies without a board of directors. Suppose the director holds management positions in multiple companies and specified rules and regulations of the law have not been complied by one of those companies even then the director is disqualified.
But aggrieved directors and companies are seeking for a solution. Ministry of Corporate Affairs (MCA) came out with ' Condonation of Delay Scheme for DIN Activation to provide relief to them. By filing the relevant documents, aggrieved directors can safeguard their current position in the company.
What are the Step Taken by Government?
As a result, the government took a step by implementing Condonation of Delay Scheme (CODS), using its powers under Sections 403, 459 and 460 in 2018. This was the safest compensation scheme.
What are the procedures for Removal of Director Disqualification?
There are two bases upon which removal of director disqualification is based:
- Where the company was functioning
- Where the company was not functioning
Case 1: When Company was functioning
Application shall be filed before NCLT in such case;
According to the Section 403, Overdue Documents are required to be filed;
Electronic Condonation of Delay Scheme on MCA21 portal.
Case 2: When Company was not functioning
Petition with High Court shall be made where the company ceases to operate its business;
According to the Section 403, Overdue Documents are required to be filed;
Electronic Condonation of Delay Scheme on MCA21 portal
There are 5 Steps required to be followed for Removal of Director Disqualification
Following below mentioned steps are required to be taken, in order to removal of director disqualification:
- We shall draft a written petition in the first stage and subsequently send it to the high court;
- For the pleadings, an advocate shall appear;
- Interim order shall be passed by the high Court;
- The High Court's order will be forwarded to the Company Registrar together with the compliance documents which are pending;
- After following all the above steps, Director Identification Number (DIN) will be activated and disqualification of the director shall be removed.
It will take about 10 days to complete the process. As we have a team of experienced and talented experts, India Financial Consultancy Corporation Pvt Ltd will complete the process on your behalf.
What does Condonation of Delay Scheme consist?
Annual return is required to be filed by every company with the Company Registrar on MCA's website, failing to do so for a continuous period of last 3 years would result in the disqualification of the company and the such defaulting company will get a status of “Strike off” from “Active” in which directors of such defaulting company will get disqualified.
Since 1 January 2018 to 30 April 2018, the "Condonation of Delay System," also known as CODS in short, was in effect. Under this scheme, by filing required documents, disqualified director may apply for DIN activation. If they have failed to do so, disqualified directors would be suspended for the next 5 years.
What are the procedure to be followed under the COD Scheme, 2018
DIN was briefly reactivated under this scheme to stop the disqualified director from filing the reports that were overdue. This was done to restore the DIN and remove Directors ' disqualification. In addition to the filing fee, the defaulting company is required to pay the additional fee in accordance to the section 403 of the Companies Act.
The company then searched for Delay's Condonation by filing e-CODS, 2018 together with a fee of Rs. 30,000/-. Under this program, incomplete annual return filing forms are required to be filed. There are, however, some companies that had not done what was required, so they were excluded by the end of the scheme and the termination of directors had to take place.
The reactivation of directors took place only after the NCLT order of those de-registered entities that had appealed within section 252 for revival. For those companies that did not comply, registrars took action accordingly. Under this program, several businesses have benefited.
Is Temporary Appointment of New Director possible?
Since directors were dismissed, promoters had to take an instant action to file overdue returns with the registrar of the companies for which new directors were to be named. Although disqualified company directors are prohibited from filing annual returns with the company registrar. Existing directors should, therefore, appoint new directors within the company, but if the existing directors are excluded, they will not be able to sign the request for the appointment of a new director electronically. To prevent the same, existing directors should notify the company registrar concerned about the appointment of a new director through the back end of the MCA with the assistance of an expert.
What are the implications of Disqualification on Directors?
Below mentioned are the implications on the directors regarding the disqualification:
- The decision of the authority regarding the Directors ' disqualification resulted in the deregistration of DINs of the directors, thereby jeopardizing the directors ' career.
- Directors shall remain disqualified for a period of 5 years according to this decision from the date of deregistration of companies.
- Company’s accounts shall not be operated by such disqualified directors.
- • Directors are excluded not only from a company that has failed to comply with the specified rules and regulations, but also from other companies in which they are a part of Board of Directors.
There are many businesses in trouble with this decision, without any fault of their own.
What are the Penalty Provisions?
A penalty is assessed on the basis of non-compliance level. Full-time directors are expected to act as custodians of ethical practices otherwise they would be liable to a liability under section 166(7) of the Companies Act, 2013. If the offense is repeated, the punishment provisions will be even worse.
What would be the reactions of Directors on Disqualification?
The companies and directors concerned that they were not even told and that no warning had been issued, so they had no opportunity to explain their role. They expressed resentment against directors for such harsh treatment. Since the directors were not aware of the new rules under the 2013 Companies Act, they were trying to question the law. They requested a course of action from the government to receive the earliest relief.
Now what should be done by the directors?
A writ petition is required to be filed in high court, for the removal of director disqualification
Note* "A written petition must be filed in high court to seek the immediate temporary relief even if you do not want to restart the company or company that does not carry out operations or if bank account is not available."
What are the reasons for the Writing Petition?
In order to remove the disqualification of the director, the director can file petition to the respective High Court on the ground that reasonable opportunity to be heard must be given before taking any action against him. Based on the facts and circumstances of each case, the high court may remove the disqualification of the director or grant an interim stay order.
Below mentioned are the grounds of arguments in writ petition:
1. Opportunity of Being Heard
In the event that the applicant has been disqualified pursuant to Section 164(2)(a) of the Companies Act, 2013 is a violation of Article 14 of the Indian Constitution, which lays down the fundamental principles of natural justice. Until issuing an order, the right of an aggrieved person to be heard by the Indian Supreme Court in the event recognized as fundamental to the Indian Constitution.
2. Violation of the natural justice principle
Company registrar published a list of disqualified directors on MCA's website without notifying them properly. We can therefore claim that this is a breach of the Natural Justice Principles defined in Article 14 of the Indian Constitution.
Typically, due to commercial transactions or any other cause such as lack of professional advice, most newly formed companies fail to start business as a result companies fail to comply with the annual report as there was no business activity. We can therefore conclude that instead of disqualifying the claimant directly under Section 164(2)(a), a due notice must be issued and an opportunity could also be granted to be heard.
Therefore, under Article 226 of the Indian Constitution, we may file a written petition with the High Court. High Court can issue a stay order on the list of disqualified directors. The director's Director Identification Number (DIN) and Digital signature Certificate (DSC) of the director can be reactivated by the ROC concerned on the basis of the stay order once a copy of the written request is sent to the ROC together with the stay order and cover letter.
What are the recommendations for the Companies?
The authority is taking strong action for the company's economic growth despite continuing scrutiny. The government's aim is quite straightforward, and companies should obey the following:
- Approach of ethical and straightforward must be followed;
- In the management of funds and fund flows, they should be open and consistent;
- Perform due diligence and compliances at all times;
- Comply with the rules & regulations and laws;
- The custodian and guardian shall be the administrators with responsibility.
- Timely checks for timely removal of irregularities.
Management shall take preventive measures to resolve and address all issues when and when they occur.
Frequently Asked Questions about Removal of Directors Disqualification
Required number of directors shall be appointed by the promoter or registrar (when there is no promoter) in a company in such situations till the appointment of directors in general meeting.
Such disqualified directors can be a shareholder of the company irrespective of their disqualification status.
According to rule 14(5) of the company act, an application for deletion of the name from the disqualification will be made to the company registrar in the form DIR-10. Nevertheless, such an application can only be made after 5 years.