Director Disqualifications: A concept study
Section 164 of the Companies Act, 2013 talks about Director Disqualifications, i.e., the conditions and reasons by which a person could be disqualified from holding the position of a director in a company.
Further, the heading of Section 164, “Disqualifications for Appointment of Director,” clearly states the grounds or the reasons on which a director can be considered to be disqualified.
In this learning blog, we are going to deal in detail and cover all the conditions and consequences of director disqualification and the cases in which they can be reappointed.
What is the Disqualification of Directors?
In brief, the concept of Disqualification of directors means restricting a person from being appointed as a director or determining the conditions in which he or she cannot be appointed as a director of a company. Furthermore, disqualified from being appointed as a company’s director means that he or she cannot be appointed as the director of any company for the time period stated by the court or tribunal.
Who is considered to be the Director of a Company?
A company on its own does not have any physical existence, and it is just considered as a legal entity. Further, the director is a person who not only maintain a fiduciary relationship with the company but also acts on behalf of it. Furthermore, these are the professional people hired by a company in order to direct them regarding company affairs. Also, they are often denoted as the Officers of the company.
In what situations a Director can be considered as Disqualified
Following listed are the reasons and situations in which a Director can be considered as Disqualified –
- If in case he is of an unsound mind and the same has been declared by the court of law.
- He is insolvent.
- He is in the course of declaring insolvency and for which his application is pending.
- He has been convicted by the court of law of any offense (whether or not including moral turpitude) and has also been imprisoned for at least 6 months. However, if in case a person has been convicted for any offense and has served a period of 7 years or more, he shall not be qualified to be appointed as a director in any company.
- If in case an order has been passed by the court or tribunal for disqualifying him of being appointed as a director.
- If in case he has not paid any calls regarding any shares held by him of the concerned company, whether alone or jointly with others, and tenure of six months has been passed from the last day fixed for the payment of the call.
- He has been convicted for the offenses dealing with the related-party transactions at any time all through the last preceding 5 years.
- He has failed to acquire a DIN (Director Identification Number).
What are the Consequences of Disqualification?
Once a person is being declared disqualified as a Director, then he or she will not be entitled to be appointed again as a Director of that concerned company or any other company for a tenure of five years starting from the date on which the said company failed to file annual compliance.
Until recently, the MCA (Ministry of Corporate Affairs) has not stringently enforced this provision of the Companies Act, 2013. However, from September 2017 onwards, the MCA has started strictly implementing these provisions of the Companies Act and has also published names of the disqualified Directors on its official website. Hence, it is significant for all the individuals who are being appointed as the Director of a Company to make sure that the compliance is maintained properly.
What are the Remedies available for the Disqualification of Directors?
In case of a disqualification, the concerned director can file an appeal to the NCLT (National Company Law Tribunal). Further, he or she can also temporarily ask for a stay order from the tribunal. Furthermore, according to the provisions of the Companies Act, 2013, if an order disqualifying a director is not operative within the next thirty days. Moreover, as soon as an appeal is filed, the concerned disqualified person will still continue to be the director of the said company for the next seven days. Also, within this set period, he can also file his annual returns or can fulfill the needs of any other conviction in order to stay the order of disqualification.
Tabular Formation of the Remedies Available for the Removal of Disqualification
When the status of the concerned Company is ‘struck off’ and the Director wants to revive the Company and remove all his disqualification.
An appeal for the revival of the concerned Company has to be filed before the NCLT (National Company Law Tribunal). Once the NCLT passes the order for the revival, the appellant is required to comply with the prerequisites to revive the said Company. If in case the revival of the said Company is denied by the NCLT, then the Company can file an appeal before the Appellate Tribunal (NCLAT) for the revival.
|Situation II: When the status of the concerned Company is ‘struck off’ and the Director does not want to revive the Company, but instead wants to remove all his disqualification. Writ petition for the removal of disqualification is required to be filed before the respective High Court or the Supreme Court. Once the interim or final order against such disqualification is received, the concerned Petitioner shall comply with the prerequisites to remove his disqualification.||
When the status of the concerned Company is ‘active,’ but all the said Directors are disqualified and want to remove the disqualification.
In certain situations, where the said Company is active, but either one or all the directors are disqualified due to any reason, then such person shall go for situation II. In certain other situations, when there is a deadlock or standstill in the Company, it is always advisable to appoint new Directors in the Company status of which is active.
Reappointment of the Disqualified Directors
It is significant to note that there is no such prescribed provision to reappoint a disqualified director. Further, a disqualified director can only be reappointed if a time frame of five years has passed, starting from the date of disqualification. However, in the case where the said director duly abides by with all the prescribed provisions or rectifies his or her mistake, then the said person can be appointed as a director again.
Difference between the provisions related to the Disqualification of Directors as per the Companies Act, 2013 and the Companies Act, 2013
|Companies Act, 1956 Section 274||Companies Act, 2013 Section 164|
|(d) he has been convicted by the court of law for any offense involving moral turpitude and has also been sentenced imprisonment for not less than 6 months, and a period of 5 years has not elapsed starting from the date of expiry of the sentence;||Along with (d) it has also been Provided that if a person convicted of any offense and has also been sentenced imprisonment for a period of 7 years or more, he shall not be entitled to be appointed as a director in any company;|
|(e) he has not paid any call regarding the shares held by him of the concerned company, whether alone or jointly with others, and 6 months have been passed from the last day fixed for making the payment of the call;||Covered in (1) f|
|(g) such person is already a director of a public limited company which: – (A) has defaulted in filing the annual accounts and annual returns for any continuous 3 financial years starting on and after the first day of April 1999; or (B) the concerned company has failed to repay its deposit or interest thereon on the due date or to redeem its debentures on due dates or pay dividend and if such failure continues for 1 year or more; Provided that such a person shall not be entitled to be appointed as a director of any other public limited company for a tenure of five years starting from the date on which such a public limited company, in which he is a director, has failed to – file its annual accounts and annual returns under sub-clause (a) or to repay its deposit or interest or redeem its debentures on the due date or pay dividend referred to in clause (B)||Covered under (2) with a minor change as – (2) No person who is or has been appointed as a director of a company which- (a) has not filed the financial statements or annual returns for any continuous period of 3 financial years; or (b) has failed to repay the deposits accepted by it or pay the interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such a failure to pay or redeem continues for 1 year or more, shall be qualified to be re-appointed as a director of that said company or appointed in any other company for a period of 5 years starting from the date on which the concerned company fails to do so.|
|Not covered||1 (e) an order disqualifying him from the appointment as a director has been passed by the Court of law and the said order is in force;|
|Not covered||1 (g) he has been convicted of the offense dealing with the related party transactions under section 188 at any time throughout the last preceding 5 years; or|
|Not covered||1(h), he has not complied with the provisions mentioned under sub-section (3) of section 152.|
|(2) The Central Government may, by issuing a notification in the Office Gazette, remove- (a) the disqualification caused by any person by virtue of clause (d) of sub-section (1), either generally or in relation to any other company or companies specified in the said notification; or (b) The disqualification caused by any position by virtue of the provisions mentioned under clause (e) of sub-section (1)||Not specified|
|(3) A private limited company which is not a subsidiary of any public limited company may, by its articles. Provided that a person shall be considered disqualified for appointment as a director on any other grounds in addition to those mentioned in the provisions of sub-section (1)||Has widened the scope by enriching all sub-section and clauses of section 164 of the Companies Act, 2013 – (3) A private limited company may by its articles provide for any disqualifications regarding the appointment as a director in addition to those mentioned in subsections (1) and (2): Provided that the disqualification mentioned in the clauses (d), (e) and (g) of sub-section (1) shall not take effect- for 30 days starting from the date of conviction or order of disqualification of the director; where an appeal or petition is being filed within a period of 30 days as aforementioned against the conviction resulting in a sentence or an order until expiry of 7 days starting from the date on which such appeal or petition is being disposed of; or where any further appeal or petition is being against the said order or sentence within a period of 7 days until such a further appeal or petition is being disposed of|