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September 11, 2020

Delhi HC set asides disqualification of directors to enable them to continue the business as per CFSS

Delhi HC set asides the disqualification of directors to enable them to continue the business in pursuance of the Companies Fresh Start Scheme, 2020

A company has no physical existence; it is merely a legal entity. The person acting on the company’s behalf is called a Director. Under company law, a director can be disqualified due to any of the following reasons:

  • He is of an unsound mind and is declared so by the court
  • He is insolvent
  • He is in the process of declaring insolvency and his application is pending
  • He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been imprisoned for at least six months. However, if a person has been convicted of any offence and has served a period of seven years or more, he shall not be eligible to be appointed as a director in any company
  • If an order has been passed disqualifying him of being appointed as a director by a court or Tribunal
  • He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly with others, and a period of six months has elapsed from the last day fixed for the payment of the call
  • He has been convicted of offences dealing with related party transactions at any time during the last preceding five years
  • He has failed to acquire a Director Identification Number.

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act.

Let us refer to the case of Sandeep Agarwal and anr vs Union of India, where petition was made before the Delhi High Court to cancel the disqualification of the directors.

Facts of the Case

  • The present petition was filed by the Petitioners – Mr Sandeep Agarwal and Ms Kokila Agarwal, both of whom are directors in two companies namely Koksun Papers Private Limited and Kushal Power Projects Private Limited.
  • 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 5 years till 31st October, 2021 under Section 164(2)(a) of the Companies Act, 2013.
  •  Pursuant to their disqualification, their Director Identification Numbers (DIN) and Digital Signature Certificates (DSC) were also been cancelled.
  • Hence, they were unable to carry on the business and file returns etc. in the active company Koksun Papers.
  • By the present petition, the disqualification of the directors was challenged

Submissions by the Petitioner

  • Petitioners relied upon Sections 164(2) and 167(1)(a) and submitted that the said sections were materially amended by the Companies Amendment Act, 2018, and 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) would show that the disqualification would not apply in a retrospective manner.
  • Petitioner relied upon the judgment of this Court in Mukut Pathak & Ors. v. Union of India & Ors (2019).
  • Moreover, Koksun Papers was entitled to take benefit of the Companies Fresh Start Scheme (CFSS) 2020  dated 30th March, 2020 introduced by the Ministry of Corporate Affairs (MCA), whereby active companies were permitted to make good any defaults in filing of documents and seek immunity from disqualification.
  • However, the directors, who had to sign the papers for Koksun Papers, were disqualified and their DINs and DSCs were deactivated.
  • As a result, Koksun Papers was not able to avail the benefit of the said Scheme.

Submissions by MCA

  • MCA submitted that the judgment in Mukut Pathak (supra) was challenged by way of an appeal by the Ministry and the said LPA was pending, though no stay was granted.
  • MCA also relied upon the recent order passed by the Division Bench in two writ petitions i.e. Anamika Devi v. Union of India. & Anr[ 2020] and Gaurav Kumar v. Union of India & Anr [2020] to argue that the disqualification list having been notified in 2017, the challenge to the same was extremely belated, hence the writ petition deserved to be dismissed.

Observations of the HC on the cases referred by the petitioner

  • The judgment in Mukut Pathak (supra), as far as the merits of the case were concerned, was squarely applicable in the present case.
  • The said judgment clearly held that the proviso to Section 167(1)(a) of the Act cannot be read to operate retrospectively.
  • It was further held that the said proviso, being a punitive measure with respect to the rights and obligations of directors, cannot be applied retrospectively unless the statutory amendment expressly provides so.
  • The judgment in Mukut Pathak (supra) has been squarely followed in Kailash Singhal & Anr. v. Union of India & Anr [2020] and Rajendra Kumar Agrawal v. Union of India & Anr [2020].

Observations of the HC on the cases referred by the MCA

Coming to the effect of the order of the Division Bench in Anamika Devi (supra) and Gaurav Kumar (supra), relied upon by the MCA, the Division Bench in the said two writ petitions had observed as under:

  • Both the petitions were filed by the petitioners praying inter alia that Union of India and the Registrar of Companies be directed not to treat them as “disqualified Directors” under the provisions of Section 164 of Companies Act.
  • Further, the petitioners sought issuance of a writ of mandamus, quashing publication of their names in the List of disqualified Directors, uploaded and published on the website of the respondents in September, 2017.
  • The petitioners also sought directions to the respondents to unfreeze their DIN and DSC thereby enabling them to file the documents and returns on behalf of the companies on which they were serving as Directors.
  • The Division requested the petitioners to address on the maintainability of the present petitions in view of the delay on the part of the petitioners in approaching the court for relief and that too when the List of disqualified Directors was uploaded and published on the website of the respondent as long back as in September 2017.
  • The explanation offered by the petitioners was that they were unaware of the publication of the aforesaid List till recently. However there was no explanation offered in the petition for the delay.
  • The aforesaid submission was not acceptable. Ignorance cannot bestow any benefit on a litigant and nor can it be a ground to condone a delay of almost three years in approaching the court for relief.
  • The petitioners were disqualified for a period of five years. By now, a little over one year of the period of disqualification was left to expire. But no steps were taken by the petitioners to seek legal recourse in all this duration.
  • Powers of judicial review vested in the court were discretionary in nature and in particular facts and circumstances, the court can decline to exercise the said power more so, when a party approaches the court for relief with a delay of almost three years, without an explanation worth the name for the said delay.
  • For the aforesaid reasons, the Division Bench declined to entertain the present petitions on the ground of delay, which was accordingly dismissed.

A perusal of the above order of the Division Bench showed that the Division Bench held that the filing of the writ petition was very belated, but at the same time the Court held that powers of judicial review were discretionary and the question of delay was to be examined in the particular facts and circumstances of each case

Observations of the HC on the Companies Fresh Start Scheme (CFSS)

The Companies Fresh Start Scheme (CFSS) was a new scheme, which was notified on 30th March, 2020. This Scheme was not invoked before the Division Bench. The scheme was obviously launched by the Government in order to give a reprieve to such companies who had defaulted in filing documents and they were allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The Scheme also envisaged non-imposition of penalty or any other charges for belated filing of the documents. The salient features of the Scheme were:

  • It was been launched to facilitate a fresh start, on a clean slate, for companies registered in India
  • Alleviative measures under the Scheme were for the benefit of all companies. It gave an opportunity to file belated documents in the MCA-21 Registry in respect of annual filings, without being subject to higher additional fee on account of delay
  • It granted immunity from launch of prosecution or of proceedings for imposition of penalty on account of delay associated with certain filings. For the said filings, only normal fee would be payable
  • Any defaulting company could file the belated documents, which were due for filing on any given date, as per the Scheme. Normal fee would be payable for such filing by the defaulting company under the Companies (Registration Offices and Fee) Rules, 2014 and no additional fee shall be payable;
  • To the extent that any prosecution was launched or penalty was imposed for the delay associated with the filings of belated documents, it provided that the same shall not be launched and immunity shall be provided
  • Applications can be made for seeking immunity in respect of belated documents.
  • Once the documents were taken on file or approved by the designated authority, such applications would have to be filed within 6 months from the date of closure of the Scheme
  • To avail benefit of the Scheme, the defaulting company would have to withdraw any appeal that it may have filed against prosecution launched or orders passed by a court or adjudicating authority under the Act
  • If a final notice of striking off of a company was already been initiated or in certain other situations as enumerated in Clause 6(ix), the Scheme would not apply
  • If immunity was granted, the Scheme provides that prosecution shall be withdrawn before the concerned Court and the proceedings for penalties shall also be closed.
  • The Scheme also extends to inactive companies who can file the requisite documents and get themselves declared as dormant companies under Section 455 or apply for striking off the name of the company.

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.

Observations of the ITAT

  • In the present case, the Petitioners were Directors of two companies – one whose name was struck off and one, which was still active.
  • In such a situation, 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.
  • The launch of the Scheme constituted a fresh and a continuing cause of action.
  • Under such circumstances, the question of delay or limitation would not arise.
  • The Division Bench did not have an occasion in the case of Anamika Devi (supra) and Gaurav Kumar (supra) to consider this Scheme.
  • In view of the fact that in the present case, the Petitioners are directors of an active company Koksun Papers in respect of which certain documents are to be filed and the said company is entitled to avail of the Scheme, the suspension of the DINs would not only affect the Petitioners qua the company, whose name has been struck off, but also qua the company which is active.
  • Thus, the facts and circumstances of this case were different from the facts in the case before the Division Bench.
  • Considering the COVID-19 pandemic, the MCA has launched the Fresh Start Scheme-2020, which ought to be given full effect.
  • It was not uncommon to see directors of one company being directors in another company.
  • Under such circumstances, to disqualify directors permanently and not allowing them to avail of their DINs and DSCs could render the Scheme itself nugatory.
  • In order to enable the Directors of Koksun Papers i.e. the Petitioners herein, to continue the business of the active company Koksun Papers, in the fitness of things and also in view of the judgment in Mukut Pathak (supra), the disqualification of the Petitioners as Directors was set aside.
  • The DINs and DSCs of the Petitioners were directed to be reactivated, within 3 working days.

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