Disqualified directors before 7th May 2018 retain directorship in other companies; the Fresh Start Scheme mitigates penalties for compliance default.

Headnote:(A) Companies Act, 2013 - Section 164(2)(a) and 167(1)(a) - Directors disqualified for non-filing of financial statements for three consecutive years - Disqualification period was from 1st November, 2017 to 31st October, 2022. The court found that directors disqualified prior to 7th May, 2018 retain their directorship in other active companies. The Companies Fresh Start Scheme-2020 aims to facilitate a fresh start for defaulters. (Paras 3, 4, 5, 6)

(B) Fresh Start Scheme - The purpose is to allow companies to resume compliance post-pandemic and not unduly penalize disqualified directors after a substantial disqualification period. (Para 5)

Facts of the case:
Petitioners were directors in a struck-off company due to non-compliance, leading to disqualification and deactivation of their DINs and DSCs.

Findings of Court:
Petitioners' DINs and DSCs must be reactivated within ten days as per precedent and guidelines established in earlier judgments.

Issues: Whether disqualified directors prior to the statutory amendment could reclaim active directorships.

Ratio Decidendi: The court ruled that disqualification before the amendment does not prohibit ongoing directorships in other companies; the Fresh Start Scheme aligns with recovery efforts for defaulting companies.

Result: Petition granted; DINs and DSCs reactivated.

JUDGMENT

Prathiba M. Singh, J. (Oral)

1. This hearing has been done by video conferencing.

CM APPL. 711/2021 (for exemption)

2. Allowed, subject to all just exceptions. Application is disposed of.

W.P.(C) 281/2021 & CM APPL. 712/2021 (for interim directions)

3. The Petitioners were directors in Nalini Pic and Pac Private Limited (hereinafter, `Nalini Limited'). Due to alleged non-compliance/default in Nalini Limited under Section 164(2)(a) of the Companies Act, 2013 i.e., non-filing of financial statements or annual returns for any continuous period of three financial years, the said Petitioners were disqualified as directors from 1st November, 2017 to 31st October, 2022. Their DINs and DSCs were de-activated. Nalini Limited has also been struck off from the Register of Companies. The Petitioners claim to be Directors in other active companies and also now wish to start a fresh business.

4. This Court has considered the legal position relating to activation of DIN/DSC numbers of directors of defaulting companies in Anjali Bhargava & Anr. v. UOI & Anr., (W.P.(C) 11264/2020, decided on 6th January, 2021). The relevant portion of the said order reads:

"4. There are four categories of Directors that are approaching Courts seeking setting aside of disqualification and activation of DIN/DSC numbers.

(a) Directors who have been disqualified prior to 7th May 2018, qua other companies in addition to the defaulting company:

As per the proviso to Section 167 (1) (a) of the Companies Act, 2013, once a director is disqualified qua one company i.e., the defaulting company, the office of the said director would become vacant in all companies. The said proviso, has, however, come into effect only on 7th May, 2018. In Mukut Pathak (supra) it was held that this proviso cannot have retrospective effect and would only apply if the disqualification took place after 7th May 2018. Paragraph 98 of Mukut Pathak (supra) reads as under:

"98. In view of the above, the petitioners would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company."

Since there is no stay on the judgment in Mukut Pathak (supra), it continues to hold the field. Thus, in cases where directors have been disqualified prior to 7th May, 2018, the proviso to Section 167(1)(a) would not apply and the directors would continue to be directors in companies other than the defaulting company. The disqualification of such directors qua active companies would therefore be liable to be set aside and their DIN and DSC's reactivated.

(b) Directors who have been disqualified post 7th May 2018, qua other `active' companies:

As held in Mukut Pathak (supra), in all cases where the directors have been disqualified on or after 7th May, 2018, the proviso to Section 167 (1) (a) would apply and such directors would cease to be directors in all companies including the defaulting company. In March, 2020, in light of the COVID-19 pandemic, the Ministry of Corporate Affairs vide General Circular No. 12/2020 introduced CFSS-2020 to allow a fresh start for defaulting companies and directors of such companies. This Court, in Sandeep Agarwal (supra) has analyzed CFSS-2020 to conclude that the purpose of the scheme is to provide an opportunity for `active' companies i.e., companies whose names have not been struck off, who may have defaulted in filing of documents, to put their affairs in order.

....

Applying the scheme to the facts of the case, this Court in Sandeep Agarwal (supra) directed reactivation of the DINs and DSCs of directors of two companies - one whose name had been struck