Director Disqualification: Remedies for Disqualified Directors

Over the last few years, the Ministry of Corporate Affairs (MCA) has actively taken action against shell companies. They have disqualified over 3,00,000 directors under section 164(2)(2) of the Companies Act, 2013. After disqualification of directors, the directors cannot use the DIN and DSC, and such directors need to resign from the company. Let’s have a deep dig into the remedies for disqualified directors and get to know the procedure for removal of disqualification.

Why does Disqualification of Directors happen and Remedies for Disqualified Directors?

As per law, the disqualification of directors happens if the director fails to file the financial statements or annual returns for 3 financial years consecutively. In addition to this, if he has not repaid the deposits taken or paid interest or redeemed debentures, then he is said to be disqualified. After the disqualification of directors, they are not eligible to be re-appointed as directors for 5 years. Further, if the companies fail to file an annual return and balance sheet with ROC, the name of the company has to be struck off from the register of the company.

A director is not eligible for fresh appointments unless there is a removal of disqualification. The Companies Act contains numerous grounds for rendering the director disqualified. But is does not contain many remedies for disqualified directors.

Disqualification of directors- Various Laws and Schemes

Previous Condonation of Delay Scheme

Under Section 8 of The Companies Act, registered company of India has to file the financial returns every year . If the directors have failed to file the returns for 3 years, then they can be disqualified, and the company would get the status of strike off. One of the remedies for disqualified directors was given by CODS. Under the CODS Scheme, the government gave the last chance to directors to comply with the requirements and avoid disqualification. It was operational from 1^st January to 30^th April.

Further, this scheme was only available to the defaulting companies whose names were not struck off but come under defaulting companies. This is due to the non-filing of the annual return and balance sheet. But this scheme was not available to companies who had already filed for strike off on their own.

Section 164(2) of the Companies Act, 2013

It explicitly states that no person can become the director of the company in case of the following-

1. Failure to file financial statements/ returns for 3 years continuously.
2. The director has moreover failed to repay the deposits or pay interest or redeem debentures for a continuous period of one year or more.
3. It furthermore mentions that they are not eligible to become a director for a period of 5 years.

What after CODS Scheme?

The MCA on 17^th May, 2018 vide general circular No.5/2018 gave clarification with reference to the CODS Scheme. As per the notification of MCA-

• Until the petition for revival of companies under section 252 of the Companies Act is pending before the Tribunal, the struck up companies can pursue the CODS scheme even after the expiry of the scheme.
• If the company is struck off, then the DIN of the disqualified director can be reactivated only after getting the NCLT order and complying with the necessary requirements.
• After obtaining the order, ROC has to raise a ticket on the MCA21 portal through a change requirement form (CRF). Thereafter, the ROC has to upload a copy of the order on the official portal. When the verification is complete, the deactivated DIN will get reactivated.
• Lastly, the disqualified director should not be the director of any other struck off the company. The ROC has full authority to conduct proper scrutiny of NCLT order and compliance.

Impact of Directors Disqualification

The office of the director will become vacant as a result of disqualification. Additionally, if the person is disqualified in any company due to section 167(1) of the Companies Act then he shall be considered as ceased in every other company where he was the director.

How can I activate DIN?

Following is the detailed procedure for DIN activation-

Step-1 

Disqualified directors have to file writ petition under Article 226 of The Constitution of India before High Court. The writ petition should accompany the following correspondence:

Step-2

The company can further file an appeal under section 252 of the Companies Act, 2013 before the National Company Law Tribunal (NCLT) for restoring the company name.

Step-3

When the High Court and NCLT give an order on DIN reactivation and revival, the appellant has to file documents along with annual returns with ROC.

Step-4

As mentioned above, after the completion of compliance, the ROC will raise a ticket on MCA21 and upload a copy of the order. Lastly, after proper verification, the officials will reactivate the DIN.

Important keynotes about remedies for disqualified directors

Are you a disqualified director? Are you suffering from deactivation of DIN?  Here is are a few key points which you need to know to overcome this situation-

• Under Section 248, the Registrar has the power to remove the name of the company from the company register.
• The ROC served notice on these companies which were going to be struck off. Ultimately, these companies were struck off since no reply of notice was given.
• If you have not filed financial statements/ returns for the past three years, then you will fall under this category. Additionally, you cannot be re-appointed as a director or appointed as director for five years.
• If the person still continues as a director even after disqualification, he commits a punishable offence. This offence is punishable with one year of imprisonment or fine which can extend from Rs. 1 Lakh to Rs 5 Lakh, or with both.
• The government has brought forth various schemes for relief to these companies.
• One of the options is to approach the High Court.
• An order stating about disqualification does not take effect within 30 days of conviction. Hence, the person receiving the order can file return and appeal within a period of 30 days to stay the proceedings.
• After disqualification, the promoters can file the overdue returns.  Once the director is disqualified, they are barred from filing any annual return.
• Currently, MCA does not have any scheme for making a disqualified director a director again before the expiry of five years.
• There are only two remedies for disqualified directors one was to avail CODS and second was to approach the Court for relief.
  

Outcome of having a disqualified director in the Company

There are recent notifications stating the need of filing form INC-22A. If one of the director’s DIN is deactivated , they cannot go ahead and file the form. Because of which, the company will become “active non-compliant” on the official MCA portal.

Active non-compliant

Following penalties will be levied in case a company becomes active non-complaint-

• After 25th April, 2019, late fine of Rs. 10,000 will be levied for filing the INC- 22A form.
• Moreover, the registrar has the power to strike off that company.
• Lastly, the company will not be able to file forms like SH7, PAS-3, INC 22, DIR-12, etc.

What to do after becoming ‘ACTIVE Non-compliant’ Company?

If your company has become an active non-complaint company you have to realize that you need to act fast. This can only be done after filing for removal for directors disqualification. Once it is done, then the tag of ‘active non-complaint’ will change to ‘active compliant.’

Hence, if the reason for not being able to file the INC-22A form is due to having a disqualified director in your company, then you have to immediately get DIN activation.

As soon as this hurdle is over, you can file the form. If you don’t get your DIN activated, ROC will swing in action and your company will be in trouble.

Conclusion

After the removal of all the inactive companies, MCA provided two remedies for disqualified directors. One was through CODS and the other was via Court. They have issued circulars which helped companies in restoring their name with ROC also. In the end, it also gave the opportunity to revive struck off companies. Therefore it can be said that the Indian government has efficiently handled the outcry about disqualification.

For more information about DIN reactivation or revival of struck off companies, do contact us here at LawyerINC.