BACKGROUND

Recently, the Ministry of Corporate Affairs (MCA), through various ROC offices, has de-registered approx 209,000 companies from its record due to “Non-filing of Annual Reports for consecutive 2 years or more” in accordance with provision of Section 248 of Indian Companies Act, 2013. As a follow-up measure, the MCA has notified a list of approx. 100,000 directors of said deregistered companies, who stand disqualified as per provision of 164(2) of the Indian Companies Act, 2013. In this background, provisions 164(2) and 248 of the Indian Companies Act, 2013 relating to strike-off of a name of the company by the Registrar of Companies due to non-filing of Annual Reports for a consecutive period of 2 years or more and disqualification of director due to non-filing of Annual Reports for a consecutive period of 3 years or more respectively, have gained additional significance. The importance of this subject has become critical considering the impact of disqualified directors on other companies, where disqualified directors are director on said companies and which are compliant.

The cumulative impact of above said provisions bring in to focus an urgent attention of all directors to be alive to this situation and more watchful in future to ensure timely filing of Annual Reports of the company.

For the sake of better understanding, relevant provisions of the Indian Companies Act, 2013 are discussed as below:

DISQUALIFICATION OF DIRECTOR DUE TO NON-FILING OF ANNUAL RETURNS & FINANCIALS STATEMENT

According to Section 164(2)(a):

“no person who is or has been a director of a company which – has not filed financial statements or annual returns for any continuous period of three financial years 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.”

Further, Section 167(1)(a) states that:

“the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.”

The plain reading of above said provisions suggests that:

1. A person is disqualified to become a director, if he has been a director in a company, which has not filed its Annual Reports for a consecutive period of 3 financial years;
2. A person, if he is a director in a company, which has not filed its Annual Reports for a consecutive period of 3 financial years, shall vacate the office of a director, as soon as he incurs earlier said disqualification; and

• The said disqualified director shall not be eligible to be appointed as a director in any company for a period of 5 years from the date of incurrence of such disqualification.

POWER OF REGISTRAR OF COMPANIES TO REMOVE THE NAME OF THE COMPANIES FROM THE REGISTER OF COMPANIES

As per section 248(1) of Indian Companies Act, 2013 read with rule 3(1) the Companies (Removal of Name of Companies from the Register of Companies) Rules 2016, the Registrar of Companies has power to remove the name of a company from the Register of Companies.

Section 248(1)(b) of the said Act provides that:

“where the ROC has reasonable cause to believe that a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455,

he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the Register of Companies and requesting them to send their representations along with the copies of relevant documents, if any within a period of 30 days from the date of notice.”

The plain reading of above said provisions suggests that:

1. The ROC has been vested with power to seek explanation from the company and its directors, in case the said company has not filed its Annual Reports for a consecutive period of 2 financial years and at the same time not applied for a status of a dormant company as defined in section 455 of the Indian Companies Act, 2013;
2. In case the ROC is not satisfied with explanations of the company and its directors, then it has power to remove the name of the company from its Register of Companies; and

• The directors of all such companies will be liable to face monetary penalties and penal consequences as may be prescribed in the said Act and related Rules.

IMPACT OF DISQUALIFIED DIRECTOR U/S 164(2) ON OTHER COMPANIES

• The office of Disqualified Director shall become vacant under section 167 of the Indian Companies Act, 2013.
• The company is mandatorily required to give written representation to the Auditors of the company to the effect that none of the directors is disqualified from being appointed as a director in terms of section 164(2).

Few situations, where disqualification u/s 164(2) can create exceptional situation are elaborated

• If disqualified director is the only resident director, who stays in India for a total period exceeding 182 days in previous calendar year, then in that situation that Company needs to appoint another resident director to fulfill the requirement of Section 149(3) of the Indian Companies Act, 2013.
• In case, there are only minimum stipulated directors in the Company and one of the directors incur disqualification, then it becomes difficult for the Company to operate and comply with provisions of the said Act and Rules.
• Disqualified director are barred from filing any statutory e-form and in case the e-form is filed, then the same is rejected and not taken on record.

CONCLUSION

In the above backdrop, it’s even more crucial for every director to ensure timely filing of Annual Report to avoid exceptional situation arising due to non-filing of Annual reports.