Summary: The disqualification of directors under the Companies Act, 2013, is a critical regulatory measure aimed at upholding corporate governance and legal compliance. Governed by Section 164 of the Act, directors can be disqualified for personal misconduct or company-related defaults. Personal disqualification may occur if the director is of unsound mind, bankrupt, or convicted of offenses involving moral turpitude or corruption. On the company’s side, directors may face disqualification if the company fails to file financial statements or repay deposits for three consecutive years. Disqualified directors must vacate their office and are barred from reappointment for five years. Actions made by a disqualified director are void unless later ratified by the board. Remedies available include appeals to the National Company Law Tribunal (NCLT), rectifying company defaults, and reactivation of the Director Identification Number (DIN) after compliance. Understanding these provisions is crucial for maintaining corporate governance and avoiding penalties.
The disqualification of directors under the Companies Act, 2013, is a significant regulatory mechanism designed to ensure corporate governance, compliance, and integrity within Indian companies. The Act sets out strict criteria for who can serve as a director, ensuring that individuals occupying these crucial roles adhere to ethical standards and legal obligation.
The disqualification of directors is governed by Section 164 of the Companies Act, 2013. Section lays down specific grounds under which an individual can be disqualified from being appointed or continuing as a director in any company.
Grounds for Disqualification of Directors
Sec 164 of Companies Act, 2013 deals with Disqualification of Director. As per the provision of Act and applicable Rules and Regulations disqualification of directors can occur either due to personal misconduct of director or defaults by the company he serves.
1. Disqualification Due to Personal Actions
An individual may be disqualified from being appointed or continuing as a director of any company if he/she:
- has been declared of unsound mind by a competent court, and the declaration has not been revoked.
- is an undischarged insolvent, meaning they have been declared bankrupt and have not resolved their insolvency.
- has applied for insolvency, and the application is still pending.
- has been convicted of an offense involving moral turpitude or any offense punishable by imprisonment for at least six months. If the imprisonment term is more than seven years, the disqualification is permanent.
- has not paid any calls on shares they hold in a company within six months from the last payment date.
- has been convicted of an offense under the Prevention of Corruption Act, 1988.
- has been disqualified by an order of a court or tribunal from holding the position of director.
- not have a valid Director Identification Number (DIN), or their DIN has been deactivated or obtained using false information.
2. Disqualification- Due to Company-Related Offenses
Directors may also attract disqualified in case of non-compliances by company itself. If company fails to meet legal requirements under Sec 164(2) of the Companies Act, 2013 then director attract disqualification.
Directors will be disqualified from being reappointed as directors in that company as well as appointed any other company in following cases-
- Failure to File Financial Statements or Annual Returns:
If a company fails to file its financial statements or annual returns of company for three consecutive financial years sec 164(2)(a) of Companies Act, 2013.
- Failure to Repay Deposits, Interest, or Redeem Debentures: If a company fails to repay deposits or interest, redeem any debentures on the due date, or pay declared dividends and failure continue for period of one year sec 164(2)(a) of Companies Act, 2013.
Consequences of Disqualification of Director- on Director as well as Company
- Director vacate their office in all companies
(Note: Where they hold directorships, except for the defaulting company in certain cases under Section 164(2)).
- He cannot be reappointed as directors for period of 5 years in the defaulting company or any other company.
- Actions or decisions made by a disqualified director may be deemed invalid and has no legal effect subject to condition as approve by Board later.
- Disqualification can lead to penalties and fines in case continued action as a director.
- Companies that fail to address disqualification issues may face regulatory scrutiny as well as compliance problems.
Remedies
Directors disqualified due to some personal as well as company related offences but woth the Same he has several potential remedies which are:
- Appeal to the National Company Law Tribunal (NCLT): Directors can appeal to NCLT in cases of technical or procedural defaults for relief.
- Rectification by the Company: Disqualification arise as per section 164(2) then company can rectify its default like filing overdue financial statements, annual returns, or repaying outstanding deposits, payment of dividend declared.
- Condonation of Delay Scheme: Under the condonation of delay scheme (provided by the Ministry of Corporate Affairs) Directors can remove disqualification and regularize his directorship.
- Judicial Relief through Writ Petitions: If case disqualification is deemed unreasonable or unlawful as per law, directors can file a writ petition in the High Court seeking relief from disqualification.
- Reappointment After the Disqualification Period: After completion of period usually five years (from date of Disqualification) and company complies with its legal obligations, directors can be reappointed in that company or any other company.
- Reactivation of DIN: If the DIN has been deactivated, directors can apply for reactivation by payment of fees and meeting all other compliance requirements.
Applicable MCA Forms
- Form DIR-9: The company must inform the RoC by filing Form DIR-9.
When a director incurs disqualification under Section 164(2) of the Companies Act, 2013, due to defaults by the company, company inform by filing DIR-9.
- DIR-10: Removal of his disqualification.
This form is used by directors who seek removal of disqualification of director.
- DIR-11: Notice of resignation.
If a director resigns from a company, director must file Form DIR-11 along with resignation letter along with proof of delivery.
- DIR-12: Communication about the appointment or resignation to ROC
Communication about the appointment or resignation of a director or KMP, including changes due to disqualification to RoC through DIR-12.
- DIR-5: Surrender DIN
Director can surrender his DIN due to disqualification or any other reason, by filing Form DIR-5 with the RoC.
Conclusion
Provisions of this section aim to promote corporate governance and legal compliance by disqualifying directors who fail to meet these standards and conditions. Proper understanding and management of these regulatory requirements are vital for companies to maintain corporate governance and safeguard rights of Shareholders/ Members. It is necessary to take care of standards as stated under Act to avoid the disqualification.
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