A Company is an artificial person having no physical existence. A Director is a person who acts on behalf of the Company, they are professional men hired to direct the affairs of the Company, making it mandatory to possess certain qualifications. The Companies Act, 2013 under Section 164 provides provisions dealing with the disqualification of a director in a company. New clause has been added by Ministry of Laws and Justice vide an ordinance dated 2nd November, 2018 adding to the criteria leading to disqualification of a Director. Private Companies may by its articles provide for any disqualification for appointment as a director in addition to those specified in sub-sections (1) and (2).
- Section 164 of Companies Act, 2013:
- Disqualifications for appointment of director
(1) A person shall not be eligible for appointment as a director of a 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.
(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns 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 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.
(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):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not take effect—
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or
(iii) where any further appeal or petition is preferred against order or sentence
within seven days, until such further appeal or petition is disposed off.
Section 164(2) of the Companies Act, 2013 is not applicable in case of Government Companies. Notification dated 5-06-2015.
Explanation of Section 164:
- Unsound mind- Any person who is a lunatic or insane and has been certified as such by the competent court, cannot be appointed as Director in any company.
- Undischarged insolvent- Any person who is unable to repay his debts or his liabilities cannot be covered by his assets is an undischarged insolvent and such person cannot be appointed as a Director in any company.
- Insolvency matter pending in court- Any person who is being adjudicated as an insolvent and his application is pending in court of law cannot be appointed as Director of any company.
- Person convicted by court of any offence– Any person who has been sentenced to imprisonment for not less than 6 months, cannot be appointed as Director of any company till the period of 5 years has elapsed from such sentence. Provided, that a person convicted for a period of 7 years for any offence or more he shall not eligible to be appointed as director of any company.
- Order of the Court- An order passed by any court or tribunal, disqualifying the person to be appointed as Director.
- Non- Payment of Calls in respect of any shares of the company held by him and a period of 6 months has elapsed.
- Not complied with sub-section 3 of section 152- A person cannot be appointed as Director in any company unless he has been allotted the Director Identification Number (DIN) under section 154 of the Companies Act, 2013.
- Convicted of offence dealing with related part transaction- A person cannot be appointed as Director in any company at any time during the preceding five years if he has been convicted under section 188 of the Act.
- A person cannot be appointed as Director of a company if he fails to file financial statement or annual returns for a continuous period of 3 financial years or has failed to repay the deposits accepted by it or pay the interest thereon, on debentures and such act continues for a period of 1 year or more shall be not eligible to be the Director of any company for a period of 5 years.
Duties of Director after Disqualification:
Every director shall inform to 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.
Consequences of Disqualification:
The person is ceased to be the Director of the company with immediate effect. If a person functions as a director even after knowing that the office of the Director held by him has become vacant, he shall be punishable with imprisonment which may extend to one year or with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees or both.(Section 167 (2) Companies Act, 2013)
Duty of remaining Directors after disqualification:
- It is the duty of the remaining Directors to file the e- Form DIR 12 for cessation of disqualified Director and inform ROC about the same.
- To hold immediate Board meeting about vacation of such director.
- Appoint new Director, In case the no of director reduced below minimum due to disqualification.
Appointment of Temporary /New Director:
- In case the Director of the company is disqualified the existing directors are barred from filing any outstanding MCA annual returns. Thus,the existing directors are supposed to execute resolution for the assignment of new Directors in the organisation.
- To appoint a new Director the existing Directors are required to submit a request letter under section 167(3) of the Companies Act, signed by the Shareholders of the Company explaining the fact that all the directors are disqualified and requesting for the appointment of a new Director through back end of the e-portal.
- In case, the Shareholder is also a disqualified Director, then shareholder should sign only in capacity of a shareholder and not as a Director.
Actions taken by Director will not be Invalidated:
Sec 176 of the Companies Act, 2013 provides Defects in appointment of director not to invalidate actions taken— No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company: Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.
The present section has kept the interest of shareholders in mind by validating the actions taken by the Director at the time of his appointment, before noticing that his appointment was invalid.
Remedies Available After Disqualification:
- Appeal against Disqualification Order:
Section 164 of the Companies Act, 2013 also provides provisions for appeal against the disqualification order.
- It provides that an order disqualifying director shall not take effect within 30 days from the date of conviction or disqualification order.
- An appeal can be filed within these 30 days in National Company Law Appellate Tribunal (NCLAT) to stay the proceedings.
- Once an appeal is initiated the person would continue to be the Director until expiry of 7 days from the date on which the appeal is disposed off.
Note: Disqualification of Director cannot be removed by any Authority (ROC,RD, MCA OR NCLT). No Authority is having power to remove order of disqaulification under the Companies Act, 2013.
Reappointment of disqualified Director:
The Companies Act, 2013 does not provide any procedure to reappoint a disqualified director. A disqualified Director can only be appointed in that company or any other company only after the expiration of 5 years from the date of disqualification.
The Companies Act, 2013 has tightened the laws regarding appointment of Directors keeping in view the public interest in recent amendment. It has also started publishing the name of the Directors in the MCA website to make sure that no disqualified director can be appointed during 5 years of his termination period.