Statutorily, Companies are required to file their annual financial statements and annual returns with the Registrar of Companies of their respective jurisdictions (“RoC”) in the forms as prescribed and rolled out by Ministry of Corporate Affairs (“MCA”) from time to time. Consequently, any non-filing of these documents is construed as an offence under the provisions of Companies Act, 2013 (or its predecessor act), as the case may be (“Act”) and the rules framed thereunder. Section 164(2) of the Act read with Section 167[See Endnote.1] provides for disqualification of a director on account of default by a company in filing an annual return or a financial statement for a continuous period of three financial years.

Whereas, consequent upon notification of provisions of section 164(2), MCA had noticed that a large number of companies had not filed their financial statements. To rectify this, and to provide an opportunity to the defaulting companies, the MCA launched a Company Law Settlement Scheme, 2014 (“CLSS”) providing an opportunity to the defaulting companies to clear their defaults within a 3 month period from August 2014 to October 2014.

Subsequent to CLSS, the MCA in September 2017, identified around 2.09 lakh companies that had failed to file financial statements or annual returns for a continuous period of three financial years 2013-14 to 2015-16. In accordance with Section 248 of the Act, these companies were struck off from the register of companies. The MCA further identified 3,09,614 directors associated with such companies and in terms of provisions of Section 164 (2) read with Section 167 (1) (a) of the Act, they were barred from accessing the online registry and were disqualified to act as directors. A list of the struck off companies and the disqualified directors was uploaded by the MCA on its portal. The Ministry of Finance, after this decision by the MCA had 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.

Due to this, a number of writ petitions in various High Courts, petitions in the National Company Law Tribunal and representations were made by various stakeholders including representations from industries, defaulting companies and their directors seeking an opportunity for the defaulting companies to complete their compliant and normalize operations. The MCA, through General Circular No.16/2017 (“Circular”) has notified the Condonation of Delay Scheme, 2018 (“Scheme”) for providing relief to the directors of the companies that had been disqualified, in the month of September, 2017, due to their failure to file financial statements or annual returns.

Based on various representations received by the aggrieved parties and with a view to giving an opportunity to the non-compliant, defaulting companies to rectify the default, MCA in exercise of its powers conferred under sections 403, 459 and 460 of the Act, has notified the Scheme which has come into force with effect from January 1, 2018 and shall remain in force up to March 31, 2018.

The Delhi High Court in the Case of Shikha Pahuja and Ors. v. Ministry of Corporate Affairs and Anr. wherein the Petitioner had approached the Delhi High Court against her disqualification by the MCA, had stayed the impugned list of disqualified directors so far as it included the names of the petitioners while issuing notices to the respondents [See endnote.2] . Similar actions were taken by the Madras High Court[See endnote.3] and the Kerala High Court [See endnote.4] . It was alleged in the petitions, among other things, that the action of such disqualification and striking off amounts to retrospective application of a penal act and violation of principles of natural justice. The MCA, in reply to the notice, had informed the Court of its intentions to introduce the present Scheme, and upon the petitioner withdrawing its petition due to such intention, the Court had directed the MCA to give wide publicity to the Scheme [See endnote.5].

This Scheme is only applicable for a defaulting company and has defined such a company as “a company which has not filed its financial statements or annual returns as required under the Companies Act, 1956 or Companies Act, 2013, as the case may be, and the Rules made thereunder for a continuous period of three years”. A defaulting company is permitted to file its overdue documents which were due for filing till June 30, 2017 in accordance with the provisions of Scheme.

The Scheme also provides that it is not applicable to defaulting companies that have been stuck off or whose names have been removed from the register of companies under section 248(5). Section 248 of the Act provides the power to the RoC to remove name of company from register of companies if the company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application to obtain the status of a dormant company.

The Scheme provides for temporary activation of the Director Identification Numbers (“DIN”) of the concerned disqualified directors of defaulting companies whose names have not been removed from register of companies, and had been de-activated pursuant to striking off in September 2017, during the validity of the scheme to enable them to file the overdue documents. The defaulting company is then required to file the overdue documents in the respective prescribed eForms by paying the statutory filing fee and additional fee payable as per Section 403 of the Act for filing these overdue documents.

The defaulting company after filing such documents, has to seek condonation of delay by filing form e-CODS online on the MCA portal. The Scheme provides that this form shall be available to be filed from February 20, 2018 and upon payment of the fee of Rs. 30,000/- (Rs. Thirty Thousand only). Although the form will only be available after February, MCA has recommended that the defaulting companies should complete the necessary procedural requirements and file overdue documents without waiting for e-CODS form to be rolled out.

The Scheme however puts a condition upon the defaulting companies whose names have been removed from the register of companies and have filed applications for revival under section 252 of the Act with the NCLT till December 31, 2017. For such companies, the Director's DIN shall be re-activated only upon an order by the NCLT ordering revival subject to the company having filled all overdue documents. Such companies also have to provide the proof of the order of the NCLT or proof of withdrawal of application before the NCLT. It seems likely that the MCA has put this restriction so that there is no conflict of interest between the RoC and the NCLT and the RoC does not take any decisions that are sub-judice.

Any of the defaulting companies or the Directors and the DINs associated with such companies that do not file their overdue documents and the eform CODS, and are not taken on record in the MCA21 registry, shall continue to be disqualified on the conclusion of the scheme and their associated DINs shall be liable to be deactivated. Further, the RoC shall also take all necessary actions under the Companies Act, 1956/ 2013 against the companies who have not availed themselves of this Scheme and continue to be in default in filing the overdue documents and may lead to strike-off of these companies.

The Scheme specifies that the defaulting companies can only file the following documents in pursuance of the Scheme:

i. Form Number 20B/ MGT-7- Form for filing annual return by a company having share capital. ii. Form 21 A/ MGT-7- Particulars of annual return for the company not having share capital. iii. 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. iv. Form 66 - Form for submission of Compliance Certificate with the Registrar. v. Form 23B/ ADT-1- Form for intimation for Appointment of Auditors.

The Scheme instructs that the concerned RoC shall withdraw any prosecution(s) pending before the concerned court(s) for all documents filed under the scheme. However, the withdrawal of such prosecutions or the Scheme shall not prevent the RoC to take any action under Section 167(2) of the Act or any civil and criminal liabilities, if any, of such disqualified directors during the period they remained disqualified. Section 167(2) states that if a person functions as a director after being aware about his disqualifications, he shall be punishable with imprisonment for a term of up to one year or with fine of up to Rs. 5,00,000 (Rupees Five Lakhs Only) or both. Thus there is a high possibility that the Directors, even though are provided relief to continue to act as directors, may be subject to criminal liabilities at a later point of time.

This Scheme may prove beneficial for bonafide directors who found themselves suddenly disqualified to act as directors and even to be appointed as a director in any other company for the next five years due to their association with the defaulting companies. It may also prove beneficial for defaulting companies who had not been aware of the notice or had not been able to file the financial statements due to any other genuine reasons. It is appreciable to note that the MCA has heard the representations by the stakeholders and has decided to bring this Scheme to prevent any injustice happening to the innocent directors and defaulting companies who got caught in the larger net laid to catch companies with illicit funding.