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Relief to disqualified directors under the Companies Act, 2013


By  Tanya Sharma and Anantha Desikan

Section 164 of the Companies Act, 2013 (“Companies Act”) deals with the eligibility criteria for appointment of a director in a company and one of the eligibility criteria is that in case a company does not file the financial statements or annual returns for a continuous period of 3 (three) years, then the directors of such company will become disqualified from being (i) re-appointed in such company and (ii) appointed in other companies as directors for a period of 5 (five) years from the date of becoming disqualified.

The Section 164 of the Companies Act was critically analysed by different courts after the notification of Ministry of Corporate affairs (“MCA”) issued on September 12, 2017 (“MCA Notification”) wherein MCA had published a list of directors who were associated with "struck off companies" by exercising the powers assigned to it under Section 248 of the Companies Act and showcased the status of those 3,09,614 directors of the struck off companies as "disqualified" directors[See endnote 1]

It was a move towards removal of shell companies that were one of the sources of generating black money. However, one of the issues with the given MCA Notification was its retrospective applicability on the companies. Typically, all statutes have prospective application unless contrary intentions can be construed from it.[See endnote 2] However, the MCA Notification had come into force with effect from April 1, 2014 and took into its ambit non-compliance vis-à-vis Section 248 of the Companies Act in relation to financial years 2014-15, 2015-16, and 2016-17.

In furtherance of exercise of the powers, a scheme namely “Condonation of Delay Scheme 2018” (“CODS”)[See endnote 3] was introduced by MCA pursuant to which a three-month long window was provided to defaulting companies to submit their annual filings starting January 1, 2018 to March 31, 2018. Such move came as a sigh of relief for several directors who were disqualified. 
 
In a writ petition filed by M/s. Dr. Reddy’s Research Foundation & Ors. v. The Ministry of Corporate Affairs & Anr., the Hyderabad High Court directed to restore the Director Identification Number (“DIN”) of the directors to enable such directors to submit annual returns in respect of the defaulting company for the years 2011 and 2016. In another important judgment, even Bombay High Court granted relief to the directors of the companies, who were disqualified by MCA, by passing an interim order, pursuant to which such directors were no longer be considered as disqualified. The Bombay High Court also directed the Registrar of Companies to accept the physical documents of the companies which were struck off and whose directors were disqualified and to treat them as applications for voluntary striking off. Similar stands were taken by various high courts such as High Court of Delhi and High Court of Rajasthan. Few directors were reinstated in furtherance of CODS while others were struck off in the cross fire.

A legal recourse finally provided a glimmer of light to the aggrieved parties when in the case of Gaurang Balvantlal Shah v. Union of India,[See endnote 4] the Hon’ble Gujrat high Court quashed the MCA Notification and held that Section 164(2) of the Companies Act will have prospective effect and not retrospective effect and consequently, the default in filing the financial statements or the annual returns shall be counted from the F.Y. 2014-15.
 
The judgement of Hon’ble Gujarat High Court is a sigh of relief for 3,09,614 directors who have been disqualified by the MCA since the judgement will have effect throughout the territory of India unless contrary judgement is given by another High Court or the Hon’ble Supreme Court of India.

[The authors are Joint Partner and Associate, respectively, in Corporate practice, Lakshmikumaran & Sridharan, New Delhi]

Endnotes:

  1. http://www.mca.gov.in/MinistryV2/disqualifieddirectorslist.html
  2. 1951 AIR 128
  3. vide General Circular No. 16/2017 dated 29.12.2017
  4. C/SCA/22435/2017
 
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