Disqualification for Appointment of
Directors
This article
is about the concept of “Disqualification for Appointment of Directors” as per
section 164 of the Companies Act 2013.
APPLICABILITY
This section
is applicable to ALL types of companies except Government Companies in some
cases (discussed later).
LIST
OF DISQUALIFICATIONS-SECTION 164(1)
A
person shall NOT be eligible for appointment as a director of ANY company, if—
(a) he is
of unsound mind and stands so declared by a competent court;
(b) he is
an undischarged insolvent;
(c) he has
applied to be adjudicated as an insolvent and his application is
pending;
(d) he has
been convicted by a court of any offence, whether involving moral turpitude
or otherwise, and sentenced in respect thereof to imprisonment for not less
than six months and a period of five years has not elapsed from the date of
expiry of the sentence:
Provided that if
a person has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years
or more, he shall not be eligible to be appointed as a director in any
company;
(e) an
order disqualifying him for appointment as a director has been passed by a
court or Tribunal and the order is in force;
(f) he has
not paid any calls in respect of any shares of the company held by him,
whether alone or jointly with others,
and six months have elapsed from the last day fixed for the payment of the
call;
(g) he has
been convicted of the offence dealing with related party transactions
under section 188 at any time during the last preceding five years; or
(h) he has
not complied with sub-section (3) of section 152.
(i) he has not
complied with the provision of sub-section (1) of section 165.
ANALYSIS
OF SECTION 164(1)
§ In clause (a): a competent court is
the one which has the jurisdiction to give such declaration.
§ In clause (b): as long as an insolvent
is not discharged by the court or other competent authority, the person remains
an “undischarged insolvent”.
§ In clause (d): definition of moral turpitude is not given anywhere
in the Act and it depends upon case-to-case basis.
*As per rule 2(1)(k), for the purpose of
section 164(1)(d), “or otherwise”
means any offence in respect of which a person has been convicted by a court under
this Act or under the Companies Act, 1956.
§
In
clause (f): even after the default is made good, i.e. the person has paid the
call money after 6 months, still he can’t be the director of such company in
which he made the default.
§
In
clause (h): non completion of section 152(3) means that the person is not
having the DIN.
§
In
clause (i): section 165(1) states the maximum number of directorships a person
can hold, which means if a person breaches this he will be disqualified from
being a director.
DISQUALIFICATION-SECTION
164(2)
A person who is
or has been a director of a company which-
(a) has
not filed financial statements(under
section 137) or annual returns(under
section 92) for any continuous period of three financial
years; or
(b) has
failed to repay the deposits accepted by it or pay interest thereon
or to redeem any debentures on the due date or pay interest due
thereon or pay any dividend declared and such failure to pay or
redeem continues for one year or more,
shall not be eligible
to be re-appointed as a director of that company or appointed(or reappointed) in other company for a period of five years from the
date on which the said company fails to do so.
Provided that
where a person is appointed as a director of a company which is in default of
clause (a) or clause (b), he shall not incur the disqualification for a period
of six months from the date of his
appointment.
NOTE-Section 164(2) shall not be applicable
to Government Companies (to avail such
exemption there shall be no default in filings of annual returns and financial
statements).
.Mr. D, is the director of ABC Ltd
(non-government company; the company has defaulted under section 164(2). Now D
wants to become a director of XYZ (government company), is it possible?
NO
.What if in the above question Mr. D
was already a director of Government Company which defaulted in section 164(2),
and now he wants to become a director of the non-government company?
YES, as this
section is not applicable to Government Companies.
ANALYSIS
OF SECTION 164(2)
Ø If Mr. D is a director in 5
companies and he is disqualified in one company as a director for 5 years, does
he have to resign from the other 4 companies as well?
As per section 167(1) (a), the office of a
director shall become vacant if he incurs any of the
disqualifications specified in section 164. Therefore, since Mr. D is
disqualified in one of the companies, he has to resign from the other 4
companies as well.
Ø Note that in clause (b) of sub-section
(2), repayment of preference shares or its dividend is not included.
Ø Mr. D is a director of PQR Ltd.
- The company
has not filed the balance sheet in the past three financial years say 2016,
2017 and 2018.
-The company has not filed the annual return in the
financial year 2016 and 2017 but has filed the annual return in the financial
year 2018.
Q. Whether Mr. D is
disqualified or not?
YES, Mr. D is disqualified, because as per
section 164(2) (a), non-filing of anyone of the financial statement or annual
return for 3 consecutive financial years by the company will lead to the
disqualification of its director.
Q. IF Mr. X is appointed as
the director of PQR Ltd. in the AGM of 2018, then whether he is disqualified on
non-filing of balance sheet in the same year?
YES, he is disqualified immediately
on the date of non-filing in the third year.
Q. Suppose the AGM was held on
30-9-2018, the due date of balance sheet financing was 30-10-2018 which was not
filed as already seen above, on 1-11-2018 Mr. R is appointed as a director of
PQR Ltd. Whether Mr. R is disqualified?
NO, as per the proviso of section
164(2), Mr. R will not be disqualified for 6 months from the date of his
appointment.
Ø Mr. D is a director of PQR Ltd. and
XYZ Ltd. Subsequently PQR Ltd. becomes defaulting company under section 164(2).
Mr. D has become disqualified. Whether he is supposed to vacate his office in
PQR Ltd. as well as in XYZ Ltd.?
NO, Mr. D need not vacate his office from PQR
Ltd. as per the proviso of sub-section (2).
YES, Mr. D shall vacate his office immediately
from XYZ Ltd. because section 167(1) (a) provides that section 164 is a ground
of vacation of office also.
Ø Mr. D is a director of PQR Ltd. and
XYZ Pvt. Ltd. Subsequently PQR Ltd. becomes defaulting company under section
164(2). Mr. D is disqualified under the section. Whether Mr. D is eligible for fresh
appointment in XYZ Pvt. Ltd. after vacating from the same company (that is
XYZ)?
NO
Section 164(3)
A
private company may by its articles provide for any disqualifications
for appointment as a director in addition to those specified in sub-sections
(1) and (2).
*NEW
PROVISO- Provided that the
disqualification referred to in clauses (d), (e), and (g) of sub-section (1) shall
continue to apply even if the appeal or petition has been filed against
the order of conviction or disqualification.
( earlier the effective date of
disqualification by the court order was different)
RULE
14 OF COMPANIES ( APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014
1. Form
DIR-8: If a director is
disqualified under section 164(2) he shall intimate the disqualification to the
company before his appointment or re-appointment in this form.
2. Form DIR-9: Where a company contravenes the provisions
of Section 164(2), it shall file Form DIR-9 to the Registrar furnishing the
names and addresses of all (past
and present both) the directors of the company during the relevant
financial years.
3. Officers of
the company specified in section 2(60) of the Act shall be officers in default,
when a company fails to file the Form DIR-9 within a period of 30 days of the
failure.
4. ROC shall
immediately on receipt of the Form DIR-9, register and place it in the
document file for public inspection.
5. Form
DIR-10: Application for removal of disqualification
shall be made in Form DIR-10 to the concerned ROC.
SOME RELATED PROVISIONS
1) Under Section 143(3) The Auditor has to state whether any
director is disqualified from being appointed as a director under sub-section
(2) of section 164.
2) Under
Section 152(4) Every person
proposed to be appointed as a director by the company in general meeting or
otherwise, shall furnish a declaration that he is not disqualified to
become a director under this Act.
3) Under Section
167 A Director shall vacate his office if he
incurs any of the Disqualifications u/s 164.
ABOUT
THE AUTHOR
RAVNIT BHATIA
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