The Ministry of Corporate Affairs tightened the noose of all the defaulters for non-filing of their financial reports annually. Under one of the measures taken by the MCA to purge defaulting companies and directors, it struck off over 2.5 lakh companies from its database and disqualified more than 3 lakh directors.
A director is said to be disqualified when they are ineligible under the law to act as a director or be appointed as a director in a company unless the reason for the disqualification is removed. Section 164 of the Companies Act, 2013 states such reasons for disqualification of Directors in a company.
Section 164 of the Companies Act, 2013
There are two situations laid down in Section 164(2) when the disqualification of directors arises:
- Non-filing of financial statements and annual return for any continuous period of 3 years;
- Failure to repay interest on deposit/ debentures or repayment of deposit/debentures and such failure continues for a period of 1 year or more.
If any of the above two situations arise, all the directors of a company face disqualification. The consequence of the disqualification is that the disqualified director can neither be re-appointed in a company nor be appointed as a director in any other company. This remains the case for the next 5 years from the date of their disqualification.
Section 172 of the Act states that a defaulting company and every officer of that company who is at default must be punished with a fine for not less than INR 50,000 extendable up to INR 5 lakhs.
Remedies For Removal Of Director Disqualification
Remedies For Companies
To provide an opportunity to the non-compliant and defaulting companies of India, for rectifying their default, the Ministry of Corporate Affairs (MCA) briefly introduced a scheme called Condonation of Delay Scheme 2018 (CODS), which was a scheme active between January 1- April 30, 2018.
Under the scheme, the DIN of disqualified directors could be reactivated so that they could file their pending documents. The CODS scheme was applicable to defaulting companies, except the companies who have been removed from the Register of Companies (ROC) in accordance with the Section 248(5) of the Companies Act, 2013. Thus, the already disqualified directors of the struck-off companies could avail of this scheme.
In that case, the only option available to the companies was to file an application with the NCLT for the revival of their struck-off company.
Remedies For Disqualified Directors- Filing of a Writ Petition
A Writ Petition can be filed with the High Court by the aggrieved director as per Article 226 of the Indian Constitution. The writ petition as a remedy for director disqualification can be used on the ground that the directors were not provided with sufficient opportunity for being heard before their disqualification under Section 164(2).
In a recent case of Srinivasan Sandilya & Others vs. Union of India, a director filed a writ petition with the High Court regarding the unjust order of disqualification without providing him with an opportunity of being heard. Subsequent to such a petition, the High Court granted a stay on the ROC’s order of director disqualification till next hearing date.
The grounds on which the writ petition was successful in getting a stay on disqualification of the director include the following:
- Audi Alteram Partem: The Latin maxim means ‘hear the other side’. The primary contention against directors’ disqualification is that they did not get a proper opportunity of being heard before stringent action of disqualification was taken against them.
- Principles of Natural Justice: The directors were disqualified and the list of their names was put up by the MCA without providing them with any information about their disqualification.
- Implementation of the new Companies Act, 2013: The applicability of the new Companies Act of 2013 was questioned upon private companies that were registered under the old Companies Act, 1956.
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