The government of India in its crackdown against illicit money and money laundering marked 209,032 for removal of names from its register of companies as shell companies. It also disqualified about 200,000 directors. As happens with most bureaucratic exercises in India, present exercise also raised more questions than it answers. There is no definition of shell companies in Indian law. The term shell companies used widely to denote companies used as a vehicle for money laundering or criminal activities. The term itself denotes that main culprit may be someone else.
In April 2017, Registrars of Companies issued notices under section 248 to companies which “believed” to be not carrying on any business for a period of two immediately preceding financial years. The removal of the name of a shell company may be bliss for its promoters washing all sin done with it. Therefore, the belief of Registrar shifted to a new formula. Against the period of two immediately preceding financial years mentioned in section 248, the government linked it with Section 164(2)(a) – not filing of annual accounts and Annual Returns with Registrar of Companies for three or more years. Therefore, Registrar of Companies issue notices to companies whose annual filing was pending for financial years 2013 – 14, 2014 – 15 and 2015 – 16. Notices were issued without discrimination including government companies and companies exempted from such removal. These exempted companies are listed in a proviso to Rule 3(1). This list includes; listed companies, delisted companies, vanishing companies, companies under investigation or inquiry, companies pending prosecution, companies pending compounding of offences, companies with public deposits, companies with a mortgage or pledge property, and not for profit companies. Not only these government and exempted companies, but Certain other companies, like companies with management or family disputes or companies having a dispute with auditors, failed to reply and faced removal of the name.
Soon after the removal of names of these companies, all Registrars started issuing lists of disqualified directors. This caused a shocker for directors of these companies and corporate India. These lists of disqualified directors were issued section 164(2)(a). According to this provision, no person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years 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.
Under present law, disqualification under section 164(2)(a) is automatic and no government or public notice of such disqualification is required. Even though government issued its list under section 164(2)(a), it played by reading it with Section 167(a). Experts believe that intention of the legislature while drafting section 167 must be to link it with sub – section (1) of section 164, not with complete section 164. This understanding was based on an obvious reason to facilitate completion of pending filings of the companies, where company otherwise is working fine. When all directors of companies vacate their offices and all possible incumbents will become disqualify at the moment of their appointment itself, how a company will work? Unless a competent court stays disqualification of its directors, companies may not come out of this tricky situation. It was not an issue of ease of doing business in India, but more likely an issue of removal of undue hardship. Instead of removing hardship for genuine cases, the government played with this otherwise a drafting issue.
The disqualification of a director is his private affairs with a limited access to companies in which he is or is going to be a director. Rule 14 of the Companies (Appointment and Qualification of Directors) Rule, 2014 explains this. According to Rule 14(1), every director shall inform the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed. This is a need-based private procedure. The chance of issuing public notice of disqualification caused by non-filing of annual accounts and annual returns is extremely rare. According to rule 14(2), whenever a company fails to file the financial statements or annual returns, the company shall immediately file Form DIR-9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years. According to rule 14(4), upon receipt of the Form DIR – 9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection. Do we practically think a company which did not file more important documents and returns, shall file this form?
The Registrar of Companies has inherent powers to issue notices to a director or a company which fails to file these Form DIR – 8 and DIR – 9. In the present case, the government did not issue such notice as it may not fetch any result where companies already removed from the register of companies. The Government may issue such notices to these directors who are on boards of other companies. However, the government took an extra step.
Interestingly, government bring out lists of director disqualified under section 164 only and not claimed that these directors have vacated or have to vacate office under section 167. According to law, the vacation of the office held by these disqualified directors is automatic and need filing of return of cession of these directors by the company. The government may advise companies to file a return of cession of their directorship from companies in which such disqualified directors are directors. Instead, Government issued an advice to these disqualified directors not to file a form with their digital signatures. To enforce its advice, Government blocked digital signatures of these disqualified directors.
Government action may be called harsh. Even then, there is no hue and cry among promoters or directors of these stricken off companies. Is major proportion of these directors in a coma or long peaceful sleep? How one can explain this silence? One significant feature of shell companies is the separation of shareholding control from namesake day to day management. Most shell companies, like companies named in Panama Papers, have dummy directors. The move claimed to be targeted towards shell companies is unfortunately directed mostly to dummy directors. Governance in corporate India requires more hard work.