Tuesday , 20 November 2018
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Striking off companies and director disqualification: rules and remedies

By Amey Salatry and Ajinkh Phondekar*

 

There has been much discussion and ambiguity surrounding striking off of companies due to non compliance of Companies Act, 2013, having a consequential effect of director disqualification in a company. This has a significant impact on the director position as being disqualified as a director in a company for a period of five years even in a non defaulting company can be significant.

The following are some of the key provisions that relate to striking off, and director disqualification under the Act.

Section 248 of the Companies Act, 2013 (‘Act’) which deals with the power of the registrar to remove name of a company from register of companies (ROC) where the Registrar shall send a notice to the company and all the directors of his intention to remove the name of the company from the register of companies and request them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.

Section 248 Vs Section 455 of the Act: Another provision which empowers ROC to remove the name of a company from the register of members is Section 455 of the Act which deals with the provisions of dormant company. In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.

A dormant company shall have such minimum number of directors, file such documents and pay such annual fee to retain its dormant status in the register and may become an active company on an application made in this behalf. The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section.

The section states the following procedure to be adopted by the dormant company and the RoC:

(a) RoC may remove the name of an inactive company from the register of members and put the same in the register of dormant companies.

(b) The dormant company shall then comply with the requirements and retain its dormant status or make an application to become an active company.

(c) Thereafter, if the dormant company fails to comply with the requirements of the section, then the RoC can finally remove the name of such company from the register of dormant company as well.

However, in this situation, the above mentioned procedure was not followed by the RoCs and names of the companies are directly struck off from the register of members. Hence, there do not seem to be an enabling provision under which the RoC has struck off the names of the companies in Goa.

Section 164 (2) of the Act provides that, no 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 or has failed to repay the deposits accepted by it or pay interest or  to redeem any debentures on the due date or pay interest due or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Further, Section 167(1) (a) of the Act directs that the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164 of the Act. Therefore, reading both the sections, it can be concluded that, the directors of such companies will, have to vacate their office, due to the disqualification incurred; not be able to be re-appointed as a director of that company; not be eligible to be appointed in any other companies as well.

The second and third effect will last up to a period of five years from the date on which the said company fails comply with the provisions of section 164 (2) of the Act.

Having said so, there arises a further question, does disqualification to section 164(2)(b) of Act will also apply to directors newly appointed in the company? To attract disqualification under section 164(2)(b), it is important that the individual has to be on the board of the company when the default actually happened. Therefore, even new directors of such companies will attract a disqualification, in spite of the fact that they were not at all involved in such non-compliance. Essentiality, the intent of law might be to deter companies from defaulting, which would demotivate any new director to join the company.

The following remedies are available to the companies whose names have been struck off the register of the companies. It can appeal before the tribunal within three years of the order passed by RoC and if the tribunal is of the opinion that the removal of name of company is not justified, it may pass an order for restoration of the name of the company in the register of companies after giving a reasonable opportunity of making representations and of being heard to the ROC. The genuine companies, which have been struck off, will move to file an appeal to the NCLT in this case.

The ROC may, within a period of three years from the date of passing of the order dissolving the company file an application before the Tribunal seeking restoration of name of the company if it is satisfied that the company has been struck off either inadvertently or on the basis of incorrect information furnished by the company or its directors. Genuine companies may make representations to prove their innocence or bonafide reason of such non-filings, pursuant to which RoC may on valid reasons but within a period of three years, restore the name of such companies.

The Tribunal, on an application made by the company, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette of the notice of dissolution of the company, if satisfied that the requisite conditions are met.

Therefore, in the present situation, it will be best for companies to make representations or applications to the RoCs proving that it is not involved in any fraudulent activities or involved in siphoning of funds through illicit activities. However, the question remains that in case of the directors who do not intend to revive/restore the struck off company, what avenues are available with them?

For companies whose names are not struck off from the register of companies but their directors stand disqualified the Ministry of Corporate affairs has come up with a scheme known as Condonation of Delay Scheme 2018. Under this scheme the ministry has activated the blocked DIN until March 31 2018 to complete the pending filing of annual returns and financial statements.

With the number of companies that have been struck off by the ROC running to 1761 in the state of Goa itself the number of companies that can benefit from the CODS scheme may not be substantial. Under the Companies Act it is mandatory to file the annual returns and financial statements of the company under section 92 and sec 137 respectively.

In conclusion, as a director of a company, it is the duty to ensure that compliance of all the applicable laws are done in letter and spirit giving preference to compliance of law. Every person who is being appointed as a director must be aware of the basic provisions of law which needs to be adhered to so as to prevent disqualification.

* Amey Salatry,is partner, Legal Minds LLP and Ajinkh Phondekar, company secretary.

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