How Disqualification Affects a Director’s Career if not Removed ?

According to the Companies Act 2013, if any company fails to submit their financial statement consecutively for three years then the director of the company might be disqualified for five years from the directorship of that company and can also be banned from joining any other organisation as a director. This could adversely affect a director’s career. Here the question to be asked is whether the disqualification can be removed before five years or not? And if it can be then what is the procedure? To give answer to these questions we have explored various aspects of the removal of director disqualification in this article. By the end of the, you will learn

  • Grounds of disqualification of directors from the organisation?
  • How does adding new provisions in the act make an impact?
  • Ways through which director can get requalified?    

Grounds for Directors’ Disqualification

The Companies Act of 2013 has made it mandatory for companies to furnish documents related to their finances and operations every year. In comparison to the previous version of Companies Act, default in submission of documents mentioned above for a continuous period of three years has stricter provisions of punishment. In case the company is in default, strict actions are taken against the director as the act considers the director of the company responsible for the actions of the company. This is because the directors of the company are responsible for the smooth functioning of the company. The following points will give information regarding rules or issues which can lead to directors’ disqualification,

  • Any director of the company who has been convicted under section 188 by the court regarding party transactions during the last five years.
  • If the directors fail to inform about their respective shares in any company held by them alone or in collaboration.
  • If any director has applied for his/her adjudication as an insolvent or if the directors’ application for the same is still pending.
  • If the director is convicted in any offence by the court and sentenced to imprisonment for more than 6 months.
  • If on due date the organisation fails to redeem any debentures or fails to pay the interest due.
  • If for three consecutive years, the director of the company has not filed its financial statements an annual report.
  • If the company has failed to repay the deposit made to it or pay interest on those deposits.
  • If for one or more years, the company fails to pay the declared dividend, then it could also lead to disqualification of the company’s director.
  • If the director is not of sound mind as confirmed by any court.
  • The directors who are undischarged insolvent can also be disqualified by the court.
  • If any court or tribunal has earlier ordered the disqualification of the director.

Impact on Director’s Career If Disqualification is not Removed in Time

  • The Ministry of corporate affairs has clearly stated that the directors once disqualified will be rendered ineligible for appointment in any other company for five years. This could mean an exile of five years from an illustrious corporate career. 
  • The liability of a company after being struck off remains with the directors even after their disqualification. 
  • The directors may also face huge penalties due to non-compliance of RoC rules. 
  • If a director continues to be on the directorship even after disqualification, then he/she could face imprisonment of one year or a fine of 1 lakh to 5 lakh. 
  • The office of the director becomes vacant after disqualification.

We can say that the directors’ disqualification not just halts the career of directors, it could also lead to them facing penalties or in some cases imprisonment. To avoid all these penalties and disqualification, the directors are advised to ensure submission of all the relevant documents of their company to the RoC and follow all the norms of the Companies Act. If any director thinks that their disqualification from directorship was unreasonable, then they can approach a legal firm for advice on the removal of disqualification. There are several ways through which director disqualification could be removed and a legal firm could assist him in choosing the best way for the removal of disqualification

Different ways to seek relief from Disqualification

In 2017 using the Companies Act there were about 2.4 companies that were axed by the Ministry of Corporate Affairs [MCA]. The companies started looking for the ways for their revival and directors hoped to get back their DIN. When the Condonation of Delay Scheme 2018 was proposed by MCA, the directors hoped to revive their companies without paying heavy penalties and applying for the removal of their disqualification.

  • As it is the duty of the director that every year he has to oversee filing of all the financial details of the company with the RoC, if one fails to do so then, the ministry can remove the company from RoC and deactivate the director's DIN for five years. In the year 2018, the government came up with a scheme under which the directors could file the relevant documents to get their DINs reactivated. This scheme was called Condonation of Delay Scheme [CODS]. The scheme involved payment of a moderate fee and condonation of heavy penalties due to defaulting in payments. Many companies used this scheme for revival and removal of directors’ disqualification. The working of the scheme is:
  • All the statutory documents are to be submitted with the RoC by the disqualified directors to get their DIN activated for a temporary period.
  • The documents are submitted with the statutory fee prescribed in Section 403 of the Companies Act.
  • The fee to be submitted was only 30000rs, with an e-CODS form so companies were saved from heavy penalties.

What are the Current Ways to Remove Directors’ Disqualification?

Many directors failed to use the advantage of CODs for reviving their business and thus also missed the chance of reviving their careers by removal of directors’ disqualification. So, the directors who failed to use the scheme and remove their disqualification were left with these options,

  • Due to the economic slowdown created by COVID-19, the MCA has started thinking of ways to revive the economy. One sure way was to allow the struck off companies to have an opportunity to restart their operations. Therefore, the Government has introduced Companies Fresh Start Scheme 2020, that allows the owners/promoters of the struck off company to apply for revival of the company without paying hefty penalties of non-compliance. Once the company is revived, the directors of the company can apply for removal of disqualification and reactivation of their DIN.
  • The directors can apply in the National Companies Law Tribunal and can hope to get a company revival order. They can also apply for removal of their disqualification and reactivation of DIN once the company has revived. In this case, when NCLT passes the revival order of the company, then RoC verifies the order and other relevant documents of the directors. But this can only be followed if the owners of the company want to revive the company.
  • The other option out there is available to the directors who only want to activate their DIN without applying for the revival of their company. In this case, the directors can file a writ petition in the High Court. Filing a writ petition in High Court is attributed to constitutional rights under Article 226 of constitution.

Hire an Experienced Representative 

Taking legal help to file a Writ Petition in the High Court is necessary considering the technicalities involved in the process. There are lots of details that should be considered before drafting the petition and only an experienced professional can handle this kind of job. Also, an expert professional from a legal firm will help you in the filing of the petition and representing your case in the Court. An advocate from a reputed firm will attend all the hearing of the Court and put arguments effectively to ask for relief from disqualification. Once the Court grants a favourable order, the expert will help you in following the complete procedure mentioned in the order. He will also help you file all the necessary documents in RoC before activation of DIN. 

If you are worried about the outcome of filing a Writ petition in High Court or confused whether it will bring positive results, then this should serve as good news to you. There have been many instances across High Courts from all over the country where the director's disqualification has been removed after hearing a Writ petition filed by them. The judiciary has granted interim relief to many directors and quashed orders of RoC in some cases. 

The Court is in general agreement with the aggrieved petitioners on the following points:

  • Retrospective Application of Companies Act: In some cases, the Court also found the act being applied retrospectively for disqualification of directors. The Courts deemed this kind of application to be unjustified. 
  • Contradictory Provisions in the Previous and New Act: The High Court finds it objectionable that the provisions of the Companies Act of 1956 did not have these regulations for the private companies and their directors, and so the new Act should not impose it on them in 2017.
  • Order of RoC is Against Natural Justice: In most cases of directors’ disqualification, the aggrieved petitioners have mentioned that they never got any notice regarding their removal from RoC before the orders. Therefore, they never had a chance to clarify to RoC why they were not able to meet all the compliance standards of RoC. This is against the constitutional right of any individual as it doesn’t allow one person to show the cause of their actions and passes the order unilaterally. 

So, you can safely assume that the judiciary generally gives a favourable decision to directors who give valid reasons for defaulting. This should serve as a ray of hope for disqualified directors who are sceptical of filing writ petition for disqualification removal of their directorship. Just select an experienced legal firm that can represent your case efficiently and hope for a positive outcome. 

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