Where Are India Inc.'s Disqualified Directors?
It was the fateful month of September 2017 when the Ministry of Corporate Affairs disqualified over 3 lakh directors with a single notice as part of its crackdown on shell companies.
More troublesome was the fact that their permanent director identification numbers were deactivated. Four years later and despite favourable court rulings, most of these directors are still fighting to shed the "disqualified" tag.
The repercussions of the almost four-year old notice are being felt even today as many directors whose DINs were disqualified then are still looking for its revival, according to Hemang Parekh, partner at DSK Legal.
The 'Disqualification' Drive
In September 2017, the ministry debarred 3,09,614 directors associated with companies that hadn't filed financial statements or annual returns for three straight years.
Consequently, as per Section 164(2) of the Companies Act, 2013, they were disqualified from being reappointed as a director of that company for five years. They could also not be appointed by any other company. And had to give up existing directorships in other companies as well.
This mass disqualification left many companies without a board of directors, besides affecting the board composition of several companies, Harish Kumar, partner at L&L Partners, said.
Due to disqualification and consequent vacation of office of certain directors holding directorship in some defaulting companies, composition of the board of other companies which were not under any such default, was impacted.Harish Kumar, Partner, L&L Partners.
The effect was also felt by limited liability partnerships, Parekh said, as DIN is also required in case of designated partners.
Since the DIN of directors concerned was cancelled by the ministry, in many cases, it became difficult for such directors to get appointed in any other capacity as a partner of an LLP as well.Hemang Parekh, Partner, DSK Legal
Industry representations prompted the ministry to notify an amnesty scheme in 2018. Defaulting companies and their disqualified directors were given an opportunity to comply within three months.
Under the scheme, DINs were temporarily re-activated to enable compliances. Directors of companies that continued to be non-compliant were disqualified again.
Disqualification Can't Lead to Deactivation of DINs, Courts Say
Six high courts have found no merit in the ministry's approach.
The high courts of Gujarat, Karnataka, Bombay, Allahabad and Delhi have all held the law doesn't empower any authority to cancel or deactivate DIN upon mere disqualification. These courts also ordered restoration of DINs of the directors before them.
The Kerala High Court is the latest to have granted disqualified directors relief.
Earlier this month, Kerala High Court held the company law provisions on disqualification as constitutional. But it specified that the DIN cannot be deactivated or cancelled solely for the reason that the directors stand disqualified for appointment or reappointment.
The court also directed the ministry to re-activate the DINs of the 242 directors before it. DIN is an identification number and disqualification under Section 164(2) is of temporary nature, it said.
“DIN number is common to persons who are at the same time directors of companies and partners of Limited Liability Partnerships... In such circumstances, there is no justification for cancelling or deactivating DINs of Directors consequent on their disqualification resulting from Section 164(2).” Kerala High Court.
Other high courts, too, have given a similar reasoning in the past.
In one of the early cases, the Gujarat High Court quashed and set aside the list of disqualified directors by the ministry and held that DIN couldn't be cancelled or deactivated merely because one of the companies in which such person was a director has been struck off from the Register of Companies.
Last year, both Allahabad and Delhi High Courts held there is no provision for cancelling DIN on the basis of disqualification under Section 164.
Once the DINs are reactivated, the directors can seek or remain in partnership capacity at LLPs, even if their temporary disqualification as directors in companies subsists.Hemang Parekh, Partner, DSK Legal
To resume or seek appointment on company boards, they'll have to wait five years from the date of disqualification, Parekh said.
While courts have been quick to come to the rescue of directors whose DIN has been cancelled, the relief granted by them has been limited in as far as its applicable to only the petitioners.
The ministry should take cognizance of these high court orders and direct registrars of companies to end the deactivation practice to avoid prolonged litigation, he said.