Removal of Directors Disqualification

Introduction

The director’s role is very crucial in the governance and management of companies involved in business planning and decision making but there are certain circumstances under which they may face disqualification for non-compliance with the rules and regulations made under the Companies Act.  When a director is disqualified, it can have significant implications for both the individual and the company. There are different grounds for director disqualification, such as being an undischarged insolvent, convicted of certain offenses, or failing to comply with financial obligations.

Grounds for Disqualification of Directors in a Company

The Companies Act, 2013 outlines specific disqualifications for the appointment of a director in a company. These disqualifications include:

1. Mental Incapacity: A person declared of unsound mind by a competent court.
2. Insolvency: Being an undischarged insolvent or having a pending insolvency application.
3. Criminal Conviction: Conviction by a court for an offense, leading to imprisonment for at least six months, with less than five years elapsed since the end of the sentence.
4. Court Order: Being disqualified by a court or Tribunal with an active disqualification order.
5. Non-Payment of Calls: Failure to pay calls on company shares within six months from the due date.
6. Related Party Transactions: Conviction for offenses related to related party transactions under section 188 within the last five years.
7. Non-Compliance: Failure to comply with section 152(3) requirements.

Additionally, individuals who were directors of companies failing to file financial statements or annual returns for three consecutive financial years, or failing to meet financial obligations like repaying deposits, interest, debentures, or dividends for over a year, are ineligible for re-appointment as directors in those companies or any other company for five years from the date of default.

Private companies can also specify additional disqualifications in their articles. However, certain disqualifications like criminal convictions, court orders, and related party transaction offenses have specific timelines before they take effect, allowing for appeals and legal processes to unfold.

Consequences of Disqualification of Directors: 

• Removal from Directorship in the company and any other.
• Possibility of imposing fines for non-compliance.
• It creates a negative impact on the company’s reputation and stakeholder confidence.
• Legal proceedings and potential liability for losses incurred by the company.

Removal of Disqualification of Directors:

• The most effective solution to directorship disqualification by the Registrar of Companies (RoC) involves reviving the company and then applying for the removal of disqualification and reactivation of Director Identification Numbers (DINs).
• One proven way to end the exile for directors facing disqualification is by filing a Writ petition to remove the disqualification, directors can revive the disqualified company after it has been struck off by the RoC and apply for the revival of their roles.
• Additionally, there are specific reasons that can lead to director disqualification, including failure to inform about shareholdings, criminal convictions, failure to meet financial obligations, and non-compliance with statutory requirements like filing financial statements and annual returns.
• To address director disqualification effectively, directors can take steps like listing dates and events of disqualification, submitting an urgent application with a Notice of Motion, justifying reasons for non-compliance with statutory documents, informing the court about the company’s current status, listing other companies where they serve as directors, and providing relevant documentation from the RoC.
• A disqualified director can only be reappointed after five years from the date of disqualification. The directors can also appeal to the High Courts to remove director disqualification. However, different High Courts have different views regarding removing disqualification under Section 164(2).

Package Inclusion:

• Personalized consultation
• Legal Analysis for disqualification and formulation of a tailored strategy
• Documentation Assistance
• Regulatory Compliance
• Representation Services
• Appeals and Petitions
• Negotiation and Resolution
• Court Proceedings Support
• Expert Guidance
• Confidentiality Assurance
• Post-Disqualification Support

Directors who have been disqualified have avenues for seeking the removal of disqualification. The process for removal varies based on the circumstances:

1. Company Revival: If a company’s status is ‘canceled,’ directors can appeal for the company’s revival before the National Company Law Tribunal (NCLT). Upon NCLT’s order for revival, directors must meet the revival requirements within the specified period.
2. Withdrawal Request: In cases where a company’s status is ‘removed,’ directors can file a written request with the High Court/Supreme Court for withdrawal of disqualification. Compliance with disqualification provisions is necessary until an interim or final order is issued.
3. Active Company: When a company is ‘active’ but directors are disqualified, new directors can be appointed to resolve the impasse. Directors facing disqualification in such situations should consider appropriate actions based on their company’s status.

Additionally, if a disqualified director wants to reduce the original period of disqualification, they can make an application to the court under Section 8A of the CDDA 1986. This process allows for a potential reduction in the disqualification period, providing an opportunity for the director to regain eligibility sooner.

Filing of forms and intimations to Registrar of Companies (ROC)

• Director’s Intimation:  A disqualified Director must inform the Company about their disqualification under Section 164(2) by submitting e-form DIR-8 before being appointed or re-appointed.
• Company’s Intimation: If the Company fails to file financial statements, annual returns, repay deposits, interest, dividends, or redeem debentures within 30 days of attracting disqualification under Section 164(2), it must file form DIR-9 with the ROC.

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