CONDONATION OF DELAY SCHEME, 2018- A MUCH AWAITED AND FINAL RELIEF TO DISQUALIFIED DIRECTORS

BY CS Rasu Sharma & Praveen Singh

As we all knows that all companies whether domestic or foreign registered under the Companies Act, 2013 are required to file their annual financial statements and annual returns with the jurisdictional Registrar of Companies (hereinafter referred to as the “RoC”) in the prescribed forms and non filing of these forms construed as an offence under the Companies Act, 2013 (hereinafter referred to as the “Act”).

Further, it is pertinent to mention here that Section 164(2) (a) read with 167(1) (a) of the Act provides for disqualification of a director in case a company did not file its annual return or a financial statement for a continuous period of three financial years.

In September 2017, the Ministry of Corporate Affairs (Hereinafter referred to as the “MCA”) identified 3,09,614 directors associated with the companies that had failed to file financial statements or annual returns from 2013-14 to 2015-16. The Registrar of Companies (“RoC”), which comes under the MCA, had disqualified directors of companies that defaulted in filing annual returns, balance sheets and profit and loss statements in a sudden move and barred them from accessing the online registry and till November 30, as many as 2.24 lakh companies had been deregistered.

Thereafter, Ministry of finance directed the banks to restrict operations of bank accounts associated with such companies. This action of striking-off defaulting companies and blocking their bank accounts was done with a view to combat the issue of black money and illicit fund flows, disguised in the form of shell companies. A list of such directors was also published on the website of MCA.

Disqualified directors were barred from sitting on boards for five years. Several high-profile independent directors were among those adversely affected by the move. The disqualification involved suspension of the Director Identification Number (“DIN”) of these directors. Under the Companies Act, 2013, only those individuals who have an active DIN can be appointed to company boards. Once a DIN is suspended, a director cannot file returns or any documents with the RoC. This had created an acute problem for SMEs, many of which found all their directors disqualified.

Following the move, concerns were raised that many directors of genuine companies have also been disqualified. Besides, some individuals moved courts against their disqualification. Apart from this MCA had also received various representations, including from the industry, seeking an opportunity for the defaulting companies to comply with the requirements while many affected parties moved various high courts.

To provide a three-month window for defaulting companies to submit their filings, the Ministry i.e., MCA come out with the “Condonation of Delay Scheme 2018”. A move that come as an absolute relief for disqualified directors. The “Condonation of Delay Scheme” is in force from January 1 to March 31, 2018. This is the second time that the ministry is coming out with such a scheme after the Companies Act, 2013 came into effect from April 1, 2014.

The MCA had earlier also launched a “Company Law Settlement Scheme 2014” providing an opportunity to the defaulting companies to clear their defaults within the time specified therein. The directors had been penalised after it was found that their companies had not filed annual returns and financial statements with the RoC for three consecutive years. Over two lakh companies had defaulted in filing their statutory reports.

It is to be noted that Director Identification Numbers (“DINs”) of the disqualified directors that have been de-activated would be ‘temporarily activated’ during the scheme period. Right now it isn’t activated. To activate the same one need to submit a letter with the Roc physically or wait for some more time.

           

After submitting the filings under the scheme, a company concerned would have to file a separate form known as Form eCODS seeking condonation of the delay along with a fee of INR 30,000. Form eCODS can be filed by directors who were disqualified.

Further, in case of defaulting companies whose names have been removed /Struck off from the register and have filed applications for revival, DINs of the directors concerned would be re-activated subject to NCLT order and other conditions.

The main objective of this scheme is to provide an opportunity for non-compliant, defaulting companies to rectify the default. All defaulting companies other than those that have been struck off or removed from the register of companies are eligible to apply for rectification of records. [For more please read the Scheme below]

The scheme will allow defaulting companies to submit all documents that were due for filing till June 30, 2017. A fee mentioned above will be charged for condoning the delayed filing of the documents. Once all annual filings and form eCODS is submitted with the RoC all the pending prosecution for defaults in filing of annual reports and financial statements will be withdrawn and disqualified directors will be free from all liabilities and no further action can be taken against them.

The main text of the scheme is as follows:

MCA wide General Circular No.16/2017 dated 29th December, 2017 in exercises of powers under Sections 403, 459 and 460 of the Companies Act, 2013 had launched “The Condonation of Delay Scheme, 2018” active from 1st January 2018 to 31st March 2018.

The COD-2018 is not applicable to companies which have been stuck off from the register of companies under Section 248(5) of the Act (companies who are out of business). During the validity of the scheme, the DINs of the disqualified directors will be temporarily activated to enable them to file the overdue documents.

Important definitions

a). Overdue documents’ means the financial statements or the annual returns or other associated documents, as applicable, in the case of a defaulting company and refer to documents mentioned in paragraph 5 of the scheme.

b). Defaulting company’ means a company which has not filed its financial statements or annual returns as required under the Companies Act, 1956 or Companies Act, 201.3, as the case may be, and the Rules made thereunder for a continuous period of three years.

APPLICABILITY OF THE SCHEME

As stated above, the “Condonation of Delay Scheme, 2018” is applicable to all defaulting companies (other than the companies which have been stuck off/whose names have been removed from the register of companies under section 248(5) of the Act).

In the period as provided under the scheme defaulting companies are permitted to file its overdue documents which were due for filing till 30.06.2017.

THE CODS SCHEME SHALL ONLY BE APPLICABLE TO BELOW MENTIONED DOCUMENTS:

Ø  Form 20B/MGT-7- Form for filing Annual return by a company having share capital;

Ø  Form 21A/MGT-7- Particulars of Annual return for the company not having share capital;

Ø  Form 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, AOC-4, AOC-4(CFS), AOC (XBRL) and AOC-4(non-XBRL) – Forms for filing Balance Sheet/Financial Statement and profit and loss account;

Ø  Form 66- Form for submission of Compliance Certificate with the Registrar;

Ø  Form 23B/ADT-1- Form for intimation for Appointment of Auditors.

PROCEDURE TO BE FOLLOWED FOR THE PURPOSES OF THE SCHEME:-

After understanding the above facts the question which will definitely comes in mind is that what should be done by the directors in order to get rid off from their default, what procedure need to be followed by them and how to get relief etc., The scheme specify the procedure which need to be follow in order to file overdue documents necessary to be filed under the scheme, The procedure is hereby enumerated for easy references:

PROCEDURE TO BE FOLLOWED BY THE DIRECTORS TO IN ORDER TO AVAIL BENEFIT OF CODS SCHEME

In the case of defaulting companies (The word “defaulting company” has been defined above) whose names have not been removed from register of companies,-

Ø  The DINs of the disqualified directors de-activated at present shall be temporarily activated during the validity of the scheme to enable them to file the overdue documents;

Ø  The defaulting company shall file the overdue documents in the respective prescribed eForms paying the statutory filing fee and additional fee payable as per section 403 of the Act read with Companies (Registration Offices and fee) Rules, 2014 for filing these overdue documents;

Ø  The defaulting company after filing documents under this scheme, shall seek condonation of delay by filing form e-CODS 2018 along with a fee of Rs. 30,000/- as prescribed under the Companies (Registration Offices and Fee) Rules, 2014 well before the last date of the scheme;

Ø  Disqualified Directors who have not avail the scheme shall be continue to remain disqualified after this scheme for a period of 5 years in terms of section 164(2) (a) read with 167(1) (a) of the Act.

*Form eCODS will not be available for download on the MCA Portal until 20th February 2018.

It is to be noted that in the event of defaulting companies whose names have been removed from the register of companies under Section 248 of the Act and which have filed applications for revival under section 252 of the Act up to the date of this scheme, the Director’s DIN shall be re-activated only by NCLT order of revival subject to the company having filing of all overdue documents.

Once any Disqualified directors availed this scheme and have filed all overdue documents, paid fee as prescribed under the Act or rules made therein. The jurisdictional Registrar shall be duty bound to set him free and to withdraw the prosecution(s) pending if any before the concerned Court(s) for all documents filed under the scheme.

However, this scheme is without prejudice to action under section 167(2) of the Act or civil and criminal liabilities, if any, of such disqualified directors during the period they remained disqualified.

The concerned Registrar shall take all necessary actions under the Companies Act, 1956 or 2013 against the companies who have not availed the Scheme and continue to be in default in filing the overdue documents.

EXTRACT OF RELEVANT SECTIONS UNDER THE COMPANIES ACT:

Section 164. “(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b)....”

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Section 167 (1) The office of a director shall become vacant in case—

(a) he incurs any of the disqualifications specified in section 164

.....”

(2) If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in sub- section (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Section 248 Power of Registrar to remove name of company from register of companies

(5) At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.

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 RASU & ASSOCIATES - Company Secretaries

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