Impact Of Removal Of Company Name From Register And Director Disqualification
As MCA has struck off the approx 209,000 Companies from its record because of “Non Filing of its financial statement for 3 years or more” as per provisions of Section 164(2) and issued the list of approx 100,000 Director who has been disqualified under 164(2). Both the lists are available on the website of the MCA.
As per Section 164(2) if a company fails to file its Financial Statement or Annual Return for continuous 3 financial years, in such case Directors shall be disqualified.
In this case, if Company has fails to file financial statement and annual return for continue 3 financial year then directors shall be disqualified, if default is only for 2 years then directors shall not be disqualified.
Personal Liability Director.
As per Section 248(&) “The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved”
In general words, liability of Directors, manager, other officers and Members of the Company shall be continue even after struck off of Company.
Hence, one can opine that they shall be personally liable for all the statutory and other liabilities of the Company. (Eg. Statutory liability like: Payment of Roc Fees, payment of income tax liability, penalty for non filing of financial statements and annual returns etc.)
Cessation of Bank Account of Company.
If a Company struck off in the record of ROC. Then ROC simultaneously send letter to Banks for cessation of Bank account of Company in the entire Bank.
Companies shall not be able to carry on business, sale/ purchase any assets, bank transactions.
If a Company once struck off in the record of ROC, then such Company:
- Can’t conduct any business activity in the Company. Company can’t carry on business. (i) Because due to cessation of Bank account they can’t do any transactions. (ii) As Company struck off promoters can’t sign any invoice or other documents on behalf of the Company.
- If Company having any assets then Company can’t sell / lease such property. Because Company can’t accept any amount from such transaction due to cessation of Bank Account.
What shall be impact of disqualification of Director on other companies in which they are continuing as Directors
Due to above mentioned actions of Ministry approx 100,000 directors has been identified as disqualified u/s 164(2)(a) due to non filing of Financial Statement and Annual Return with ROC.
Legal Language: 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,
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.
Penalty for the Directors for Non Compliance
* Any person who contravenes the provisions of sec 164:
There are no specific penal provisions stated for the occurrence of default, but same as be stated under section 172 of the Act, company and every officer who is in default of chapter IX shall be punishable with fine of Rs. 50000 to 5 Lacs
* Contravention on continue as director even after attainment of disqualification
He 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
* Penalty on 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) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, and the community and for the protection of environment.
As it is duties of the directors of the company to act in best interest of the Company, shareholders etc. It is duty of the directors to follow and comply with the provision of Companies Act and other legal compliances.
Consequently, one can opine that, if a director fails to comply with his duties then he is 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.’
- Vacation of office of directorship u/s 167.
As per Section 167(1) The office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164;
As per MCA press release ‘on suffering the disqualification, the Director shall vacant the office”
One plain reading of section and press release one can opine that on occurrence of above disqualification u/s 164 the directors have to vacant their offices including the office of Company which has made non Compliance.
Now the Following Question Arise:
- How the Company shall Appoint new director in case of disqualification u/s 164(2)
As per Section 164 (3) where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the 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.
Therefore, it can be opine that due to provision of Section 164(3) promoters has the power to appoint the new directors in case of disqualification of all the existing Directors.
- Whether such disqualified directors shall act as Shareholder or Not?
Yes, such disqualified director can freely continue as Shareholders in all the Companies irrespective they are disqualified u/s 164 and vacant office u/s 167.
- Removal of Disqualifications
As per The Companies (Appointment and Qualification of Directors) Rules, 2014 contain a provision pursuant to “application for removal of disqualification of directors shall be made in Form DIR-10.”
Rule 14(5) states that, “Any application for removal of disqualification of directors shall be made in Form DIR-10.” However this is physical form required to be file with other form with the appropriate authority.
Conclusion:
After reading the above mentioned provisions of Section 164, Section 167, Press Release of MCA, Practical problem in filing of form etc. etc. It can be opine that vacation of office of Director going to be one of the major action by Ministry of Corporate affairs against shell Companies.
Author: CS Aniket Sharma, Team urbanCFO
Disclaimer: for information purpose only
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