A company is generally managed by a bunch of people known as directors who collectively form the Board of Directors. They are responsible for making strategic decisions that affect the overall functioning of the business entity. It is imperative that the directors act in good faith and work towards the benefit of the shareholders and the company that they represent.
A director is expected to perform his tasks and duties with diligence and utmost care and integrity, failing which he/she could be removed or ousted. The year 2017 saw a massive step taken in the right direction by the government as they disqualified over 3,00,000 persons holding directorship positions as they failed to comply with regulatory requirements that were set by the Companies Act, 2013.
Disqualification of Directors
The Companies Act, 2013 lays down the grounds upon which a director may attract disqualification. Section 164 of the Companies Act, 2013 deals with the same, presented here in a condensed manner:-
1. Where he/she has been declared as a person of unsound mind by a competent court.
2. Where he/she is an undischarged insolvent.
3. Where insolvency has been applied for, but the application still stands pending.
4. Where there is an offence involving moral turpitude that he/she has been convicted of and sentenced with imprisonment for a period of not less than six months.
5. Any court/Tribunal has passed an order that disqualifies him from being appointed as a director.
6. Where he/she holds the shares of any company and has not made the payment of any such call, provided six months have passed since the last date to pay such call money.
7. At any time during the final preceding five years, he/she has been convicted of an offence involving related party transactions which are governed under Section 188 of the Companies Act, 2013.
8. Where he/she has not obtained a Director Identification Number (“DIN”).
9. Where he/she is the director of a company that has either – a. Failed to file the annual returns for 3 years running b. Failed to pay interest on/repay the deposits for over a year c. Failed to pay any dividend that was declared for over a year d. Failed to redeem debentures or pay interest on debentures for over a year
With regard to this particular provision, non-eligibility for directorship will be for a period of five years from the date of such default, be it in that particular company or any other company.
Effect of Disqualification of Director
Ever since the mass disqualification rally of 2017, the Ministry of Corporate Affairs (“MCA”) has been vigilant in keeping tabs on the directors with regard to their regulatory and statutory compliances. Depending on what the grounds for disqualification is in a particular scenario, a person is disqualified either for a period of five years or as the case may be. The names of the directors who are disqualified will be published on the MCA portal. The DIN allotted to that specific director will be deactivated by the Registrar of Companies.
Removal of Disqualification
Disqualified directors can make use of a couple of approaches that will be their lifeboats in disguise.
1. Appeal to be made against the disqualification
In case the company has had one or more directors disqualified, the disqualified director may file a writ petition with the High Court, seeking relief. This results in creating a stay against the order temporarily. This gives the director sufficient time to right the wrongs, provided it is within the scope of the law to do so.
2. New Directors to be appointed on a temporary basis
If the company has had all of its directors disqualified, in order to stay compliant, the company may appoint new directors to come in and take the reins. This will ensure that the compliances, regulatory or statutory, are observed to the full.
Additionally, if there are returns that are overdue, or any compliances that haven’t been met and remain outstanding, the DIN and Digital Signature Certificate (DSC) of the new directors may be used to upload and submit all pending forms in the interim.
3. Filing of an application with the National Company Law Tribunal (NCLT)
If there arises a situation where because of non-compliance with regard to the filing of returns, the status of the company is moved to “Strike Off”, an application may be filed with the NCLT moving towards restoring the “Active” status for the company again. The necessary documents may be submitted to the NCLT and the Registrar of Companies for clearance of the “Strike Off” status.
At the time of the hearing, a practicing professional (CA/CS/Advocate) may represent the company and present all the relevant facts with regard to the particular case. If the NCLT is satisfied with the details presented, the clearance for strike off will be ruled upon. Once the clearance for strike off is received and the company’s status is restored to “Active”, the restoration of the DIN of the directors may also be initiated.
Managing the affairs of a company is not a piece of cake. There are various compliances to be met, each one just as important, each one with its respective penalties and consequences when not followed. Directors have a fiduciary responsibility to the shareholders and the public, at large, which is why they have to be people of good repute and possess impeccable moral character.