Consequences of Continuation of Disqualified Director

A. SHORT SUMMARY:

The purpose behind this editorial, to understand the concept of ‘Disqualification of Directors’.  Consequences on Directors after the get disqualified, consequences on Company, Other Directors, Auditors if disqualify director continue as Director. Provisions for removal of Disqualification, if possible. Whether order from high court is final way out for removal of Disqualification. To discuss following frequent questions:

A. Whether Disqualified Director can continue in Companies as Director?

B. What shall be the effect date of cessation of Disqualified Director?

C. Whether there is any way out to remove the disqualification of Directors?

D. What are the consequences, if disqualified Director continued as Director in Company?

First Step: – Reason of Disqualification of Director

Section 164 (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;

shall not 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.

Therefore, if a company fails to file its financial statement for continue 3 financial year Director shall be disqualified for next 5 years.

Second Step: – Impact of Disqualification

Section 167(1)(a) The office of a director shall become vacant in case— (a) he incurs any of the disqualifications specified in section 164;

Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

Therefore, if a person disqualified in any Company due to section 167(1) such person shall be considered as Ceased in all other Companies wherever he was appointed as Director.

One can opine that:

Disqualified Director can’t continue as Director in Companies. He shall be considered as ceased with immediate effect.

If such Person continues as director even after vacation such person shall be liable for Imprisonment or fine.

Consequences:

If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Third Step: – Action by Companies on Disqualification

• Company shall file e-form DIR-12 with ROC for cessation of such Director with Immediate effect.
• Company shall take not in immediate next Board meeting about vacation of such Director.
• In case no. of director reduced below minimum limit due to disqualification, then appoint new Director.

Entry in Register of Members about disqualification/ vacation of Director.

One can opine that:

It is responsibility of the remaining Directors to file e-form DIR-12 for cessation of Disqualified Director and inform ROC about the same.

If Directors fails to file DIR-12 they are liable for fine as mentioned below.

Consequences:

As per Section 166 it is duties of Directors of Company to comply with provisions of Act, act in good faith etc.  If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Fourth Step: – Removal of Disqualification of Director

As per Companies Act, 2013 Disqualification of Director can’t be removed by any authority Like (ROC, RD, MCA or NCLT). No authority having power for removal of Disqualification under Companies Act, 2013.

However, many people have filed Writ Petition in High court for removal of disqualification of Director. High court has passed order for Interim Stay on Disqualification of Director. However, “High Court” is not pronouncing order for remove the disqualification of Directors.

One can opine that:

Once a director is disqualified, and then disqualified for next 5 years. There is no way out for removal of Disqualification of Director.

Fifth: –

Consequences if Disqualified Director Continue as Director

List of Default of Section in case of Continuation of Disqualified Director

• If there is only Two Director in Company one Disqualified – All the Board Meetings shall be invalid
• If disqualified Director Signing the Financials-Such financials shall be considered as void.
• Any documents, Resolution signed by disqualified Director shall be considered as invalid/ void.ETC

 MONATORY CONSEQUENCIES:

QUICK BITES

A. What shall be effective date of Disqualification?

Date of disqualification shall be actual date when filing of financial statement for third financial year become due.

Date as mentioned in ROC list is not actual date of disqualification. Disqualification may be any date before that due to Section 164(2).

B. Whether Company required obtaining resignation from the disqualified Director?

There is no need of Resignation of disqualified Director. Because as per act once he disqualified he automatically ceased to continue as Director.

C. If all the Directors are disqualified, How to Company will appoint new Directors?

As per Section 167(3) in case all the directors disqualified then Promoters shall appoint the New Directors and take help of Roc for Backhand.

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).