Condonation of Delay Scheme: Testing the Utility.

[Tushar Behl and Priyanka Sharma]

The authors are third-year students of School of Law, University of Petroleum and Energy Studies, Dehradun. They may be reached at behl.tushar96@gmail.com.

The Companies Act, 2013 (‘‘Act’’) has been in need of a substantial revamp for some time now, to make it more contemporary and relevant to the corporate world. The changes in the Act have long term implications which have been set to notably change the manner in which the corporates operate in India. While several successful as well as unsuccessful attempts have been made earlier to revise the existing Act, one of them leads us to the very recent, Condonation of Delay Scheme (“CODS”).

Every company registered under the Act is inter alia required to file their annual financial statements[1] and annual returns[2] with the Registrar of Companies (‘‘ROC’’), and non-filing of such reports is an offence under the Act.

Under the present Act, on account of default by a company in filing annual return or financial statement for a continuous period of 3 years, company directors are, by virtue of section 164(2)[3] read with section 167[4] of the Act, disqualified. Additionally, the Companies (Appointment and Qualification of Directors) Rules, 2014[5] confer a responsibility upon the director to inform the company concerned about his disqualification in respect of form DIR-8.[6]

In line with the Act, the Ministry of Corporate Affairs (‘‘MCA’’) recently went into the process of marking out defaulting companies and recognized 3,09,614 directors associated with companies that had substantially failed to file their annual financial statements and annual returns in MCA online registry for a 3-year financial period starting from 2013-14 to 2015-2016. Following the MCA identification process, most of the disqualified directors have filed writ petitions and representations before various high courts and the National Company Law Tribunal (“NCLT”), hoping to obtain relief therefrom.

Keeping this consideration in view, the Central Government, and the MCA in exercise of its powers conferred under the Act,[7] have collectively decided to roll out the CODS in order to provide a final opportunity in the form of a ‘three-month window’ for the non-compliant and defaulting companies to rectify the default, and normalize and regularize the compliance issues.

The CODS came into force from January 01, 2018 and shall continue till March 31, 2018- a clear prescribed period of three months. This scheme will be applicable to all defaulting companies, leaving aside those whose names have been struck off from the ROC by virtue of Section 248(5)[8] of the Act. During this period, the Director Identification Number (“DIN”) of all the disqualified directors will be re-activated temporarily to smoothen the process of filing all overdue documents in respective E-forms.[9] In addition to the overdue documents, the defaulting company has to file form e-CODS 2018 along with a Rs. 30,000 charge. If a director of the defaulting company fails to utilise the CODS and regularise compliance after the end of the three-month window period, his DIN will be deactivated and he will be further disqualified for a total period of 5 years.

Primarily, the CODS is meant only for companies whose process of filing is clear/active but whose directors are disqualified. However, as regards a company whose name has been removed[10] and which has filed an application under section 252[11] on or before January 1, 2018 for which the matter has been listed before the NCLT for restoration of the name, the DIN of its disqualified director(s) shall be reactivated temporarily after the NCLT authorizes reinstitution, and permanently only after the overdue documents have been duly filed within the three-month period. A question that still remains unanswered is whether the whole of the process-application for reinstitution, order of the NCLT, and filing of overdue documents- needs to be completed by March 31, 2018, and whether other non-defaulting companies can also apply for the same. Secondly, in the case of defaulting companies which have shut their business or in respect of whom the application for reinstitution has been rejected by NCLT, how exactly the disqualified directors could cure disqualification needs to be clarified. Finally, it remains uncertain whether disqualification will actually be removed upon filing of all pending documents or whether further action will be required, such as filing of form DIR-10.[12]

The scheme appears to be a one-time opportunity given to active defaulting companies whose directors have been disqualified. The time period of the scheme is indeed short, especially when we take into account struck-off companies which are burdened with the entire procedure of restitution of name, pending filings and filing of e-CODS 2018 within a short span of three months. Even though the scheme has already become operational, the process for ‘reactivating’ the DINs in system in respect of disqualified directors is still in progress and will not be activated for e-filing until January 12, 2018. This, it is submitted, is likely to delay the process. Taking into consideration the Delhi High Court’s order giving wide publicity[13] to the CODS and its aim of benefitting a large number of disqualified directors, it seems that the scheme may provide for such efficiency as deemed just for placing the company and all other essential persons in the same position (as nearly as possible) as if the company had not been struck off from the register of companies. During the operation of the scheme, it is hoped that the defaulting companies complete their pending annual filings, enable restoration and make the best use of the opportunity.

[1] The Act, section 137.

[2] Ibid, section 92(4).

[3] Ibid, section 164(2).

[4] Ibid, section 167.

[5] The Companies (Appointment and Qualification of Directors) Rules, 2014, rule 14.

[6] Every director of the company in each financial year is required to make disclosure of non-disqualification to the company.

[7] The Act, sections 403, 459 and 460.

[8] Ibid, section 248(5).

[9] Under the CODS, only the following E-forms can be filed: Form 20B/MGT-7, Form 21A/MGT-7, Form 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, AOC-4, AOC-4(CFS), AOC (XBRL), AOC-4(non-XBRL), Form 66, and Form 23B/ADT-1.

[10] The Act, section 248.

[11] Ibid, section 252.

[12] Application for removal of disqualification of director.

[13] Shikha Pahuja v. Ministry of Corporate Affairs, W.P.(C) 9501/2017 & CM No. 38623/2017.