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Revival Struck Off Companies and Its Impact Analysis

In this article, we will discuss the revival of struck off companies as well impact of Struck off action taken by the Registrar of Companies.

What is struck off by companies?

Recently, Ministry of Corporate Affairs has struck off approximately 209,000  defaulting Companies from its record because of “Non Filing of its financial statements for 3 years or more” and issued the list of 100,000 Directors approximately who has been disqualified under section 164(2) of the Companies Act 2013 as on 12th September, 2017. The following lists are available on the website of the MCA^[1].

What is MCA’s intention behind the struck off Action?

The government’s main intention behind these actions is to fight against Black Money. It shall be incomplete without breaking the network of Shell Companies^[2]. With this initiative, the interest of stakeholders would be protected and the image of the country in the global business would substantially improve.

Will the director of a struck off disqualified of being a director in any other Company after Stuck off action was taken by the registrar of companies?

As per section 164(2)

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; or

(b) Has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

Disqualification arises in two situations:

• Nonfiling of financial statements and annual return for a continuous period of 3 years;
• Failure to repay interest on deposit/ debentures or repayment of deposit/debentures for continues for a period of 1 year or more.

What is the overall impact of the Disqualification of Directors due to struck off companies?

If a person is a director in more than one company and one of such Company has made default u/s 164(2) and the name of Company may or may not be struck off Companies from the Register of the ROC but such director has become disqualified.

In such case, if that disqualified director filing any form in other Company then an error is occurring that “the person associated with the DIN is disqualified and not allowed to file the form”

Therefore, with this practical problem, we can assume that intention of the Ministry is that once a director is disqualified u/s 164(2)(a) he has to vacate the office from all the Companies in which he is acting as a director as a vacation u/s 167(1).

Issue: In case the Company fails to file its Annual Return or Financial statement for more than 3 years and the Status of the Company is still active.

Whether the director of such a company shall be disqualified to continue their appointment in another company or to file forms of other Companies?

Solution: First of all to identify the disqualification or non-disqualification of a director, Status of Company is not a decisive factor. Even if a Company is active, directors of the Company may be disqualified.

As per the provisions of Section 164(2)^[3] “A person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years shall not be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years”

Therefore we can conclude that the principle of qualification or disqualification of the director is concerned with the non-filing of financial statements. Hence we can say that even if the status of the company is still active in the records of ROC but Company has not filed the financial statements and annual returns from the last 3 years then the status of the director shall be “DISQUALIFIED”.

What is the Liability of a Director?

Under Section 248 if there is any liability of every director, manager, or another officer who was exercising any powers of management shall continue as if the Company has not been struck off.

Even in the show cause notice of ROC “This dissolution by ROC is subject to the provisions that the liability of every director and members of the Company shall continue and may be enforced as if the company has not been dissolved”

Therefore, we can say that even after struck off the name of the Company from the record of ROC directors are liable for the liabilities of the Company.

Read our article:Revival Struck Off Companies and Its Impact Analysis

Are there Penalty provisions for the Directors in case of Non-Compliance in Company in which he is a director?

In case any person contravenes the provisions of sec 164:

There are no specific penal provisions in case of occurrence of the default, but the same as stated under section 172 of the Act, company and every officer who is in default of chapter IX shall be punishable with a fine of Rs.50,000 up to Rs.5 Lacs.

Contravention in case director continues as a director even after attainment of disqualification

Director shall be punishable with the imprisonment for a term up to 1 year or with fine of Rs.1 lac to Rs.5 Lacs or with both.

The penalty in case of non-compliance of general duties u/s 166:

(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.

(2) Director of a company shall act in good faith in order to promote the objects of the company and for the benefit of its members as a whole, and in the best interests of the company, employees, and the shareholders, and the community and for the protection of the environment.

It is a duty of the directors to follow and comply with the provisions of the Companies Act and other legal compliances.

Consequently, in case of director fails to comply with his duties then he shall be liable for penalty u/s 166(7) i.e. ‘fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.’

Queries related to section 164(2)

What is the required compliance’s in case the company fails to file its Financial Statement or Annual Return for 3 financial years?

In case of Company fails to file its Financial Statement and Annual Return for the continuous period of 3 years then here are the following compliance requirements for the Company according to Section 164(2) read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014:

In such a case, the company shall immediately file Form DIR-9 to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial year. In this form, it is required by the company to mention the name of those directors who were directors of the Company during such period.

On the receipt of the Form DIR-9, Registrar shall immediately register the document and place it in the document file for public inspection.

The main purpose of this form is to inform the Registrar of Companies about the Disqualified Directors so that ROC can debar them from an appointment in another company.

Therefore, Every Company which has not filed form DIR–9 with ROC shall be liable for non-compliance.

Who shall be responsible for such Compliance under Rule 14?

In case the company fails to file Form DIR-9 within a period of thirty days of the failure it would attract the disqualification under sub-section (2) of section 164.

Officers of the company specified in clause (60) of section 2 of the Act shall be the officers in default namely:

• Whole-time director;
• Key managerial personnel;
• In case of no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified

In case there is a Company Secretary in Such Company whether Company Secretary will be responsible for such non-compliance?

Under the provisions of Section 2(51) of Companies Act, 2013 “Company Secretary” is covered under the definition of Key Managerial Personnel and KMP is included in the definition of Officer in Default.

Hence, we can say that in case the Company fails to file DIR-9 within 30 days of the occurrence of Disqualification of Director then Company Secretary shall be an officer in Default and shall be liable for the penalty u/s 172. The penalty shall also be applicable to the Directors of the Company.

Penalty u/s 172: Under this, company and every officer in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

In case a person is the director of 4 Companies. Out of 4 Companies 1 Company having KMP (like CEO/CFO/CS).

1 company out of these 4 Companies fails to file its financial statement or annual return for a continuous period of 3 years. In such a situation, Mr. A becomes disqualify u/s 164(2) and has to vacate office immediately u/s 167(1) (a). But even after disqualification u/s 164(2) Mr. A continued as a director in another 3 Companies.

Whether there will be any penalty on the Directors, Company Secretary, KMP, Practicing Company Secretary who has certified the form of these Companies?

If Auditor has not mentioned in its auditor report whether he shall be responsible for such non-compliance?

Pursuant to the provision of Section 143(3) the auditor’s report shall state whether any director of the company is disqualified from being appointed as a director under sub-section (2) of section 164.

In the above example, in case auditor of above 3 companies has not mentioned in their Auditor Reports that the directors are not disqualified u/s 164(2). It will be considered non-compliance on the part of Auditors u/s 143(3) and they are liable for penalty under Companies Act, 2013.

If a company or any other officer of a company contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees, and in case where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues. 

How to appoint new Director in such Company for completion of the pending compliance?

In case of disqualification of all the Directors of the Company, it is not possible for such a Company to appoint the new director and pass the Board Resolution or to file form DIR- 12 with ROC.

Pursuant to provisions of section 167(3) where all the directors of a company vacate their offices under any of the specified disqualifications, promoter or in the absence of the promoter, 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.

Due to the disqualification of the entire directors in the company, there is NIL Directors on the Board. Promoters of the Company can appoint any other person as Director of the Company that person shall hold the office until the next General Meeting of the Company. Hence we can say that in such a case the Promoter can appoint Director.

In this case, it is required by the company to file the physical copy of the application along with the details of the person appointed by the promoter to act as a director of the Company. The registrar shall verify the application and if they are satisfied they will update the name of such person in their record as Director of the Company.

This type of remedy is in addition to any other remedies available to the members of such a company by applying to the CLB for an order convening a general meeting of the company under section 98 of the Act.

Conclusion

Director disqualified under section 164(2) of the Companies Act, 2013 is advised not to act as the director during the period of disqualification and not to file any document, application or any form with MCA as the same shall be rejected.

Now it is clear that disqualified Directors are not able to continue as a director in other Companies also according to section 167(1). In case of failure of information regarding disqualification to ROC by the officer of the Company, they shall be punishable for non-compliance under the Act.

Read our article:Procedure for Striking off a Company under Companies Act 2013