Impact of disqualification on directors - Struck off companies


In this Flash editorial, the author referring the provisions relating to POSITION OF INDIVIDUAL AS DIRECTOR due to struck off name of Companies by ROC and HOW TO REMOVE DISQUALIFICATION OF DIRECTOR and the steps taken by the Ministries in this regards.

INTRODUCTION:

Ministry of Corporate Affairs along with Ministry of Finance has taken actions against the Shell Companies in other words the Companies which has not filed the Financial Statement and Annual Return with ROC. They have taken the action step wise step like;

  • MCA has cancelled the registration of around 2010 lakh (209,032) defaulting Companies from the records of ROC
  • Subsequently Ministry of Finance instruct the banks to restrict operations of Bank account of such Struck off Companies by Directors of such Companies and their representatives as on 5th September, 2017.
  • Subsequent, MCA has identified 106,578 Directors for disqualification under section 164(2)(a) of Companies Act, 2013 as on 12th September, 2017.

Intention behind above steps:

The intention of the Government behind the above actions is fight against Black Money. As menace of shell companies is an imperative element of such fight. As the fight against black money shall be incomplete without breaking the network of shell Companies.

This whole exercise shall go a long way in creating an atmosphere of confidence and faith in the system paving the way for ease of doing business in India. The interest of stakeholders would be protected and the image of the country in the global business arena and for a would substantially improve.

IMPACT OF ABOVE ACTIONS:

DIRECTORS of struck off companies

Due to above mentioned actions of Ministry approx 100,000 directors has been identified as disqualified u/s 164(2)(a) due to non filing of Financial Statement and Annual Return with ROC.

Legal Language: Section 164(2):

No person who is or has been a director of a company which-

(a) Has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

Shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

The most important questions in the mind of Professionals and the Corporates are what shall be the impact of such disqualification on Directors and Companies. There are many points to be discussed in relation to impact on directors. Which are given as follow:

1. Eligibility for Appointment in existing or new Companies or
Incorporation in New Companies.

2. Liability of Director after struck off of Company.

3. Penalty for the Directors for Non Compliance

  • Contravention of provisions u/s 164
  • Contravention on continue as director even after attainment of disqualification.
  • Penalty for default in Compliance of general duties

4. Vacation of office of directorship u/s 167.

5. Removal of Disqualification.

A. Eligibility for Appointment in existing or new Companies OR Incorporation of new Company

As per Section 164(2) in case of non compliance director shall not be eligible for re-appointment in that Company or 'appointment in any other Company'.

Even in the press release of MCA dated 12.09.2017 mentioned that 'any person who is or has been a director in a Company which has not filed financial statements or Annual return for any continuous period of 3 financial years shall not be eligible for 're-appointment as a director in that Company' or 'appointed in other Company' for a period of 5 years.

Therefore, it is clear that such person can’t be appointing as Director in any other Company after attainment of disqualification.

Even a Company has not struck off by Roc but the Company has not filed its financial statement or Annual Return for the period of 3 financial year director shall be disqualified to attain appointment in any other Company. In this case if director get appointment in any new Company then director shall be liable for non compliance of provision of section 164 and the professional who ever will certify the form shall be liable for non compliance u/s 447 and 448 of Companies Act, 2013.

As a result, it is advisable for all the professionals to check the qualification of director at the time of appointment or incorporation of new Company.

B. Liability of Director after Struck off from the Register of ROC:

Section 248 provides that, the liability, if any, of every director, manager, or other officer who was exercising any powers of management and of every member of the struck off Company, shall continue and may be enforced as if the Company has not been struck off.

Even in the show cause notice of ROC 'This dissolution by ROC is subject to the provisions that the liability of every director and members of the Company shall continue and may be enforced as if the company has not been dissolved'

Therefore, one can opine that even after struck off name of Company from the record of ROC directors are liable for the liabilities of the Company.

C. Penalty for the Directors for Non Compliance

1. Any person who contravenes the provisions of sec 164:

There are no specific penal provisions stated for the occurrence of default, but same as be stated under section 172 of the Act, company and every officer who is in default of chapter IX shall be punishable with fine of Rs. 50000 to 5 Lacs

2. Contravention on continue as director even after attainment of disqualification

He shall be punishable with the imprisonment for a term upto 1 year or with fine of Rs. 1 lac to Rs. 5 Lacs or with both

3. Penalty on non compliance of General Duties u/s 166: (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. (2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, and the community and for the protection of environment.

As it is duties of the directors of the company to act in best interest of the Company, shareholders etc. It is duty of the directors to follow and comply with the provisions of Companies Act and other legal compliances.

Consequently, one can opine that, if a director fails to comply with his duties then he is liable for penalty u/s 166(7) i.e. 'fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.’

D. Vacation of office of directorship u/s 167.

As per Section 167(1) The office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164;

As per MCA press release 'on suffering the disqualification, the Director shall vacant the office.'

One plain reading of section and press release one can opine that on occurrence of above disqualification u/s 164 the directors have to vacant their offices including the office of Company which has made non Compliance.

Practical Example:

If a Person is director in more than 1 Company example in 4 (A,B,C,D) Companies. One of such Companies (Company A) made default u/s 164(2). The name of Company has been struck off from the record of ROC and name of Such person has been mentioned in the list of disqualified directors by MCA on September, 12 2017.

In such case if that disqualified director filing any form in other Company (i.e. B, C, D) then a error is occurring that 'the person associated with the DIN is disqualified and not allowed to file the form'

Therefore, by this practical problem one can opine that intention of the Ministry is that once as director is disqualified u/s 164(2)(a) he have to vacant the office from all the Companies in which he is acting as director as a vacation u/s 167(1).

Now the Following Question Arise:

1. How the Company shall Appoint new director in case of disqualification u/s 164(2)

As per Section 164 (3) where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

Therefore, it can be opine that due to provision of Section 164(3) promoters has the power to appoint the new directors in case of disqualification of all the existing Directors.

However, Still there is a question:

In case of disqualification of all the directors, their DSC shall not work on the website of the MCA due to disqualification then how the Company will file the form for appointment of director appointed by Promoter or Central Government.

2. Whether such disqualified directors shall act as Shareholder or Not?

Yes, such disqualified director can freely continue as Shareholders in all the Companies irrespective they are disqualified u/s 164 and vacant office u/s 167.

E. Removal of Disqualifications

As per The Companies (Appointment and Qualification of Directors) Rules, 2014 contain a provision pursuant to 'application for removal of disqualification of directors shall be made in Form DIR-10.'

Rule 14(5) states that, 'Any application for removal of disqualification of directors shall be made in Form DIR-10.' However this is physical form required to be file with other form with the appropriate authority.

However, many questions arise in the mind after reading of Rule 14(5) which are still not answered by the Companies Act, 2013 like:

(i) Procedure of filing of DIR -10,
(ii) Appropriate authority to be address for DIR-10
(iii) Documents required to be submit with DIR-10 application etc. etc.
(iv) Whether disqualification shall be removed in case of Company went to NCLT for revival u/s 252.

Conclusion:

After reading the above mentioned provisions of Section 164, Section 167, Press Release of MCA, Practical problem in filing of form etc. etc. It can be opine that vacation of office of Director going to be one of the major action by Ministry of Corporate affairs against shell Companies.

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CS Divesh Goyal 
on 12 October 2017
Published in Corporate Law
Views : 1385
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