Disqualified directors of defaulting companies permitted for new appointment and reactivation of DSC/DIN

The Delhi High Court has ruled that directors disqualified due to a company's default can be appointed to new companies, provided a significant period has passed since their disqualification. This decision stems from the Companies Fresh Start Scheme, 2020, introduced to help defaulting companies and their directors rectify their affairs. The court permitted the reactivation of a disqualified director's DIN and DSC to allow them to start a new business, subject to filing necessary documents and seeking condonation of delay.

The Hon'ble Delhi High Court in Anant Narain v. Union of India [W.P. (C) 7280 of 2020 and CM Appls. 24543-44 of 2020, dated January 06, 2021] set aside disqualification of the directors of the defaulting Company and provided an opportunity to the disqualified directors of the struck off Company under Companies Fresh Start Scheme, 2020 ('the Scheme') to be appointed as directors of other/new companies, provided the directors have gone a substantial period of their disqualification.

Facts

Anant Kumar ('the Petitioner') is the director of M/s Innowin Info Solutions Pvt. Ltd. ('the Company') which was struck off due to non-filing of financial statements or annual return for a continuous period of three financial years. The Petitioner was disqualified under Section 164(2) of the Companies Act, 2013 ('the Companies Act') and its Director Identification Number ('DIN') and Digital Signature Certificate ('DSC') had also been deactivated. The Petitioner now wants to start a new business and accordingly pray for reactivation of DIN and DSC, in view of the Scheme. Hence, this petition.

Issue

• Whether the Petitioner being a disqualified director of struck off Company is entitled to be appointed as director of other/new companies?

Held

The Hon'ble Delhi High Court in W.P. (C) 7280 of 2020 and CM Appls. 24543-44 of 2020 dated January 06, 2021 held as under:

• Noted that, the government introduced the Scheme, in light of the COVID-19 pandemic videGeneral Circular No. 12/2020, dated March 30, 2020, to allow a fresh start for defaulting companies and directors of such companies and provides an opportunity for active companies who may have defaulted in filing of documents, to put their affairs in order. 
• Observed that, in furtherance of the purpose of the Scheme, the directors of the struck off companies who seek to be appointed as directors of other/new companies, ought to be provided an opportunity to avail the Scheme, provided that directors have undergone a substantial period of their disqualification.
• Further noted that, the Scheme clearly seeks to provide a fresh start for directors of defaulting companies who seek appointment in other companies or wish to start new businesses. Therefore, if a substantial period has passed since the disqualification of such directors, they ought to be given an opportunity to avail of the scheme.
• Held that, the Petitioner wish to start a new business, their DIN/DSC ought to be reactivated within a period of one week to enable them to conduct their fresh business in accordance with law.
• Further directed the Petitioner to file the relevant documents and seek condonation of delay in accordance with the applicable laws and regulations w.r.t the Company, if the same is permissible.

Relevant Provisions

Section 167(1)(a) of the Companies Act

'Vacation of office of a director

167(1) The office of a director shall become vacant in case-

he incurs any of the disqualifications specified in section 164;

Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.'

Section 164(2) of the Companies Act

'Disqualification for appointment of director

164(2) No person who is or has been a director of a company which-

• has not filed financial statements or annual returns for any continuous period of three financial years; or
• 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.

Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.'