Delhi HC Orders Ministry Of Corporate Affairs To Set Aside Disqualification Of Directors On June, 2017 In Light Of Companies Fresh Start Scheme, 2020 [Read Order]

The petitioners were directors in two companies namely Koksun Papers Private Limited and Kushal Power Projects Private Limited and were disqualified from directorship of both companies for a period of five years under Section 164(2) of the Companies Act, 2013 when one of the companies, Kushal Power was struck off from the Registrar of Companies due to non-filing of financial statements and annual returns. Subsequent to this, their DSC and DINs were also cancelled.

Their disqualification was given effect under a retrospective application of the Companies Amendment Act of 2018 to their case. The Act of 2018 had materially amended Section 164(2) and Section 167(1)(a) of the Companies Act, 2013 by introducing a proviso to the Sections that stated that Directors who incurred disqualification from Directorship of one company shall also be disqualified from their Directorship position in other companies.

However, the Delhi High Court noted a previous ruling of the Court in the case of Mukut Pathak & Ors. v. Union of India & Others (2019) that had stated that such disqualification under Companies Amendment Act, 2018 shall not have a retrospective effect and shall only apply from 07^th June 2018 onwards. In Mukut Pathak, the Court with respect to the retrospective nature of the amendment had stated that

The proviso to Section 167(1) of the Act imposes a punitive measure on directors of defaulting companies. Such being the nature of the amendment, the same cannot be applied retrospectively. It is well settled that the Statute that impairs an existing right, creates new disabilities or obligations - otherwise than in regard to matters of procedure - cannot be applied retrospectively unless the construction of the Statute expressly so provides or is required to be so construed by necessary implication.

The Court also rejected the contention of the Ministry of Corporate Affairs that the challenge to the disqualification by the Petitioners was extremely belated and thus deserves to be dismissed. The Court noted that in the present case, a fresh cause of action has arisen for the petitioners by the launch of the Companies Fresh Start Scheme on 30^th March, 2020. The Court noted that

"the Scheme has been launched by the Government in order to give a reprieve to such companies who have defaulted in filing documents and they have been allowed to file their requisite documents and to regularize their operations, so as to not face disqualification. The Scheme also envisages non-imposition of penalty or any other charges for belated filing of the documents."

The Court stated that the new Scheme provides remedies to the Petitioners with respect to their active company Koksun Papers and that the Petitioners must be allowed to avail the same.

"the Petitioners are Directors of two companies – one whose name has been struck off and one, which is still active. In such a situation, the disqualification and cancellation of DINs would be a severe impediment for them in availing remedies under the Scheme, in respect of the active company. The purpose and intent of the Scheme is to allow a fresh start for companies which have defaulted. In order for the Scheme to be effective, Directors of these companies ought to be given an opportunity to avail of the Scheme. The launch of the Scheme itself constitutes a fresh and a continuing cause of action. Under such circumstances, the question of delay or limitation would not arise."

The Court also stated that considering the COVID-19 pandemic, the scheme shall be given full effect and that a permanent disqualification of directors shall render the Scheme itself nugatory.

Relying on the ruling in Mukut Pathak, the Court ordered that the petitioners be allowed to continue the business of their active company Koksun Papers and their disqualifications as Directors be set aside. It also ordered that the DINs and DSCs of the Directors be reactivated within three working days.

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