Remedy for ‘Disqualified Directors’

Ministry of Corporate Affairs (MCA) has announced the ‘Condoning of Delay Scheme - 2018’ which now allows defaulting companies to make good their irregularities, especially in terms of failure to file their financial statements of account for a continuous period of three financial years. This is a one-time settlement scheme that shall remain in force from January 1, 2018 through March 31, 2018.

In September 2017, MCA had disqualified 309,614 Directors associated with companies that had failed to file Financial Statements or Annual Returns for a continuous period of three financial years from 2013-14 to 2015-16 in terms of provisions of Section 164(2) read with Section 167(1)(a) of the Indian Companies Act, 2013. A list of such Disqualified Directors was published on the website of MCA.

Consequently, there has been a spate of representations from industry, defaulting companies and their directors seeking an opportunity to become compliant and normalize their operations.

Certain affected persons have also filed writ petitions before various High Courts seeking relief from the disqualification. The High Courts of Delhi and Madras have given notices to the Ministry of Corporate Affairs and the Registrar of Companies in lieu of petitions challenging disqualification of these directors.

Section 274 of the Indian Companies Act of 1956 was limited to dealing with disqualification of Directors of Public Limited Companies. However, the Act was amended bringing in its purview Private Companies as well in 2014 through the Indian Companies Act of 2013.

Legal Angle

Section 92 of the Indian Companies Act 2013 provides that every company shall prepare an annual return in the prescribed form containing the particulars as they stood on the close of the financial year within sixty days from the date on which Annual General Meeting (AGM) is held.

Section 164(2) provides that no person who is or has been a Director of a company which has not filed financial statements or annual returns for any continuous period of three financial years shall be eligible to be re-appointed as a Director of that company or appointed in other Company for a period of five years from the date on which the said company fails to do so.

Section 167(1)(a) provides that the office of a Director shall become vacant in case he incurs any of the disqualifications specified in section 164.

Therefore, failure to file annual returns for any continuous period of three financial years would lead to vacancy of office of Director.

Further, Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that every director shall inform the company concerned about his disqualification, if any, under section 164(2) in Form DIR – 8.

Relief

In December 2017, MCA announced the ‘Condoning of Delay Scheme - 2018’ which now allows defaulting companies to make good their irregularities, especially in terms of failure to file their financial statements of account for a continuous period of three financial years. This is a one-time settlement scheme that shall remain in force from January 1, 2018 through March 31, 2018.

Applicability

This scheme is available for all defaulting companies which have failed to file their financial statements or annual return as required under the Indian Companies Act, 1956 or the Indian Companies Act, 2013, as the case may be, and the Rules made there under, for a continuous period of three years.

Only those financial statements or the annual returns or other associated documents which were due for filing till June 30, 2017 shall be eligible for filing under this scheme.

This scheme shall apply only to the following documents:

1. Form 20B/MGT-7: Form for filing Annual Return by a company having share capital 
2. Form 21A/MGT-7: Particulars of Annual return for the company not having share capital
3. Form 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, AOC-4, AOC-4(CFS), AOC (XBRL) and AOC-4(non-XBRL): Forms for filing Balance Sheet/Financial Statement and profit and loss account
4. Form 66: Form for submission of Compliance Certificate with the Registrar
5. Form 23B/ADT-1: Form for intimation for Appointment of Auditors.

Procedure

1. The Director Identification Number (DIN) of the disqualified directors shall be temporarily activated during the validity of the scheme to enable them to file the due documents.
2. The defaulting company shall file thedue documents in the respective prescribed eForms paying the statutory filing fee and additional fee payable as per section 403 of the Act.
3. The defaulting company after filing documents under this scheme, shall seek condoning of delay by filing form e-CODS 2018 attached to this scheme along with a fee of Rs. 30,000/- (Rs. Thirty Thousand only) as prescribed under the Companies (Registration Offices and Fee) Rules, 2014 well before the last date of the scheme.

Conclusion

This is a very good one-time opportunity for ‘Disqualified Directors’ and defaulting companies to make good their default. This scheme is expected to benefit over three Lakh disqualified directors. 

For Directors who fail to take advantage of this amnesty scheme, their disqualification will be made final for a period of five years and other penalties as prescribed under the Indian Companies Act, 2013 will be attract.