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Supreme Court Judgement on Disqualification of Directors
Savvy Midha
| Updated: Jan 28, 2020 | Category: DIN, Legal

Supreme Court Judgement on Disqualification of Directors

Every Company, be it Private, Public or OPC, is an artificial person with no physical existence. The company has a legal existence separate from its members and acts through a natural person- director of the company. The collective group of directors forms the Board of the company, which is accustomed to act for the benefit of the company. These are professional persons hired by the company to hold the position of director. This documentary entails the consequences of judgement on disqualification of directors.

The Companies Act doesn’t specify qualification for director’s appointment. However, it regulates the provisions of disqualification of directors in Section 164.

In 2017, the Ministry of Corporate Affairs (MCA) passed a notification vide which all the redundant companies had to be strike off and the directors of these companies were held to be disqualified. However, many High Courts ruled against this. Recently, the Supreme Court of India has passed an order, upon Special Leave Petition of the MCA, upholding the decision of MCA and squashing the decision of all the High Courts.

When the director is disqualified under Companies Act 2013?

Directors are disqualified for the appointment if they possess any of the following reasons as stated herein below:

  • He is declared a person with unsound mind by a court
  • He is undischarged insolvent
  • He has applied for insolvency and such application is pending
  • Has been convicted by a court for any offense that involves moral turpitude and is sentenced imprisonment for at least 6 months
  • If any court or tribunal has passed the order disqualifying him from being appointed as a director
  • In case any director holds unpaid shares has not paid the calls in respect of them
  • In case he has been convicted for the offenses involving related party transaction in past
  • He has failed to acquire or validate his Director Identification Number

Bombay High Court on Disqualification of Directors

A division bench comprising of judicial members for hearing the petition in regards to Disqualification of Director due to failure to file an annual return. Following orders were passed by the bench of judicial:

  • Companies which are struck off under the provisions of section 248 of the act, its directors are not stated to be disqualified. Section 248 gives the power to the Registrar of Companies to remove the name of companies.
  • Writ petitions are allowed for the cases in which the director is disqualified for financial years before 1st April 2014 and is reckoned for continuous three financial years.
  • The writ petition is allowed for disqualification occurred under the provisions of old act, i.e., Companies Act 1956
  • DIN of those directors will be restored whose disqualification is squashed by this court
  • Those disqualifications occurred for continuous three financial years after 1st April 2014 remains disqualified

Supreme Court Judgment on Disqualification of Directors

Supreme Court has stayed the judgment of Bombay High Court reliving the disqualified directors. Along with this, it has also stayed other orders passed by various high courts in around 2000 cases related to the disqualification of directors.

Ministry of Corporate Affairs filed Special Leave Petition to Supreme Court to squash the orders passed by several high courts and the same has been admitted by the Supreme Court. 

MCA has struck off approximately 3 Lakhs Companies and disqualified around more than 3 Lakhs directors due to the reason for failure to file financial statements and annual return and such default continued for three consecutive years.

After this order of MCA, directors of these companies move to the High Courts for relief, however, the judgments on disqualification of directors vary from state to state. For instance, Chennai High Court’s order was contrary to MCA’s decision and MP High Court upheld MCA’s decision. Thus, as a result, all these orders passed by the Bombay High Court and other high court are stayed aside by the Supreme Court.

Consequences of Disqualification

Following are the prescribed consequences faced by directors due to the judgement on disqualification of directors. In case the company fails to file its Financial Statement and annual return with ROC for a continuous period of three years, directors of such defaulting company:

  • Shall not be re-appointed in that defaulting company
  • Shall not be eligible to be appointed in any other company for 5 years
  • Shall immediately vacate the office from all companies
  • Director Identification Number is de-activated by Registrar of Company

History of the relevant judgment relating to Disqualification of Directors

Section 164 of the Companies Act 2013 deals with the disqualification of directors. One such disqualification occurs in the case when any company fails to file Financial Statements or Annual Return for 3 consecutive years. Directors of such companies cannot be reappointed in the same company or appointed in another company for at least 5 years.

MCA vide its notification dated 12th September 2017 published the list of directors associated with struck off companies through its authority under Companies Act. And thereafter section 164 was critically analyzed by various courts in India.

MCA through this action had planned on removing shell companies from India. Shell companies are one of the sources that generate black money. Furthermore, MCA introduced a scheme named Condonation of Delay for providing relief to these shell companies to complete their pending annual filing. Such a move of MCA was a relief to several directors who were disqualified.

The writ petition was filed against these MCA orders in several high courts in which judgments were passed which are enumerated for you:

  • Hyderabad High Court order to restore DIN of directors so that they can file their pending annual return
  • Bombay high court passed an interim order under which directors were no longer disqualified
  • Bombay high court directed the ROC to accept physical documents by struck off companies to treat such application as voluntary striking off.
  • Similar such judgments were passed by the Delhi high court and Rajasthan high court as well.

However, recently the Supreme Court has admitted the petition by MCA and stayed the orders passed by the High Court in about 2000 cases relating to this matter.

Expert’s Opinion

The Supreme Court’s judgement on disqualification of directors seems fair since shell companies are a burden to the economy and the directors of these companies should be disqualified, if they have not been taking steps to improve the economic conditions of the company.

Also, Read:Union Budget 2020-21: Key Highlights

Savvy Midha

Savvy Midha holds the degrees of B.Com(honors), LL.B and Company Secretary. She is an experienced Legal and Financial writer with expertise in research, drafting, and copy-writing.

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