High Court Stays RoC’s Order Disqualifying Individual Director!
MCA's Clarification also expected soon!!
The Madras High Court has issued an interim stay against an order of the Registrar of Companies (RoC), Chennai, disqualifying an individual from being director under the Companies Act, 2013, for five years till 2021. The court has also issued notice of motion to the Centre and the Registrar of Companies, in a petition filed by an individual director.
Alleged ‘Clean up Act’
In a so-called ‘clean up act’ Ministry of Corporate Affairs (MCA) had disqualified in September this year, 106,578 directors of companies that did not file their financial statements for three straight years. It had also identified 210,000 shell companies and bank accounts of around 200,000 shell firms were frozen.
In September 2017 MCA had planned to blacklist 300,000 directors of shell firms. National Stock Exchange (NSE) also asked 200 companies to take action against directors named in the MCA list.
Consequence of Disqualification
Under the Indian Companies Act 2013, a Director disqualified by MCA cannot serve on the Board of any company (including a not-for-profit Section 8 company) for a period of five years. His/her digital signature would also be treated as invalid.
This means, if an individual is Director on the Board of five companies and if one of these companies has failed to file accounts with the RoC for a block of three years, he/she would be disqualified for the next five years from serving on the Board of any of the five companies or any other company for the next five years.
While most of the blacklisted individuals were associated with small or defunct companies, the list also included a few prominent names. Reportedly, Pawan Goenka of Mahindra & Mahindra, S Narayan of Apollo Tyres, Vinod Kumar Dasari of Ashok Leyland, S Sridhar of DCB Bank, and GV Krishna of Hindustan Petroleum, are also on the list.
MCA’s move to disqualify directors is without following principles of natural justice. Being on defunct companies is not sufficient to disqualify a director since holding such a position doesn’t prove any wrongdoing.
According to the Companies Act, it is clear that such disqualified directors have to vacate directorship in the company concerned and also can’t seek fresh directorship or re-appointment in any other firm. However, what it does not suggest is a cascading removal from boards of other firms.
MCA may soon issue clarification
A couple of weeks back there was news that the Ministry of Corporate Affairs will soon clarify that a director’s disqualification would be limited only to the company which did not file statutory returns for three consecutive years, and not others which were compliant.
Reportedly, the ministry plans to file a transfer petition before the Supreme Court to club all writ petitions pending before different high courts into one, while stating that a director’s disqualification was applicable only to the defaulting company.
MCA’s draft proposed clarification
“A director disqualified in terms of Section 164(2)(a) of the (Companies) Act would be liable to vacate his office as Director under the provisions of Section 167 (1)(a) only in the company that has defaulted in filing its statutory returns for three consecutive years. He would continue to hold his office of Director, if any held by him, in companies that are compliant in filing their statutory returns as per the Companies Act.”
Madras High Court
The petition was filed by R Ganapathi, who has been the director at RSG Engineering and Constructions Pvt. Ltd, Deccan Softlab Pvt Ltd and Projelec Marketing and Management Pvt. Ltd, which weren't operative and were struck off from the Register of Companies prior to 2010. However, he was named in RoC's list of disqualified directors in an order dated September 8, 2017, for being a director in some other companies that had not filed annual returns continuously for three years.
Ganapathi argued that RoC’s order should be quashed as illegal, arbitrary and devoid of merit, and also sought direction from the Court to the Ministry and the Registrar to permit him to get re-appointed or appointed as director of any company in any company without any hindrance.
Ganapathi further argued that the new regulation disqualifying a company if it fails to file annual returns for three financial years, as per Section 164 of the Companies Act, 2013, came into effect only on April 1, 2014 and the time limit to disqualify companies under this would start only after October 30, 2017. The argument being three years from April 2014, would fall only by the end of March 31, 2017 and that the last date for filing annual return for the fiscal 2016-17 -- the third year from implementation of the new Act -- is October 30, 2017.
It was argued that the order of Registrar of Companies, Chennai, disqualifying the director without giving him any opportunity of being heard is against the provisions of the Act.
Hearing the petition, Justice M Duraiswamy has issued an order to issue a notice of motion returnable in four weeks.