As per the provisions mentioned in the Companies Act 2013, a director of a company can be disqualified for five years from the directorship of his/her company and also banned from joining any other organization as a director if his/her current organization fails to submit their financial statement for three years consecutively.
Director disqualification is a legal process that prevents an individual from serving as a company director for a specified period. This measure is enacted to safeguard the interests of stakeholders and maintain the integrity of corporate governance. In this article, we will delve into the causes, consequences, and prevention of director disqualification.
Grounds for Removal of Director Disqualification:
- Financial Mismanagement: Directors can face disqualification if they engage in financial mismanagement, such as fraudulent activities, misappropriation of funds, or trading while insolvent.
- Breach of Fiduciary Duties: Fiduciary duties require directors to act in the best interests of the company and its shareholders. Breaches of these duties such as conflicts of interest, can lead to disqualification.
- Failure to Keep Proper Accounting Records: Directors must ensure that accurate and up-to-date accounting records are maintained. Failure to do so can result in disqualification.
- Inability to Pay Debts: If a company becomes insolvent and directors are found to have continued trading while aware of the financial difficulties, they may be disqualified.
- Inability to file the Financial Statements: If the company of the director has not filed its financial statements and annual returns for three years consecutively.
Analysis of Delhi High Court Order
Since the norms for director disqualification have come into place the high courts throughout India are using a flurry of writ petitions being filed for relief. Recently during the hearing of a case, the Delhi High Court Order emphasized that,
“This Court is of the firm opinion that for the Scheme to be effective, Directors of the Companies ought to be allowed to avail of the Scheme”.
Through the above-mentioned order, the High Court directed the Registrar of Companies to reactivate the canceled DINs of directors with their digital signatures to let them avail of the Companies Fresh Start Scheme 2020 to revive their struck-off companies.
Legal Remedies
Various directors and company owners could not get an advantage of the CODS Scheme to revive their businesses and thus, their directors also missed the chance the revive their careers. The directors who failed to use this scheme for the removal of director disqualification were left with two options.
- Apply to the National Companies Law Tribunal and hope to get a company revival order. Once the company was revived, they could apply for the removal of director disqualification and reactivation of DIN.
In this case, when the NCLT passed the Revival order of the company, then RoC was used to verify the said order and relevant documents of the directors. This procedure could only be followed if the owners of the companies wanted to revive it.
- The other option for directors who just wanted to activate their DIN without applying for the revival of their company was to apply for Removal of director disqualification in the respective High Court through a Writ Petition.
The option of writing a Writ Petition to the High Court is attributed to constitutional rights conferred by Article 226 of the Constitution to seek relief.
- With the Order of the Delhi High Court, the directors can also apply for DIN reactivation to take advantage of the latest Companies Fresh Start Scheme 2020 brought by the government to revive struck-off companies without paying heavy non-compliance fees.
However, this is a simple way would make it compulsory for a Director to apply for the revival of the company. So, to get the DIN reactivated without reviving the company, filing a writ petition is still the most preferred way.
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