Introduction
In recent years, there’s been a significant problem with Directors facing disqualification. The Ministry of Corporate Affairs is now taking active steps to find Directors who haven’t followed the rules and penalize them by either disqualifying them or deactivating their Director Identification Number (DIN). This not only affects the Directors but also the companies they are a part of. Therefore, it’s crucial for a company to have capable leaders who can ensure good corporate governance and protect the interests of everyone involved. This article will explain more about why Directors get disqualified, what happens when their DIN is deactivated, and how these two things are connected.
Different Kinds of Disqualifications:
There are different reasons why Directors can be disqualified under Section 164 of the Companies Act, 2013. These can be grouped into personal disqualifications (like being of unsound mind, declared insolvent, convicted of certain offenses, involved in related party transactions, or not having a valid DIN) and company-related disqualifications (such as not filing financial statements or annual returns for three years, or failing to repay deposits/interest/dividends for a year). If a director faces any of these issues in a company, they may be disqualified for five years from being a director in any company.
Submission of the Declaration for Disqualification:
Every Director is required to submit a declaration to the company, as per Rule 14 of the Companies (Appointment and Disqualification of Director) Rules, 2014. This declaration, called Form DIR 8, is an official notice from the Director informing the company about any disqualifications they may have. On January 20, 2023, the Ministry made significant changes to the DIR Rules, affecting how Directors report their disqualifications.
- Requirement of disclosure of personal disqualifications in DIR 8– Previously, Directors only had to inform the company about disqualifications related to the company itself. However, due to an amendment, Directors are now obligated to disclose not just company-related disqualifications (Section 164(2)) but also personal disqualifications mentioned in Section 164(1). This means Directors need to be more cautious about their personal behavior and reputation to continue serving as directors in any company.
- Resultant changes in DIR forms– The new requirement to disclose personal disqualifications has led to modifications in the format of several Director-related forms. Forms like DIR 3, DIR 5, DIR 6, DIR 9, DIR 10, DIR 11, and DIR 12 have been updated to accommodate these changes.
Filing of Form DIR 10 with the Regional Director- Before, if a director wanted to remove their disqualification, they had to submit an application using Form DIR 10 to the Registrar of Companies (RoC). However, with the recent changes in the DIR Rules, the process has been made simpler. Now, Directors can apply for the removal of disqualification by using the web-based Form DIR 10 and submitting it to the Regional Director (North). The format of the form has been updated to match these changes.
De-activating DIN:
The procedure is governed by Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
Authority to Deactivate– The authority to deactivate a Director Identification Number (DIN) is held by the Central Government, Regional Director (North), Noida, or any officer authorized by the Regional Director.
Reasons for DIN Deactivation:
- Having more than one DIN.
- Obtaining DIN through wrongful or fraudulent means.
- Death of the individual concerned.
- The individual has been declared insolvent.
- A voluntary request from the DIN holder to surrender their DIN using Form DIR 5.
- Failure to submit DIR 3 KYC/DIR 3 KYC Web within the specified time according to Rule 12A.
Does the deactivation of DIN lead to the Director’s Disqualification?
No, it does not. The disqualification of a Director is based on the reasons outlined in Section 164 of the Act. On the other hand, the deactivation of DIN occurs due to the mentioned reasons. There is no overlap where a Director’s DIN is deactivated solely because of disqualification under Section 164.
In 2017, the Ministry and the Registrar of Companies (RoC) took action to prevent the creation of shell companies and potential money laundering. Many directors were disqualified under section 164(2) of the Act due to failure to file financial statements or annual returns continuously for three years. The RoC, exceeding their powers, also deactivated the Director Identification Numbers (DINs) of these disqualified directors. This decision was based on the notion that a director, once disqualified under section 164, would be considered to have vacated their position in other companies as well, preventing them from acting as a director for a period of 5 years. The action was taken abruptly, without prior notice or hearings for the disqualified directors. Consequently, these directors were unable to file necessary documents/returns for the companies they served, start new businesses, or take advantage of the Companies Fresh Start Scheme (CFSS) introduced by the Ministry to rectify document filing defaults and obtain immunity from disqualification.
Many directors who felt aggrieved by the Ministry’s actions challenged them on various grounds. One of the key issues raised was questioning the Registrar of Companies’ authority to deactivate Director Identification Numbers (DINs) en masse as part of its efforts to address the problem of shell companies. Following numerous High Court decisions, the Registrar of Companies’ action was nullified by the Delhi High Court in Mukut Pathak’s case. The court examined that the authority to deactivate Director Identification Numbers (DIN) does not lie with the Registrar of Companies (RoC). Additionally, the reasons outlined for DIN deactivation in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, do not encompass the disqualification of Directors. Consequently, the court ordered the reactivation of the DINs.
Hence, we can confidently affirm that the authority to deactivate Director Identification Numbers (DIN) and the grounds for such deactivation are clearly outlined in the Rules, and no action can be undertaken beyond these specified provisions.
Considering the Viewpoint of Foreign Directors
Despite the Ministry’s efforts to streamline business operations in India and improve the effectiveness of the Act through various amendments and initiatives, users, particularly those residing outside India, have faced challenges during the phases of transitions and amendments.
The introduction of the MCA V3 portal to implement updates and amendments can be considered a significant accomplishment by the Ministry. However, stakeholders, including foreign directors, have faced additional challenges in meeting compliance requirements. This includes the creation of different user accounts, various OTP verifications, and the re-association of Digital Signature Certificates (DSCs). For foreign directors, differences in time zones and unclear requirements have made these processes difficult. Similar challenges were observed during the correction of disqualifications and the deactivation of Director Identification Numbers (DIN).
However, keeping a watchful eye on Directors will be beneficial for companies in the long term, ensuring the appointment of responsible and principled individuals to their Boards.