How to Remove Directors Disqualification By FCS Shweta Gupta


1#: THE DAWN OF MODI ERA, 2014:

  • The sunset of the UPA govt. was predicted even before the elections took place.
  • The final phase of Mr. Manmohan Singh’s regime was marred in controversies of laxity and corruption.
  • The economic condition was precarious; cases of corruption, fraud, money laundering, black money hoarding, etc. resulted into low GDP growth and high inflation.
  • The sentiments of common people were of despair and hopelessness as jobs had dwindled.
  • Global image of the country took a severe beating; investors shied away from our markets.
  • Entire govt. machinery came to a standstill as conclusive decisions were not taken.
  • This negativism gave an unprecedented advantage to Mr. Modi, who was the PM candidate of the BJP.
  • Thus, in May 2014, India witnessed the dawn of ‘Modi Era’ in India, giving him a clear mandate for the next five years.

2#: DECODING THE MODI ERA:

  • Mr. Modi in his poll speeches pledged to eradicate corruption, if voted to power.
  • After taking oath as Prime Minister, he reiterated his stand on fighting corruption and black money.
  • Keeping with the expectations of the people, the first step was taken in 2016- Demonetization of 500 & 1000-rupee notes.
  • A Special Task Force(STF) was constituted by the Prime Minister’s Office, with joint Chairmanship of Secretary, Revenue and Secretary, Corporate Affairs. Along with other agencies, this Task Force was to enforce action against erring companies.
  • These efforts led to unearthing more than 2 lakh companies which were defaulters, dormant, non-functional, hibernating or shell.
  • Thus, in mid-2017, a stringent action in the form of deregistering 2.2 lakh companies and removal of directors of these companies was announced.

3#: MODI AND ECONOMY:

  • Modi inherited a crippled economy; barely managing to hobble on crutches. Looking at the challenge ahead, he took some tough decisions.
  • All govt. authorities were instructed to work in full earnestness and compile an exhaustive list of wrongdoers.
  • In this process demonetization was announced; followed by strike-off of shell companies.
  • His focus was on providing infrastructure, good governance and ease of doing business, so that development starts.
  • From 2014-2018, in the opinion of many, Modi’s govt. has put the economy on the right track.
Prime Minister Modi has always expressed his view that development should encompass ALL and the result of it should reach the lowest strata of the society.
Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)

4#: STRIKE-OFF AND ITS IMPACT:

REASONS WHICH LED TO THIS ACTION:

REASON 1#: The Registrar of companies(RoC) reviewed and assessed all registered companies and based on the findings took punitive action in accordance with the section 248 of Companies Act 2013.

REASON 2#: Those Companies which were defaulters, hibernating or lack due diligence were struck off.

REASON 3#: This action of the RoCs had a cascading effect on the Directors working in these Companies. The disqualification of Directors took place under Section 164(2) of Companies Act.

REASON 4#: Most of the companies hit by this action had defaulted and not complied with the prescribed law. They had failed to file the Financial Statements and/or Annual Returns for consecutive 3 years.

REASON 5#: Dormant companies had not informed the authority of their status.

REASON 6#: Shell companies that showed a huge amount of money transactions during demonetization but may not explain them.

REASON 7#: Directors didn’t take note of due-diligence, therefore, failed in their duties which led to the removal of directors.

IMPACT ON THE COMPANIES:

IMPACT 1#: These companies, from the date of issue of the notice by the RoCs, may not operate any further.

IMPACT 2#: All their bank accounts were frozen, and no transaction can take place. However, the liabilities and dues of the company will not be absolved.

IMPACT 3#: Penalty imposed in accordance to the provisions provided under the Act and the Rules prescribed thereunder.

IMPACT 4#: In addition to these, restriction have been put on transfer and sale of movable and immovable properties of such companies.

IMPLICATIONS FOR THE DIRECTORS:

IMPLICATION 1#: The disqualification of Directors led to their DINs being deregistered and hence, their career jeopardized.

IMPLICATION 2#: The disqualified directors were barred for 5 years from the date of the company’s deregistration.

IMPLICATION 3#: They may not operate the company’s account as they were frozen.

IMPLICATION 4#: The removal of directors was not only from that company but from all other companies in which they may have been on Board of Directors.

IMPLICATION 5#: In this way, indirectly many companies were affected adversely, finding themselves in great trouble for no fault of their own.

PENALTIES UNDER COMPANIES ACT, 2013

PENALTY #1: As most of the companies have been deregistered because of defaulting in filing of documents such as IT returns, therefore the penalty imposed is generally ‘Late Fine’.

PENALTY #2: Repeat offenders, who don’t fall in line, are given harsher punishment.

PENALTY #3: The full-time Directors are supposed to be custodians of ethical practices and if they fail in doing so, they are liable to a penalty under section 166 (7) of Companies Act, 2013.

PENALTY #4: A disqualified director can be fined anything between 1-5 lakh rupees, based on the severity of non-compliance.

ITS REPERCUSSIONS:

1. The affected companies and their Directors cried foul as they claimed they were not served any notice and hence, no chance to explain their stand.

2. The Directors, who were not full-time directors, showed their grievance towards such harsh treatment.

3. The Industry, on the whole, panicked and tried to question the action as there was lack of awareness about the new provisions under the Companies Act, 2013.

4. Many companies pleaded that the error was a management lapse on their part and not intentional.

5. The demand of the companies at large was for the govt. to work out a course of action through which genuine businesses may get a reprieve at the earliest.

SOLUTIONS TO THE PROBLEM:

Although the revival of struck off companies is not easy but is certainly possible. Under Section 252 of Companies Act, 2013, there are certain provisions for the revival of the deregistered companies as well as restoration of DIN.

SOLUTION 1#: Appeal to The Tribunal:

Section 252(3)- An aggrieved company or its member or creditor or workman can appeal to the Tribunal by the way of filing an application within 3 years of the name being struck off.

The Tribunal has the power to restore the Company and for removal of Directors disqualification, if it’s satisfied by the explanation and evidence.

SOLUTION 2#: Rule 87(A) NCLT (National Company Law Tribunal) (Amendment) 2017:

An application can be filed by the affected company or its members or workmen with the NCLT within 20 years of publication of notice. Due documents must be submitted, affidavit verified, and stipulated fee submitted.

The Tribunal will then hear the case as per the specified Act. At the end, if the Tribunal is satisfied by the documents and evidence, it will revive the company.

SOLUTION 3#: Writ Petition:

A Writ Petition can be filed in the concerned court to seek reprieve. In fact, removal of directors had led to a spate of such petitions praying for immediate relief.

SOLUTION 4#: Condonation of Delay Scheme, 2018:

In the wake of this stern action, a great uproar was created by the industry. The pressure was created to provide a quick solution to this mammoth problem. Thus, the Central Govt. took a step utilizing its powers under sections 403,459 and 460 and introduced the Condonation of Delay scheme (CODS), 2018. This was seen as a relief and an opportunity to rectify their mistakes.

BEST WAY OUT:

The best option for the revival of struck off companies was to avail the CODS, 2018 as it’s a one-time settlement scheme saved not only time but also money.

PROCEDURE AND PROVISIONS OF THE COD SCHEME, 2018:

  • All companies, except those removed from the register under section 248(5) of the Companies Act, 2013, can apply.
  • Duration of the scheme was from 01.01.2018 – 13.03.2028, which was further extended to 01.05.2018.
  • In order to achieve restoration of DIN and remove disqualification of Directors, their DIN was reactivated (temporarily) to facilitate the filing of overdue documents.
  • The applicant defaulting company had to pay the filing fee as well as the additional fee as prescribed under section 403 of the Companies Act.
  • Then after that, the company sought Condonation of Delay by filing e-CODS, 2018 along with a fee of 30,000 rupees.
  • Forms filled were Form No. 208/MGT, Form No. 21A/MGT-7, Form No. 23, Form No. 66, Form No. 238/ADT-1.
  • Those companies that had not done the needful and their details were not in the records of the MCA21 portal and found disqualified by the end of the scheme, then removal of directors had to take place once again.
  • Those entities that had been deregistered under section 248 of the Companies Act, 2013 and had appealed for revival under section 252, their Directors’ reactivation took place only after the NCLT order.
  • The companies which had not complied fully, the Registrars took action accordingly.

Many companies have benefited under this scheme!

5#: ‘MODI’FIED FUTURE- AFTER CODS 2018:

As Mr. Modi hinted that all actions taken were the beginning and not the end. Hence, the govt. continued relentlessly to pursue its goal. The govt. and its agencies are working earnestly towards continuing with the cleaning up act.

PLAN #1: All the ambiguities in the Companies law have been dealt with and now there are clear cut provisions and penalties for every default.

PLAN #2: Some Directors were working in as many as 20 companies that goes to show they had malafide intentions. Thus, a strict criminality procedure was started against them.

PLAN #3: The Serious Fraud Investigation Office (SFIO) was empowered to handle such criminal offences and even arrest the guilty.

PLAN #4: A National Financial Reporting Authority(NFRA), an independent body was set-up to keep tab on financial statements and accounts of companies.

PLAN #5: Another initiative which was underway in mid 2018 was development of a state-of-the-art software application with a feature of ‘Early Warning System’(EWS).

PLAN #6: A Special Task Force (STF) was constituted by the Prime Minister’s Office, with joint Chairmanship of Secretary, Revenue and Secretary, Corporate Affairs. Along with other agencies, this Task Force’s job was to enforce action against erring companies.

PLAN #7: This STF met seven times till mid 2018 and is working in all earnestness to weed out fraudulent companies and black money.

PLAN #8:Dummy Directors’ was another major concern for the govt. To counter this menace, the MCA had planned to seed DIN with PAN and Aadhaar at the time of application for DIN.

6#: ADVICE FOR THE COMPANIES:

As the Govt’s intent is quite clear the companies need to tread cautiously.

ADVICE #1: The Companies need to follow the rule book to a T.

ADVICE #2: Ethical and straightforward approach will keep them safe.

ADVICE #3: Self-regulation shall be implemented in full sincerity.

ADVICE #4: Accounts and fund flows shall have transparency and clarity.

ADVICE #5: Due diligence and compliance shall be ensured at all times.

ADVICE #6: Directors shall be conversant with the rules, laws and amendments of the Companies Act.

ADVICE #7: Directors shall take up the role of custodian and guardian in full earnestness.

ADVICE #8: Checks and balances shall be in place to red flag any irregularity well on time.

ADVICE #9: Management shall be able to take preemptive measures, overcome and solve all problems as and when they arise.

CONCLUSION:

The Modi govt. completed four years in mid-2018 and has been under continuous scrutiny from the first day. Many strong steps have been taken and the country today is comparatively much better off than it was in 2014.

On the one hand, Modi has won many die-hard fans but on the other, he has been ripped apart by criticism too. His step of demonetization is now touted by the opposition as the reason for slow economic growth. Newly introduced GST has also come under severe flak by some.

Undeterred by criticism, Mr. Modi has made it clear that he will continue to pursue his goals for the progress of the country.

The companies need to adhere to the system with full honesty;
progress and development will automatically come to them.
Shweta Gupta (Founder and CEO, MUDS)
Any unanswered questions or doubts, please contact us:
call at 9599653306 or mudsmanagement@gmail.com

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  • Modi is an illeterate fool who has stopped all business in India. How can you block all businesses of a person if he has made a small mistake and failed to file documents of a dormant company for 3 years. At most there should be a financial penalty for the delay, specially in cases where is no transaction has been made by a company.

    07-09-2018 / 11:37:37 PM
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