Disqualification of Directors under Companies Act, 2013

The Ministry of Corporate Affairs (MCA) has recently disqualified over 3 lakh Directors of defaulting companies under Section 164(2)(a) read with Section 167(1)(a) of the Companies Act of 2013. These companies had failed to file their MCA annual return on time. The recent decision by MCA has left many companies without a Board of Directors. Some Directors who hold Directorship in multiple companies have also been disqualified, even if only one of the companies failed to file MCA annual return.

However, the Ministry of Corporate Affairs (MCA) has decided to introduce the Condonation of Delay Scheme, 2018, with a view to granting an extension to the non-compliant companies to file their overdue financial statements, annual returns and other related documents by March 31, 2018.

Condonation of Delay Scheme, 2018

The Ministry of Corporate Affairs has recently released a circular as a relief to the disqualified directors:

  • Whereas, companies registered under the Companies Act, 2013 (or its predecessor Act) are inter-alia required to file their Annual Financial statements and Annual Returns with the Registrar of Companies and non-filing of such reports is an offence under the said Act.
  • Whereas, section 164(2) of the Act read with section 167 of the Companies Act,2013 [the Act], which provisions were commenced with effect from 01.04.2014, provide for disqualification of a director on account of default by a company in filing an annual return or a financial statement for a continuous period of three years.
  • Whereas, Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 further prescribes that every director shall inform to the company concerned about his disqualification, if any, under section 764(2), in form DIR-8.
  • Whereas, consequent upon notification of provisions of section 164(2), Ministry of Corporate Affairs (MCA) had launched a Company Law Settlement Scheme 2014 providing an opportunity to the defaulting companies to clear their defaults within the time period specified therein and following the due process as notified.
  • Whereas, MCA in September 2017, identified 3,09,614 directors associated with the companies that had failed to file financial statements or annual returns in the MCA21 online registry for a continuous period of three financial years 2013-14 to 2015-16 in terms of provisions of section 1.64(2) r /w 167(1)(a) of the Act and they were barred from accessing the online registry and a list of such directors was published on the website of MCA.
  • Whereas, as a result of above action, there has been a spate of representations from industry, defaulting companies and their directors seeking an opportunity for the defaulting companies to become compliant and normalize operations.

How can a Director be disqualified?

A director can be disqualified under Section 164 of the Companies Act, 2013 for the following reasons:

  • The Director is of unsound mind and stands so declared by a competent court.
  • The Director is an undischarged insolvent.
  • The Director has applied to be adjudicated as an insolvent and his application is pending.
  • The Director has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence. Also, any person who has been convicted of any offence and sentenced to imprisonment for a period of seven years or more, will not be eligible to be appointed as a director in any company.
  • An order disqualifying the Director for appointment as a director has been passed by a court or Tribunal and the order is in force.
  • The Director has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
  • The Director has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.
  • 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 company 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.

A person can be disqualified as a Director if the company has not filed MCA annual return for a continuous period of three years. Under Section 274 of the Companies Act, any person disqualified from being a Director will not be eligible for being appointed as Director in any company for a period of 5 years. 

Ways to Become a Director Again after Disqualification

A person can become a Director again after the disqualification procedure by appealing to the NCLT and work closely with Officers at MCA for filing returns. We work closely with the directors and companies to resolve the disqualification matter at the earliest.

30 Days Appeal Period

A Director who has been disqualified can appeal the decision with 30 days of notice to temporarily stay the order. Companies Act 2013 states that an order disqualifying a Director does not take effect within 30 days of conviction resulting in sentence or order. Once, an appeal is initiated, the person would continue to be Director until the expiry of 7 days from the date on which the appeal or petition is disposed of. Hence, any person who has received an order can file the returns and appeal within 30 days to stay the order of director disqualification.

Punishment to MCA Defaulters

The MCA has instructed that in case a director or authorized signatory of any ‘struck off’ company tries to syphon-off or embezzle money in any manner from his bank account, he will be liable for punishment of imprisonment for a period of 6 months – 10 years. 

Become a Director Again After Disqualification

There is no process in place currently for the MCA to make a Disqualified Director, a Director again before the end of the 5 year period. However, all stakeholders are currently waiting for the MCA to announce a procedure for removing the disqualification after filing the necessary compliance and payment of a penalty.

Legal Process for Restoring DIN of Disqualified Directors

Over the past few weeks, we have helped several promoters who have been disqualified in the defaulting companies for the restoration of their DIN.

In case you need assistance with filing an annual return for your company or removal of Director Disqualification, contact our expert tax advisor.