What next after Disqualification of Directors?

Ministry of Corporate Affairs (MCA) recently via press release announce that it has identifies more than one lakh directors of shell companies for disqualification. The process started with Government taking action against Black Money  first they cancelled license of nearly 2 lakhs Companies, later they announced freezing of Bank Accounts of all the Shell Companies whose registrations are cancelled. The move was backed up by a proposal to demat shares of certain unlisted Public Company. Now with disqualification of Directors, MCA and Government is certainly targeting the individuals behind the Shell Companies.

To put in numbers, the step MCA, in consultation with Finance Ministry and Government of India has taken is as under:

1. MCA cancelled the registration of above 2 lakh Shell Companies.
2. Subsequently, Ministry of Finance via Press Release announced that the bank accounts of all such companies are frozen and Banks and announced that Directors and Officer of the Company will not able to operate Bank Account of such companies unless  such companies are legally restored by NCLT. 
3. Now, MCA has identified over 1 lakh Directors for disqualification under section 164(2)(a) of Companies Act, 2013 as on 12th September, 2017. Click here to check the list of disqualified Directors

What next after disqualification for such Directors?

The relevant extract of Section 164(2)(a) of Companies Act, 2013 under which all Directors are disqualified is as under :

Section 164 (2) (a)

No person who is or has been a director of a company which—

(a) 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 164(2)(a) makes it very clear that all the Director of a Shell Company (which has not filed Financial Statement or Annual Returns for continuous period of 3 Years) will not be eligible to be Director for a period of 5 years. Though, this section was there in the Act, since the introduction of Companies Act, 2013 and similar provisions were there in Companies Act, 1956 as well, the Government had never taken suo motto action against such Directors/Companies for the default.

Now with the steps of cancelling registration and subsequently disqualifying over 1 lakh Directors is easiest the biggest action ever taken against the Directors in the history of Indian Companies Act.

Impact of Disqualification:

Since cancellation of registration of Shell Companies or the disqualification of the Director of Shell Companies to act as a Director, may not impact that particular Shell Company as much. However, since the Director of shell Companies are disqualified, the particular individual will not able to act as a Director in any other Company for a period of 5 years and it might also attract huge penalty individually.

The impact of disqualification can have multiple effect, from incorporating new companies, to continuing in existing companies as well as liability or penalty on Individuals. So it is very important to know the step by step process to know how to remove such disqualification and avoid paying hefty penalties.

Important Points to note after of Disqualification of Directors

1) Appointment of disqualified Directors in any other Company

Since, 164(2)(a) of the Companies Act, 2013 makes it clear that a disqualified director cannot be appointed as a director for any other Company for a period of 5 years and Section 167 provides for vacation of office for a director who has incurred a disqualification under Section 164. Any director who has been disqualified under Section 164 cannot continue to act as a director of any existing Company also he will not be eligible to be appointed as a director in any new Company till the time disqualification is not removed.

Further, it is important to note that, while government/MCA has disqualified nearly 1 lakh directors under Section 164, there are many other companies who have not completed annual filings and the directors are disqualified under Section 164 are not disqualified by MCA under their suo motto action. Professionals are advised to check qualification under Section 164 of each director before signing or certifying any form for directors. 

As any form for appointment or any other regular business, signed by professionals, contains a disclaimer under Section 447 and Section 448 of the Companies Act, 2013 which makes it clear that professionals certifying form will be guilty under Section 447 and Section 448.

2) Liability of a Director after the Company is Struck off by MCA

Section 248 of the Companies Act, 2013 provides that the liability, if any, of every director, manager, or other officer who was exercising any powers of management and of every member of the struck off Company, shall continue and may be enforced as if the Company has not been struck off.

Interestingly, the Strike off does not automatically relieve the company and its directors from the compliance requirement and penalties, it is merely striking off name from the record of the ROC. However, the liability of the company and every director will continue and may be enforced as if company is not struck off. 

3) Penalties & consequences

a) Penalties Section 164: 

Since, no specific penalty is provided under Section 164, the penalty for non compliance will be as per Section 172 of the Companies Act, 2013. As per Section 172 of the Companies Act, 2013, "If a company contravenes any of the provisions of this Chapter and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees." Further, in case continuous offence (if individual continue to act as a even after attaining disqualification), he/she shall be punishable with the imprisonment for a term upto 1 year or with fine of Rs. 1 lac to Rs. 5 Lacs or with both.

b) Vacation of Office under Section 167:

As per Section 167(1) of the Companies Act, 2013 the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164. This was further confirmed by MCA press release ‘on suffering the disqualification, the Director shall vacant the office”. It means that once a director is disqualified u/s 164(2)(a) he have to vacant the office from all the Companies in which he is acting as director as a vacation u/s 167(1). Further, he will not be eligible to be appointed as a director in a new company as well during the non compliance period of Section 164.

4) Process for removal of disqualification

The director who is disqualified under Section 164 of the Companies Act, 2013 needs to file form DIR 10 as per the Companies (Appointment and Qualification of Directors) Rules, 2014. 

It is unclear that is it mandatory for Company to file DIR-9 before filing DIR 10. If yes, whether the Companies which are already struck off, will be able to file DIR 9 or not.

Conclusion:

While, disqualifying the Directorship of more than 1 lakh director in suo motto is very bold and big move, it has affected many genuine directors who are stuck with some wrong company which for some reason were not active. While striking off move have helped them from getting rid of, otherwise a dead company. This step makes life of such director complicated. Unless Government comes out with more clear steps for removal of disqualification, it will add chaos to the chaos already created by GST and Demonitisation. 

Considering the seriousness of Government and back to back action taken by MCA, Ministry of Finance and Government against shell Companies, professionals are also advised to ensure a due diligence while signing or certifying any documents relating to Shell Companies or Directors to avoid any penalties and prosecution later.