In an interesting move, the Delhi High Court (“Court”) recently, in the matter of Sandeep Agarwal & Anr. (“Petitioners”) Vs. Union of India & Anr., (“Respondents”) [W.P.(C) 5490/2020] has set aside the disqualification of directors to enable them to continue business as an active company in pursuance of the Companies Fresh Start Scheme, 2020.
Brief facts of the case:
- The Petitioners are directors in two companies namely Koksun Papers Private Limited (“Koksun Papers”) and Kushal Power Projects Private Limited (“Kushal Power”).
The name of Kushal Power was struck off from the Register of the Companies on 30th June, 2017, due to non-filing of financial statements and annual returns.
- The Petitioners, being directors of Kushal Power were also disqualified with effect from 1st November, 2016 for a period of five years till 31st October, 2021 under Section 164(2)(a) of the Companies Act, 2013 (“Act”).
- Consequent to this disqualification, their Director Identification Numbers (“DIN”) and Digital Signature Certificates (“DSC”) were also cancelled and as such they were unable to carry on the business and file returns etc. in the active company Koksun Papers. By way of the present petition, the disqualification has been challenged and quashing is sought of the disputed list of disqualified directors.
Arguments placed by the Petitioners:
1. Introduction of the disqualification in proviso under Section 167(1)(a), came into effect only on 7th May, 2018. Thus, in respect of the companies, in which the Petitioners were already directors, a conjoint reading of Section 164(2) and 167(1)(a) show that the disqualification would not apply in a retrospective manner.
- Koksun Papers is entitled to take benefit of the Companies Fresh Start Scheme (CFSS) 2020 (“Scheme”) dated 30th March, 2020 introduced by the Ministry of Corporate Affairs, whereby active companies are permitted to make good any defaults in filing of documents and seek immunity from disqualification. However, the directors, who have to sign the papers for Koksun Papers, have been disqualified and their DINs and DSCs have been deactivated. As a result, Koksun Papers were not able to avail the benefit of the said Scheme.
What the Court held
1.The proviso to Section 167(1)(a) of the Act being a punitive measure with respect to the rights and obligations of directors, cannot be applied retrospectively unless the statutory amendment expressly provides so.2.The Scheme has been launched by the Government in order to give a reprieve to such companies who have defaulted in filing documents and they have been allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The Scheme also envisages non-imposition of penalty or any other charges for belated filing of the documents.
3.Also, this Scheme provides an opportunity for active companies who may have defaulted in filing of documents, to put their affairs in order. It thus provides Directors of such companies a fresh cause of action to also challenge their disqualification qua the active companies.
4.In the present case, the disqualification and cancellation of DINs would be a severe impediment for them in availing remedies under the Scheme, in respect of the active company. The purpose and intent of the Scheme is to allow a fresh start for companies which have defaulted. In order for the Scheme to be effective, Directors of these companies ought to be given an opportunity to avail of the Scheme.
5.In order to enable the Petitioners to continue the business of the active company Koksun Papers, the disqualification of the Petitioners as Directors is set aside. The DINs and DSCs of the Petitioners have been directed to be reactivated, within a period of three working days.
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Relevant provisions relied upon:
1. Section 164(2) of the Companies Act 2013:
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, 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.
2. Sec 167(1) of the Companies Act 2013:
The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164
(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
(c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:
Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.
Source : Delhi High Court
