Detailed note on Disqualification of Directors- Section 164

A company being an artificial person managed by natural persons who are technically called as directors and collectively known as Board of directors.

Every form of company should have directors to run and manage its business-like one-person company (OPC) needs to have at least one director, a private limited company needs to have at least two directors, and a public limited company must have at least   three directors. A company can have a maximum of 15 directors.

Though in the eyes of law a company has separate legal entity from its directors and shareholders but for any offence committed by a company is seen as offence done by its directors and officers. Therefore, along with company its Directors and Officers in default can also be punished in case of non- compliance. specified penalties and punishments are also applicable on directors. Section 164 deals with Disqualification of Directors and in this article, we will cover various instances in which a person will become disqualified to be a director of a company.

Why Directors become Disqualified?

The main purpose of disqualification of a director is to appoint a suitable person as a director so that money invested by shareholders cannot be mismanaged, ensure compliance of filing of annual accounts and annual returns, and to protect interest of investors and other stakeholders.

Section 164 of Companies Act, 2013 specified certain cases where a director is disqualified from being appointed as director of the company. It disqualifies a director either for his own default or for default of the company in which he is a director.

Disqualification Due to Personal Actions of the Directors

As per Section 164(1), following person shall not be eligible to appoint as director of the company:

• Person of unsound mind
• Undischarged insolvent
• Person who has applied to be adjudicated as an insolvent and his application is pending
• Any person who has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced to imprisonment for 6 months or more, so, after expiry of the sentence, he will be disqualified to be appointed as a director for 5 years.
• if a person has been convicted of any offense and sentenced to imprisonment for such office for 7 years or more, he would be disqualified for lifetime.
• Where an order, disqualifying him for appointment as a director, has been passed by a court or Tribunal and the order is in force.
• Any person who has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and 6 months have elapsed from the last day fixed for the payment of the call.
• He has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding 5 years.
• If director has been appointed without Director Identification Number (DIN) or the same has become inactive, he would be disqualified.
• If he has been the director in more than 20 companies at the same time, he would be disqualified.
• If he has been found guilty of fraud or breach of trust in relation to company, he would be disqualified.

Disqualification of Directors for Offenses of the Company

As per Section 164(2) of Companies Act, in following cases, a director shall be disqualified from being appointed as director due to non-compliance by company:

• If the company has not filed its financial statements or annual return for continuously 3 years, the concerned person who is the director of the company will be disqualified.
• If the company has not repaid deposit and interest thereon, redeem debentures on due date and interest on it has not been paid and has not paid dividend to its shareholders which was earlier declared by the company, then the directors would be disqualified.

PERIOD OF DISQUALIFICATION OF DIRECTORS

Process of Disqualification of Directors by MCA/ROC

• Ministry of Corporate Affairs (MCA) initiates director disqualification proceedings. ROC refers all the cases to the MCA.
  • Before passing disqualification order, MCA give a notice to director stating the reasons for disqualification and provide a timeframe within which the director can respond.
  • If MCA thinks the reasons for disqualification to valid, it would pass disqualification order. The order specifies the period of disqualification ranging from 5 years to lifetime.

Disqualification would lead to prohibition of the director for appointment as director in any company and he shall have to vacate his office of director. However, if the director thinks that the disqualification was unjust, he can file a file an application with National Company Law Tribunal (NCLT) along with evidence documents to remove disqualification. The NCLT has the power to remove disqualification if it is satisfied that the disqualification is unjust.

Forms to be filed in case of Disqualification of Directors

1. Form to be filed by the Director: Every director shall inform the company about his disqualification under section 164 in Form DIR-8 before his appointment or re-appointment.
2. Forms to be filed by the Company:

• On receipt of information in form DIR-8, the company shall file form DIR- 9 with RoC within 30 days of such receipt.
• Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend u/s 164(2), 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.
• 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.

Process to renew directorship of a disqualified Director

Once the period of disqualification expires or the event that has triggered disqualification has been removed then disqualification of director shall come to end. In such case, a director is required to file DIR-10 to the Registrar for removal of disqualification and removal of his/her name from the list of disqualified directors.

Penalties for Non-Compliances on disqualification of directors

1. If a person functions as a director even when he knows that the office of director held by him has become vacant then he shall be punishable with fine which shall not be less than INR 1 Lacs but which may extend up to INR 5 Lacs.
2. In case of non-compliance of Section 164, The company and every officer of the company who is in default shall be liable to a penalty of INR 50,000. Further, in case of continuing failure, an additional penalty of INR 500 per day during which such failure continues, subject to a maximum of INR 3 Lacs in case of a company and one lakh rupees in case of an officer who is in default.

Some Additional Points Related to Disqualification of Directors

• Where director is also a shareholder of the company, disqualification will not impact his shareholding.
• If all the directors are disqualified in a company, promoters of a company will appoint the required number of directors till the time new directors are not appointed by shareholders in a general meeting. Where a person is appointed as a director of a company which is involved in above mentioned defaults then such new director shall not incur the disqualification for a period of 6 months from the date of his appointment.