Directors’ disqualification only from defaulting firms, Corporate Affairs Ministry clarification soon

Last September, the ministry issued a statement saying that it had identified 1,06,578 directors of companies that did not file their financial statements for three straight years.

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The government recently de-recognised 2.10 lakh companies that were dormant and utilised for dubious transactions.

After creating a corporate turmoil by removing allegedly tainted directors from boards of all companies, the Ministry of Corporate Affairs would soon clarify that a director’s disqualification would be limited from the company which did not file statutory returns for three consecutive years, and not others which were compliant.

Sources said the ministry plans to file a transfer petition before the Supreme Court to club all writ petitions pending before different high courts into one, while stating that a director’s disqualification was applicable only to the defaulting company.

“A director disqualified in terms of Section 164(2)(a) of the (Companies) Act would be liable to vacate his office as Director under the provisions of Section 167 (1)(a) only in the company that has defaulted in filing its statutory returns for three consecutive years,” says the proposed clarification.

“He would continue to hold his office of Director, if any held by him, in companies that are compliant in filing their statutory returns as per the Companies Act,” it adds.

Last September, the ministry issued a statement saying that it had identified 1,06,578 directors of companies that did not file their financial statements for three straight years and directed that these directors cannot serve on the board of any company for the next five years.

Not only did this disturb the functioning of boards and hurt business sentiment, the disqualification resulted in several writ petitions including one in the Delhi High Court which stayed the debarment of three such directors.

Fearing severe stricture from the Delhi High Court, the ministry last week approached the Additional Solicitor General who opined that the government take a uniform stand that the vacation of office of the director would occur only in the company which has defaulted in filing returns.

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The government recently de-recognised 2.10 lakh companies that were dormant and utilised for dubious transactions. After de-recognition, the finance ministry directed banks to restrict operations of bank accounts of such firms by their directors or authorised representatives.