With the burning issue of disqualification of Directors since last few years, the Ministry of Corporate Affairs has become proactive in its initiatives to identify Directors who have fallen under the ambit of non-compliances and have penalised them by disqualifying them or de-activating their DIN. These have affected not only the Directors but also the companies in which they hold such positions. Hence, a Company must be in capable hands who can uphold corporate governance and protect interests of stakeholders.
In this article, we shall understand more about Disqualification of Directors, De-activation of DIN and their inter-relation.
Types of Disqualifications:
Section 164 of the Companies Act, 2013 (“the Act”) lays down distinct traits and situations which may lead to disqualification of Directors. These include:
A Director may be disqualified for a period of 5 years from all the companies in which he holds directorship in case the above grounds of disqualification occur in any of the company in which he is a Director.
Declaration for Disqualification:
Each Director shall provide his declaration to the Company under Rule 14 of the Companies (Appointment and Disqualification of Director) Rules, 2014 in Form DIR 8 (Intimation by Director of his Disqualification). The Ministry vide its amendment on 20th January, 2023 in DIR Rules brought about the following major changes:
De-activation of DIN:
The process is ruled by Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
Power to De-activate–The power to deactivate a DIN lies with the Central Government or Regional Director (North), Noida or any other officer authorised by the Regional Director.
Reasons for De-activation of DIN-
Does DIN De-activation result in Disqualification of Director?
The answer is NO. A director is disqualified on grounds specified under Section 164 of the Act. Whereas, de-activation of DIN is a result of the aforesaid reasons. There are no overlaps for a Director’s DIN being de-activated due to disqualification under Section 164.
During the initiative driven by the Ministry and the Registrar of Companies (RoC) in 2017 to curb formation of shell companies and consequent money laundering, a large number of directors were disqualified under section 164(2) of the Act for default in filing of financial statements or annual return during a continuous period of three years. The RoC went way ahead their powers and also de-activated DINs of such disqualified directors on the ground that pursuant to a director being disqualified under section 164, such director would be deemed to have vacated his office in other companies in which he was a director and he could not act as a director for a period of 5 years. This was done in a sweeping action, and without giving any prior notice or hearings to such disqualified directors. As a result, such Directors were unable to file documents/returns of behalf of company on which they had been serving as directors or start any new business or avail the benefit of Companies Fresh Start Scheme (CFSS) introduced by the Ministry to make good any default of filing documents and seek immunity from disqualification.
The action of the Ministry was challenged by a huge number of aggrieved directors on various grounds including questioning the power of RoC to de-activate the DINs en masse as a prong in its drive to tackle the issue of shell companies.
Amongst many other High court decisions made thereafter, the action of RoC was quashed by Delhi High Court in Mukut Pathak’s case wherein it was examined that the power to de-activate DIN does not vest with the RoC. Moreover, the reasons for de-activation of DIN laid down under Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 do not include disqualification of Directors. Hence, the DINs were re-activated upon the order of the Court.
Therefore, we can safely conclude that the power to deactivate DIN and the reasons for deactivation of DIN are explicitly specified in the Rules beyond which no action can be taken.
From the perspective of Foreign Directors:
Although the Ministry with all its amendments and initiative intends to ease doing business in India and enhance efficacy of the Act, the users (especially resident outside India) have struggled through the phase of transitions and amendments.
Launching of the MCA V3 portal to effectuate the various update and amendments must have been one of the salient achievements of the Ministry. However, the stakeholders have been made to undergo extra compliances due to setting of different User accounts, various OTP verifications and re-association of DSCs. These have been difficult for foreign directors due to difference in time zones and lack of clarity on the need for same. Similar effects were perceived while rectification of disqualification and de-activation of DIN.
Nevertheless, an eye on the Directors shall be helpful for companies in the long run to appoint accountable and principled individual in its Board.