Delhi High Court
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Disqualification of directors of an active company and Companies Fresh Start Scheme: What Delhi HC has held

The Court set aside the disqualification of directors to enable them to continue the business of an active company in pursuance of the Companies Fresh Start Scheme, 2020.

Aditi Singh

The Delhi High Court has set aside the disqualification of directors to enable them to continue the business of an active company in pursuance of the Companies Fresh Start Scheme, 2020. (Sandeep Agarwal & anr vs UOI)

The order was passed by a Single Judge Bench of Justice Prathiba M Singh.

The Petitioners were directors in two companies namely Koksun Papers Private Limited and Kushal Power Projects Private Limited.

The name of Kushal Power was struck off from the Register of the Companies in June 2017 due to non-filing of financial statements and annual returns.

Being the directors, the Petitioners were also disqualified with effect from November 1, 2016 for a period of five years under Section 164(2)(a) of the Companies Act, 2013.

Consequently, the Petitioners’ Director Identification Numbers (DIN) and Digital Signature Certificates (DSC) were cancelled and they were disabled from carrying on the business and file returns etc in the active company, Koksun Papers.

Challenging their disqualification, the Petitioners submitted that in view of Mukut Pathak judgement, disqualification proviso under Section 167(1)(a) came into effect only on May 7, 2018, and 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.

It was also stated that while Koksun Papers was entitled to take benefit of the Companies Fresh Start Scheme (CFSS) 2020, since the Petitioners’ DINs and DSCs were deactivated, it was not able to avail the benefit of the same.

The Scheme, which was rolled out on March 31, 2020, was introduced by the Ministry of Corporate Affairs to permit active companies to make good any defaults in filing of documents and seek immunity from disqualification.

The Central Government informed the Court that the judgment in Mukut Pathak was under challenge by way of an appeal, though no stay was presently in place.

Relying on two orders passed by a Division Bench, it was further said that the disqualification list was notified in 2017 and thus, the challenge to the same by the Petitioners deserved to be dismissed for being extremely belated.

After considering the submissions made by the parties, the Court noted that the judgment in Mukut Pathak insofar as the merits of the case was concerned, was squarely applicable in the present case.

The said judgment clearly holds 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 Court noted.

The Court further observed that the Division Bench's order cited by Centre itself clarified that the powers of judicial review were discretionary and the question of delay was to be examined in the particular facts and circumstances of each case.

The issue of Companies Fresh Start Scheme was also not invoked before the Division Bench, the Court said.

Shedding light on the purpose of the Scheme, the Court listed the salient features of the Scheme, which are as follows:

- The Scheme was launched to facilitate a fresh start, on a clean slate, for companies registered in India;

- Alleviative measures under the Scheme are for the benefit of all companies.

- It gives 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 grants immunity from launch of prosecution or of proceedings for imposition of penalty on account of delay associated with certain filings;

- Any defaulting company can 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;

- Applications can be made for seeking immunity in respect of belated documents. Once the documents are taken on file or approved by the designated authority, such applications would have to be filed within six 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 has already been initiated or in certain other situations as enumerated in Clause 6(ix), the Scheme would not apply;

- If immunity is granted, the Scheme provides that prosecution shall be withdrawn before the concerned Court and the proceedings for penalties shall also be closed;

- The Scheme 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.

The Court thus observed that when the purpose and intent of the Scheme is to allow a fresh start for companies which have defaulted, the disqualification and cancellation of DINs of the Petitioners would be a severe impediment.

Considering the COVID-19 pandemic, the MCA has launched the Fresh Start Scheme-2020, which ought to be given full effect. It is 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.
Delhi High Court said.

In view of the above discussion, the Court set aside the disqualification of the Petitioners as directors, in order to enable them to continue the business of the active company, Koksun Papers.

The DINs and DSCs of the Petitioners were directed to be reactivated, within a period of three working days.

The Petitioners were represented by Advocate Nikhil Verma.

Advocate Gigi C George appeared for Centre.

Read the order:

(Sandeep Agarwal & anr vs UOI.pdf
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