Director disqualification - Status as on October 11, 2017 - Rumors and clarification

Disqualification of Directors - Current status:

While there are confusion prevailing over What next after disqualification of Directors? MCA is yet to come out with any official clarification on it.

There are many companies which are affected due to the steps taken by MCA. While, the action by MCA was very clear that all the Directors who are disqualified will not be able to work as a Director and their respective DIN will be disabled for a period of 5 years. Many senior professionals have opined that such disqualification will not amount to automatic vacation of office of directorship from other companies.

However, looking at the action taken by MCA, as of now it is clear that, disqualification will amount to vacation of office and Director will not able to act as a Director in any other Company. Though, MCA has not expressly clarified on the point, they have put up a notice, expressly prohibiting disqualified Directors from signing any forms to be submitted with MCA.

Case where all directors are disqualified by MCA?

While there are still no clarity on the status of disqualified Directors, there are many Companies, whose all Directors are disqualified and DIN of all directors are disabled. As a result, the Company is not able to file any documents/forms with ROC.

As per Section 164 (3) where all the directors of a company vacate their offices under any of
the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold office till the
directors are appointed by the company in the general meeting.

Therefore, it can be opine that due to provision of Section 164(3) promoters has the power
to appoint the new directors in case of disqualification of all the existing Directors.

Practical Situation
While, legally, Act empowers promoters to appoint Directors in case where all the Directors of the company vacate its office under Section 164. Practically, it is not possible under the current system to appoint any person as a director without filing an eform DIR 12. The promoter, whose DSC is not linked with Company (Courtsey Role Check), will not be able to file any application online using MCA portal. Unless, the form DIR 12 is filed, a new Director will not come on record of the Company. So practically, even though Act has provided for solution, the current IT infrastructure of MCA does not support appointment of Director by promoters.

MCA Circular on offline filing?

The following MCA circular is going viral on social media and many people are claiming that now you can file DIR-12 in offline more with ROC and ROC will update the signatory details of the Company with name of newly appointed directors by promoters.

When we found the circular on whatsapp, we tried to verify the content with ROC and found that concerned ROCs are still not aware about any such instructions, if any, received from the higher authority. Also, ROC has confirmed that they will not be able to process any forms in offline mode. Infact, just like MCA, even ROC currently does not have any infrastructure to support offline filing of Form DIR-12 or taking on record appointment of Directors. We believe, either the above image of circular is fake or is not yet implemented and HENCE CAN NOT BE ACTED UPON.

Will new Director appointed be also liable for default under Section 164?

Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc. This Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. 

Going by the literal interpretation, a New Director, if any, appointed by a promoter in a Company which has defaulted under Section 164 will also be disqualified immediately on appointment as a Director on such defaulting company. Which will amount to deadlock as no director will be able to file any documents with ROC after attaining the disqualification under the said provisions. 

The Company Law Committee in its report, inter alia, suggested following" 

"1) In this regard, the Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

2) The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the noncompliance, and in case of a continuing non-compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant"

Conclusion:

While there are many confusions, the current status is still unclear and even ROC officials are not able to provide any solution on the situation. Therefore till the MCA does not come out with any official solution or provide any way out, the Company and Directors affected does not seem to have any other option but to wait for it. Lets hope MCA comes out with some practical solution about the problem soon.