Disqualification of directors- Options availiable to individual directors?

As we all are aware that in September, 2017 the government of India steps up its fight against the black money. The Government of India with the help of Ministry of Finance, pushes ahead with the efforts to weed out shell companies (a term used for entities that have not been carrying out business for long and are allegedly used as conduit for illegal fund flows) has taken strict action against the shell Companies.

1. The first action was against those Companies that prima facie appears to be non-functional (also called 'Shell Companies'). On 5th September, 2017 around 208,800 Companies were struck off from the database of the Registrar of Companies (RoC);

2. The Ministry of Finance directed the branches of all the banks of those companies to restrict/stop the operation of the bank accounts of all such companies by their directors and authorized representatives;

3.Third step involves action against the defaulting Directors of those all Companies that did not filed their Annual returns or financial statements for the past three years. After MCA direction around 3,09,614 directors has been barred to continue on the board of Directors of any company in which they are Directors for the next five years. After this action the Digital signatures of all the disqualified directors can't be used in filing of any document like annual reports and Balance sheet documents will not to be accepted by concerned RoC with which Company is registered.

In this Article we will try to discuss on the option which are available to an Individual Director (i.e. directors who has been barred to continue on the board of Directors of any company for the next five years) to remove his disqualification. First of all let us understand the relevant provision of Section 164 (2) (a) of the Companies Act, 2013, which dealt with the ground of Disqualifications.

A company in which the Director is a part of the Board has not filed financial statements or annual returns for any continuous period of three financial years. The Section provides for disqualification of directors if the company has not filed financial statements or annual returns for a continuous period of three financial years (non-compliance ground). Disqualification under Section 164(2)(a) results in automatic vacation of the office of the disqualified director, under Section 167.

Let us understand the options to come out from the disqualification available in all the above three situations:-

SITUATION NO-1: WHERE THE AGGRIEVED PERSON IS A DIRECTOR IN ONLY ONE COMPANY AND THE STATUS OF THE SAME IS 'STRIKED OFF' AS PER MCA DATABASE;

Some people are having an opinion that disqualification of Directors can be removed by filing of application in DIR-10 with Central Government. However, the fact is that such application in DIR-10 can be file only at the end of the tenure of five years post his disqualification.' Therefore, Filing of DIR-10 before completion of 5 year is not a way out for removal of disqualification of director or to get rid from the status of disqualified Director. Considering the situation it can be conclude at present, since there seems to be no remedy available as per the Companies Act, 2013, a Writ Petition can be made by the aggrieved director under Article 226 of the Constitution of India in the absence of any alternate remedy available. On 21.09.2017, the Madras High Court has passed an interim order staying the RoC Chennai's order of disqualification of Bhagavan Das Dhananjaya Das as the director of Birdies and Eagles Sports Technology, a Private Company.

SITUATION NO-2: WHERE AGGRIEVED PERSON IS A DIRECTOR IN A COMPANY AND THE STATUS OF SAME IS STILL ACTIVE AS PER MCA DATABASE;

To opt 'The Condonation of Delay Scheme, 2018' announced by the Ministry of Corporate Affairs and which is active from 1st January 2018 to 31st March 2018. All the Directors who were recently disqualified for failure to file MCA annual return can file MCA eCODS form 2018 to regularize compliance and avoid permanent disqualification for a period of 5 years. Once all the overdue annual returns have been filed, form eCODS must be filed by the Director before 31st March 2018.

Important Note: Form eCODS will not be available for download on the MCA Portal until 20th February 2018. However, the Directors will be allowed to file the overdue MCA annual return from 1st January 2018. Hence, all overdue compliance can be completed before the release of eCODS form by the MCA. Once form is made available, the Directors would have to file eCODS form with the details of all overdue MCA annual returns filed along with a payment of Rs.30,000/-

SITUATION NO-3: WHERE AGGRIEVED PERSON IS A DIRECTOR IN MORE THAN ONE COMPANY AND THE STATUS OF ONE COMPANY IS ACTIVE AND OTHER IS STRIKED OFF AS PER MCA DATABASE;

Considering the situation it can be concluded at present, since there seems to be no remedy available as per the Companies Act, 2013, a Writ Petition can be made by the aggrieved director under Article 226 of the Constitution of India in the absence of any alternate remedy available. 

The author can be reached at legal@sigmalegal.in, cs@sigmalegal.in, ipr@sigmalegal.in