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Onus of Annual Reports on Directors

The new Companies Act spells serious trouble for directors of any private or public company that has not filed for three years its annual returns or audited financial statements, and the board's report. The new Act, which came into effect from April 1, disqualifies such directors for a period of five years, including the company in which the default has occurred. Private companies were not included in disqualification provisions under the Companies Act, 1956.

About 13.95 lakh companies were registered with the Registrar of Companies (RoC) at the end of March 2014. Of this, about 9.52 lakh companies remain active. Interestingly, just 25 directors were disqualified under the Companies Act, 1956, till March 25, according to data with the ministry of corporate affairs (MCA). Of these, 16 were disqualified as their companies failed to file annual accounts and returns, the MCA data showed.

About 25-30% of the active registered companies would be in default if the new provisions are applied, says K S Ravichandran, partner, KSR & Co Company Secretaries. Many private and public companies have not filed returns, statements and reports for several years. 

Under the previous law, such a draconian provision was applicable only to defaults in public companies and only if both the returns as well as reports were not filed. "Taking advantage of such a law, many companies had filed only annual returns so that their directors would not suffer any disqualification on that count," Ravichandran says.

"Moreover, under the previous law, disqualification did not result in vacation of office of that director. He would continue as a director even in the public company in which the default had occurred," he says. Now the rules governing such defaults have become stringent. "It applies to directors of any company that has defaulted in filing with RoC, either the annual returns or the financial statements and reports or both in three consecutive years," Ravichandran says.

G Karthikeyan, a Coimbatore-based chartered accountant, says, "Private limited companies were formed only for statutory purposes in many cases. It (the new Act) is a welcome step. But these measures will increase compliance costs. Small companies will be adversely affected. They will have to restrict their business."

Times of India, New Delhi, 29-04-2014

 
     
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