Safeguarding Directorship: Navigating Disqualifications and DIN Deactivations

The realm of corporate governance is built upon a foundation of transparency and accountability, where directors play a pivotal role in upholding these principles. In recent years, the Ministry of Corporate Affairs (MCA) has taken proactive measures to identify and penalize directors who fail to comply with statutory obligations, thereby safeguarding the interests of stakeholders and fostering a robust business environment.

At the heart of this initiative lies Section 164 of the Companies Act, 2013, which outlines distinct traits and situations that may lead to the disqualification of directors. These grounds can be broadly categorized into two domains: personal disqualifications and company-related disqualifications.

Personal disqualifications, as outlined in Section 164(1), encompass scenarios such as an individual with an unsound mind, an applicant for adjudication as an insolvent, or a person convicted by a court of any offense involving moral turpitude or related party transactions. Additionally, individuals disqualified by the order of a Tribunal or those without a valid Directors Identification Number (DIN) fall under this category.

On the other hand, company-related disqualifications, as stipulated in Section 164(2), arise when a director fails to ensure the timely filing of financial statements or annual returns for a continuous period of three years, or when a company under their directorship fails to repay deposits, interest, or dividends for a continuous period of one year. In such cases, the director may be disqualified from holding directorship in any company for a period of five years.

To further strengthen the disclosure requirements, the MCA, through an amendment on January 20, 2023, in the Companies (Appointment and Disqualification of Directors) Rules, 2014, mandated that directors declare both personal and company-related disqualifications in Form DIR-8. This amendment has resulted in consequential changes to various director-related forms, such as DIR-3, DIR-5, DIR-6, DIR-9, DIR-10, DIR-11, and DIR-12.

Moreover, the process of removing a director’s disqualification has been streamlined. Previously, an application for removal of disqualification was required to be filed with the Registrar of Companies (RoC) in Form DIR-10. However, the updated rules have simplified the process by allowing directors to apply to the Regional Director (North) through a web-based Form DIR-10, with a revised format.

In addition to disqualifications, the MCA also has the power to deactivate DINs under specific circumstances outlined in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014. These reasons include duplicity of DIN, DIN obtained through wrongful or fraudulent means, death of the concerned individual, insolvency of the individual, or a voluntary application by the DIN holder to surrender their DIN in Form DIR-5. Notably, non-filing of DIR-3 KYC/DIR-3 KYC Web within the stipulated time can also lead to DIN deactivation.

It is crucial to note that the deactivation of a DIN does not automatically result in the disqualification of a director. Disqualification occurs on the grounds specified under Section 164 of the Act, while DIN deactivation is a separate process governed by the aforementioned rules.

In a landmark case, Mukut Pathak’s case, the Delhi High Court quashed the action of the RoC in deactivating DINs en masse as part of its drive to tackle the issue of shell companies. The court examined that the power to deactivate DINs does not vest with the RoC, and the reasons for deactivation laid down under Rule 11 do not include disqualification of directors. Consequently, the DINs were reactivated upon the court’s order.

While the MCA’s initiatives aim to enhance the efficacy of the Act and ease doing business in India, stakeholders, especially those residing outside India, have faced challenges during the transition and amendment phases. The launch of the MCA V3 portal, although a significant achievement, has introduced additional compliances, such as setting up different user accounts, various OTP verifications, and re-association of Digital Signature Certificates (DSCs), which can be particularly challenging for foreign directors due to time zone differences and lack of clarity.

Nonetheless, the MCA’s efforts to appoint accountable and principled individuals on company boards are expected to benefit companies in the long run, fostering a culture of corporate governance and stakeholder protection

FAQs:

Q1. What are the grounds for disqualification of directors under Section 164 of the Companies Act, 2013?

A1. Section 164 outlines two categories of grounds for disqualification: personal disqualifications (Section 164(1)) and company-related disqualifications (Section 164(2)). Personal disqualifications include scenarios such as an unsound mind, insolvency, or convictions involving moral turpitude, while company-related disqualifications arise from non-compliance with statutory filing requirements or failure to repay deposits, interest, or dividends.

Q2. What is the significance of the recent amendment to the Companies

A2. (Appointment and Disqualification of Directors) Rules, 2014? The amendment mandates that directors declare both personal and company-related disqualifications in Form DIR-8, thereby enhancing disclosure requirements. It has also resulted in consequential changes to various director-related forms.

Q3.What is the process for removing a director’s disqualification

A3.Previously, an application for removal of disqualification was filed with the Registrar of Companies (RoC) in Form DIR-10. However, the updated rules have simplified the process by allowing directors to apply to the Regional Director (North) through a web-based Form DIR-10, with a revised format.

Q4.What are the grounds for deactivation of a Director Identification Number (DIN)?

A4. The grounds for DIN deactivation are outlined in Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, and include duplicity of DIN, DIN obtained through wrongful or fraudulent means, death of the concerned individual, insolvency of the individual, or a voluntary application by the DIN holder to surrender their DIN in Form DIR Non-filing of DIR-3 KYC/DIR-3 KYC Web within the stipulated time can also lead to DIN deactivation.

Q5. What was the significance of the Mukut Pathak’s case regarding DIN deactivations?

A5. In Mukut Pathak’s case, the Delhi High Court quashed the action of the RoC in deactivating DINs en masse as part of its drive to tackle the issue of shell companies. The court examined that the power to deactivate DINs does not vest with the RoC, and the reasons for deactivation laid down under Rule 11 do not include disqualification of directors. Consequently, the DINs were reactivated upon the court’s order.