Whether 'Disqualification' of Director can be removed by 'Restoration of Name of Company'

Short Summary:

In this Flash editorial, the author begins by referring the provisions of section 252 read with provisions of Section 164(2) of Companies Act, 2013 relating to Revival of Companies Struck off from the record of the Registrar and Removal of Disqualification of Director.

The main thrust of the article, however, is upon the 'Removal of Disqualification by Restoration of Name of Company with the approval of NCLT?'

Introduction:

As MCA has struck off approx 209,000 Companies and disqualified approx 300,000 Directors from its records. Due to disqualification, the person is not allowed to file the forms in other active companies also. As due to such mass struck off by ROC many applications have filed by the Companies with NCLT for revival of Companies.

Professionals / Corporates having many questions in mind relating to 'Revival of Company' and impact of revival of Company. Like:

i. Whether after revival of Company disqualification of director shall be remove automatically.
ii. Whether after revival disqualification can be remove by compounding under Companies Act, 2013.

Provisions under the Act:

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

Section 252 (3) If a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the Tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies, and the Tribunal may, by the order, give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies.

SELF GOVERNING SECTIONS:

First of all, we have to be aware of that both sections 164 and 252 are self-governing. They are not linking to each other or not reliant on each other. Even as per the MCA records several personnel has been disqualified as Director u/s 164 although the status of Company is active. It demonstrates that both sections are self-governing and independent.

Example: As per Section 248 if as per ROC company is not having business or operations from 2 (Two) financial years it can strike off the name of Company after fulfilling the compliances mentioned thereunder. However, as per section 164(2) disqualification trigger in case company fails to file Annual Return or Financial statement for continue 3 (Three) financial year. Trigger point of both the sections are dissimilar.

In other word we can say that non filing of Annual Return or Financial statement is not a standard for removal of name of Company from the record of ROC.

Analysis of Sections- 252:

Section 252 states that

First: 'Tribunal may order the name of the company to be restored to the register of companies'. Therefore, one can opine that if tribunal satisfied its restore Name of Company in the record of the Registrar of Company.

Second: 'Tribunal may give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies' Therefore, one can opine that tribunal may order for same position in the company of all the person and same position of the Company as it was on the date of strike off.

Section 252 is Just talk about 'Company'. The Section is not stating anything about Directors, Shareholders, Stake holders, Officer in default etc.

Analysis of Sections- 164(2):

As mentioned over, Section 252 states merely about the status of Company. Disqualification of Director elicit under Section 164.

Section 164(2) states that 'if director make default he shall not be eligible to re-appoint as a director of that company or appointed in other company for a period of five year.

This section has not point out anywhere that if Company be unsuccessful to file Annual Return or Financial Statement then ROC can strike off the name of the Company from its record.

Therefore one can opine that Section 164(2) restrict the director for re-appointment, new appointment etc for 5 years.

Even such directors are disqualified company can be run by appointment of New Directors. It is good saying that 'Company is a separate legal entity' it can’t stop working due to disqualification of its directors, death of shareholders, employees etc.

Now the question:

Whether Disqualification can be removed by the revival of Company:

As per above-mentioned provisions, both the sections have their own independence, are not dependent on each other. Disqualification trigger next day from the date of expiry of non-filing of 3 financial years. Strike off trigger by ROC after his satisfaction that the Company is not having any business or operations. Trigger point of both the sections is different- 2.

Power of NCLT: Even NCLT has assigned with powers under section 252 for the restoration of name of Company in its record. Although nowhere under Companies Act, 2013 power is hand over to NCLT pursuant to the removal of disqualification of Directors u/s 164.

Therefore one can opine that 'NCLT have power to issue order for restoration of name of Company in the record of the ROC. Although after restoration Company have to follow the compliances of all the sections of Companies Act, 2013. Like: If Company made any default / offence it is liable for penalty, punishments, compounding etc.'

On the basis of all the above mentioned discussion and pursuant to provisions of Companies Act, 2013 one can opine that 'Revival of name of Company in the record of ROC is not a criteria for removal of disqualification of director.' Even Name of Company is restored in the record of ROC still directors shall be continued as disqualified u/s 164(2) for appointment and reappointment and liable for vacant office in other Companies u/s 167(1) until unless there is any amendment in the provisiosn of Companies Act, 2013 or any clarification issued by the Central Government'

CONCLUSION:

As both the sections are independent, Section 252 given power to NCLT only for restoration of Name of Company. Companies Act, 2013 nowhere provisions is given for removal of disqualification of Directors. No provisions regarding removal of disqualification by compounding, payment of penalties etc.  Because compounding can be done for offences and disqualification is not an offence.

Therefore, it can be said that once a director is disqualified u/s 164(2) he shall continue disqualified for FIVE financial years. In the Active Companies promoters have to appoint new directors for smooth working of the Company.