Gujarat HC Override MCA Notification on Disqualification of Directors Online

Narendra Kumar

13 Jun, 2019

MCA has come up with various notifications in the month of September 2017, that disqualification of directors was wrong and amounted to give retrospective effect to the provisions of Section 164(2) of the Companies Act 2013. Further MCA has struck off companies by naming them as ‘Shell Companies’ and as a result disqualified their directors, which extended to private companies as well.

Ruling of Gujarat High Court on Disqualification of Directors

In case of “Gaurang Balvant Lal Shah vs Union of India” the Gujarat High Court observed that “Section 164(2) of the Companies Act of 2013, which had come into force from 1.1.2014 would have the prospective effect, not retrospective.

In the respective case, more than 20 applications were clubbed together, as the court opined that the basic challenge was similar in all the application. All petitioners were disqualified by the MCA for being associated with the struck off companies and their DINs were deactivated. (CODS) Condonation of Delay Scheme 2018 were introduced to such defaulting companies except struck off companies under section 248(2) for a period of 3 months subject to the NCLT order under section 252 on the applications seeking.

Types of Disqualification of Director

Disqualification of Director can be-

• Personal disqualification

The director will be disqualified for the respective period; this also results in a vacation of Office under section 167.

• Company Disqualification

All directors holding the position of directors will be disqualified for 5 years and results in a vacation of office under section 167.

Provisions Regarding Disqualification of Directors

Section 164 deals with disqualification for the appointment of director. A person shall not be eligible to appoint as a director if he is –

• Unsound mind,
• Un-discharged insolvent,
• Applied to be adjudicated as an insolvent.
• He has not got the DIN
• Disqualification order for appointment as director has been passed by the court.
• The director has not filed the financial statement and annual return on time as prescribed.
• Failure in repayment of deposits accepted, interest on debentures and dividend.

In case of Private Company – In addition to the above, if the article of association provides, a person can be disqualified as director. On the other hand if its Article does not provide then grounds mentioned under section 164 shall be applied for disqualification of the director.

The DIN of the directors was deactivated; the judge further points out that striking off a company shall not lead to instant deactivation of DIN. Further, Rule 11 Of Companies (Appointment of Directors) Rules, 2014 – states the circumstances under which DIN may be deactivated. The reasons for the deactivation of DIN are as follows –

• DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
• DIN was obtained in a wrongful manner or by fraudulent means
• Death of the concerned individual;
• Concerned individual has been declared as a person of unsound mind by a competent Court,
• Concerned individual has been adjudicated an insolvent.

Vacation of Office of Director – Section 167

Section 167 co-relates itself with the criteria of disqualification of directors provided under section 164(2) of the Act, 2013. As per the Companies (Amendment) Act, 2017 one of the criteria is incurring disqualification under Section 164(2), except the defaulting company a vacation of office of the director must be made from all other companies. It complies with the condition where the office of the directors become vacant. i.e.

• If the director incurs any disqualification mentioned under section 164.
• With or without seeking the leave of absence, if the director absent himself from all the meeting of the BOD held during a period of 12 months.
• Acts done in contravention of section 184
• Disqualified by an order of a court/tribunal.

Every Director shall inform to the company concerned about his disqualification in form DIR-8

Companies Failed to File Annual Return and Financial Statement

Section 92 and Section 137 deals with filing of annual return and financial statement

Section 92 provision provides that a copy of the annual return in e-Form MGT-7. Within a time period of 60 days from the date of the Annual General Meeting or the date when it should have been held, should be filed with the Registrar of Companies

Section 137 deals in filing a financial statement in e-form-AOC-4 within a time period of 30 days from the date of AGM or the date when the AGM should have been held, should be filed with the Registrar of Companies.

Fee for filing under section 92 and 137- Additional fee for filing the return and financial payment beyond the time prescribed is required to be filed.

Fee for filing under section 92 and 137-Additional fee for filing the return and financial payment beyond the time prescribed is required to be filed.

Case Studies Related To Disqualification of Directors

Conclusion

As per the judgment of Gujarat High Court it was not legally tenable deactivating the DIN of the petitioner (Directors). The court has considered that section 164(2) would have prospective effect and not retrospective. The ruling was made to provide relief to the directors who have been disqualified by the MCA. Based on the MCA notification by the Gujarat High Court, companies are free to appoint the individual, if they can restore their DIN.

For more information, please click here: Director Disqualification