Condonation of Delay Scheme, 2018: A Relief to Defaulting Directors and Companies

[Tanaya Desai is a 4th-year student at ILS Law College, Pune]

In a bid to constrict and prevent illicit fund flows and black money by shell companies, the Ministry of Corporate Affairs (“MCA”) last year disqualified over 300,000 directors for default in filing company annual returns and financial statements with the Registrar of Companies (“RoC”), a statutory mandate prescribed by the Companies Act, 2013 (“Act”). Sanctioning the same, section164(2) read with section167 of the Act provides for disqualification of a director on account of non filing of annual returns or financial statements for any continuous period of three financial years, ipso facto rendering the office of the defaulting director vacant.

Background

Consequent upon notification of section 164(2), the MCA had launched a Company Law Settlement Scheme in 2014, providing an opportunity to the defaulting companies to clear their defaults within the time period specified therein. The MCA in September 2017 identified over 300,000 directors associated with the companies that had failed to file financial statements or annual returns in compliance, and disqualified them. In furtherance of this step, the names of over 200,000 defaulting companies were struck-off by the RoC from the Register of Companies for failing to comply with the prescribed statutory requirements, in accordance with section 248 of the Act. Consequently, the Ministry of Finance had directed banks to restrict operation with such defaulting companies, and block banks accounts of the same. As a result, writ petitions were filed in various High Courts, seeking relief from disqualification and praying for an opportunity to remedy such default. Ergo, the MCA, by way of General Circular No.16/2017 dated December 29, 2017 introduced the Condonation of Delay Scheme, 2018 (“Scheme”) in exercise of its powers under sections 403, 459 and 460 of the Act, to provide the disqualified directors with an opportunity to regularise compliance and rectify default.

The Scheme

The Scheme, envisioned to be in effect until March 31, 2018, shall be applicable to all ‘defaulting companies’ which comprises companies that have not filed their financial statements or annual returns for a continuous period of three years as required under the Act. It is pertinent to note that the same does not encompass those companies which have been struck off the register of companies in accordance with section 248(5) of the Act, for failure in making an application seeking status of a dormant company in the event that the company has not been carrying on any business or operations for a period of two immediately preceding financial years. 

Given that disqualification of directors automatically invalidates any further acts of such person acting as director, the Scheme provides for a temporary activation of the Director Identification Number (“DIN”) of such directors to authorise filing of the overdue documents. Subsequent to filing of the overdue documents, the company shall seek condonation of delay in the prescribed manner. However, in the case of companies that have been been struck off the register of companies under section 248 of the Act and have applied for revival under section 252, the Scheme provides for a conditional activation of the directors DIN, subject to the National Company Law Tribunal (“NCLT”) ordering revival of the company, upon the company having filed all overdue documents. Additionally, it is also provided that upon termination of the Scheme, the DINs of those directors associated with companies, which have failed to file the overdue documents and seek condonation of delay within the time prescribed by the Scheme, shall be liable to be deactivated and the directors so associated shall continue to be disqualified under the Act.

Other provisions of the Scheme elaborate upon the overdue documents required to be filed, while specifically excluding other documents from its purview of applicability. Although the Scheme directs the RoC to withdraw any pending prosecution(s) for documents filed under the Scheme, the same does not exempt directors from personal liability under section 167(2) of the Act for wilfully acting as directors even after being aware of their disqualification under the Act. Thus, even though the Scheme allows for directors to resume office in official capacity, the same does not absolve directors from criminal liability for violation of the aforementioned statutory provision.

Conclusion

This much sought after relief to distressed directors and companies in the wake of stringent noose-tightening by the Government may prove to be favourable to bona fide directors oblivious to their disqualification owing to association with disqualified companies. Given the rigid repercussions of such sanction and the inability of defaulters to be re-elected as directors for the defaulting company or appointment in any other company for a period of five years following such disqualification, the Scheme provides an escape to companies to regularise operations and ensure statutory compliance. Among other things, an interesting aspect to ponder upon perusal of the Scheme is the validity of the acts of ‘disqualified’ directors in official capacity during the period of disqualification prior to the initiation of the Scheme. Given that the Scheme provides outright for the re-activation of the directors DIN to validate filing of overdue documents, it may seem that any preceding acts of such directors would be rendered void.

– Tanaya Desai

About the author

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics