Appeal against Director Disqualification

Disqualification of Directors

Since the year 2013, the Ministry of Corporate Affairs (MCA) can disqualify a director for any of the following reasons under Company law.

He/She is an irrational person or unsound mind.
He/She is an insolvent
He/She is in the process of declaring insolvency
If an order has been passed for disqualifying him/her as a director of the company by Court
He/She had been convicted by a court
If he/she had bit paid any calls with respect to any shares of the company held
He/She has been convicted of offenses dealing with related party transactions at any time during the last preceding 5 years
He/She had failed to acquire a Director Identification Number(DIN).

Some Important Case Laws

Jai Shankar Agrahari Vs Union of India And Ors in Allahabad High Court

The high court quashed a list published by ROC of disqualified directors in the public gazette. It was held by Allahabad high court that only on the grounds of director disqualification under section 164(2) (a) or on his office becoming vacant under section 167(1) (a) ROC gets no power to de-activate DIN.

Delhi High Court’s Judgement in Mukut Pathak

The Hon’ble High Court of Delhi in a recent judgment dated November 04, 2019, in the matter of Mukut Pathak & Ors. vs. Union of India and Anr. [W.P.(C) 9088/2018 & CM Appln. No. 35006/2018] interpreted the provisions of Section 164(2) of the Companies Act, 2013 (“CA 2013”) in detail including disqualification of directors, retrospective applicability of the section, and applicability of principles of natural justice and discussed its consequent repercussions under Section 167(1) of the CA 2013.

The High Court clarified that there is no dispute that the Companies Act, 1956 as well as CA 2013 expressly obliges a company to file its financial statements and its annual returns within the stipulated period. As per Section 96(1) of CA 2013, a company is required to hold an annual general meeting (“AGM”) within a period of six months from the end of the financial year, and thus the company is obligated to hold its AGM before 30^th September of the next financial year following the close of the financial year. In terms of Section 92(4) of CA 2013, the annual return for a financial year is to be filed within a period of sixty days from the AGM or the last date on which the AGM of a company ought to have been held and in terms of Section 137(1) and (2) the financial statement of the company is required to be filed within a period of thirty days from the holding of the meeting and in cases where such meeting has not been held, the financial statements have to be filed within thirty days from the last date of holding of such AGM.

Relying on the judgment passed by the Hon’ble Supreme Court in the case of Union of India v J.N. Sinha [(1970) 2 SCC 458], the High Court noticed that the principles of natural justice are meant to supplement the law to ensure procedural fairness and such principles are to be followed while taking administrative decisions to ensure fairness in action. However, Section 164(2) of CA 2013 merely sets out the conditions, which if not complied with would disqualify an individual from being re-appointed or appointed as a director. In other words, the said Section sets out a qualifying criterion for directors to be appointed or re-appointed, in negative terms. Therefore, the provision does not entail any decision-making process on the part of the authorities and as a result, in such circumstances, the principles of natural justice such as the rule of audi alteram partem would be inapplicable.

The Delhi High Court was of the view that the directors would not demit their office on account of disqualifications incurred under Section 164(2) for the period prior to the amendments brought in through the Companies (Amendment) Act, 2018 with effect from May 07, 2018 by virtue of Section 167(1)(a) of CA 2013. However, if they suffer any of the disqualifications under Section 164(2) on or after May 07, 2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the CA 2013 are that they would demit their office in all companies other than the defaulting company.

Telangana High Court in Venkata Ramana Tadiparthi

The Court Said “Rule 11 clauses (a) to (f) as extracted above, informs about the circumstances under which DIN can be canceled or deactivated. But the said grounds are not the same as grounds envisaged under section 164(2) (a) of act. So, there is an alleged violation under section 164 of act, due to which DINs cannot be deactivated or canceled, except when it is in accordance with Rule 11 of the rules.

In view of the above circumstances and facts and the judgment referred to supra, the deactivation of the DINs of the company directors for alleged violations under section 164 of the act, cannot be sustained.”

Lucknow High Court’s bench headed by Tariq Siddiqui (supra) quoted in ex tensio, the view was taken by the Gujarat High Court and allowed the writ petition. The operative part of its judgment read:

“Considering the above cases, filing of writ petitions to challenge deactivation of the DIN is allowed. It was deactivated on account of their dis-qualification in one company affecting DIN for the other companies. The opposition parties are directed to reactivate the DIN of petitioners for use with other company. The respondent parties would however have the liberty to take legal action against the said petitioners for any non-compliance or statutory default of the provisions of the Companies Act of 2013. It would obviously have to be in accordance with the stated provisions of law.”

If the petitioners have incurred disqualification under section 164 of the act, 2013 then the actions of the respondents and in particular of ROC, in the deactivation of DIN od petitioners, cannot be sustained in absence of any provisions.

Writ petitions have to be allowed partly and the actions of the respondents should be quashed in deactivation of DIN of the petitioners as a consequence lead by the above discussion.

Effects of Disqualification

Once a person is disqualified, then he/she is not eligible for being appointed as Director of that or any other companies. The restrictions remain valid for five years.

Recently, the disqualified Directors’ names are been published on the government website. The High Court of Delhi in November 2019 clarified its position on director disqualification related cases during the hearing of Mukut Pathak and Ors. V. Union of India and anr. This said judgment resonated with other similar judgments passed by High Courts of Madras, Gujarat, and Karnataka, under Section 164(2)(a) of the Companies Act, 2013.

The judgment led to directors of many different companies collectively approach the Delhi High Court after disqualification from being appointed/reappointed as directors by MCA. The disqualifications were a result of their companies failing to file financial statements or annual returns for the past three years, and hence, the directors were disqualified under Section 164(2)(a).

Remedies Against Disqualification

If any company did not take advantage of CODS 2018, will they not be allowed to revive their company, and subsequently the directors can’t get their DINs reactivated? The answer is NO. But what are other ways to do the above tasks?

If any company fails to submit their financial statements or annual returns for 3 years continuously then it gets disqualified and because the director if the company is responsible for the functioning of the company his office gets vacant and his DIN get deactivated. Under CODS, the DIN of a director gets reactivated temporarily so he can submit the documents of the company and once the company gets revived, the director can also apply for the removal of his disqualification.

Applying to NCLT: Companies that get disqualified due to default in the submission of documents can apply to the National Companies Law Tribunal to get the revival order for their company and once the NCLT has approved the revival of their company, they can apply for the reactivation of DIN and obviously removal of disqualification.

Writ Petition: This method is preferably used by directors who only want their DIN to be reactivated can file a writ petition in High Court. And filing a writ petition in the high court is a constitutional right of any person under Article 226 of the constitution. Taking legal assistance might work in this case as filing a writ petition might come out as a tedious and time-consuming option for any director who does not have legal knowledge. The procedure of filing writ petition might be a difficult task as you can see below;

Drafting of writ petition

It requires a list of dates and events
An urgent application with notice of motion
Document stating a reasonable justification for the failure of documents submission
Information related to current status of company and about directors
The list of companies where petitioner holds the office
A copy of the impugned press release or notice having the list of the disqualified directors
Personal information of director and designation
This drafted application along with affidavits are required to be filed in High Court

An advocate needs to appear and receive the final order from the respective High Court
If the order is in favor of the petitioner then one requires to file the same to the RoC

Appeal Against the Decision of Disqualification of Director

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

Anyways there is no process in place currently for the MCA to make disqualified Director, a Director again before the end of 5 years period.

Appointing a new director is the first step to be taken by promoters after disqualification and to file the overdue returns. Since the existing Directors are disqualified, their digital signature certificates are also rendered invalid and therefore they cannot digitally sign the new director’s appointment application for filing with MCA. Hence, the existing Directors must execute resolutions for the appointment of the new Director of Company.

Principle of Natural Justice: Many of the companies do not receive any notice from the RoC asking for clarifications about the default that company made even though it is a mandatory clause. This is against the principle of natural justice, one should get the chance to clarify himself/herself.

Date of Implementation: The companies act, 2013 was implemented from 01.04.2014 and court took a stand that applying provisions retrospectively will be unjustified.

Contradiction in the acts: Companies act, 1956 had no provision for disqualification of directors of private companies for non-compliance so imposing of the new act on them in 2017 seems unjustified.