Section 164 (2) of Companies Act, 2013 enumerates two conditions for the disqualification of directors i.e. non filing of annual returns and financial statements and the non return of deposits or the non payment of dividends. Section 164 (2) is successor to the erstwhile provisions of Section 274(g) under Companies Act, 1956 which also had similar conditions for disqualification but did not resulted into automatic vacation of office of director which is the twist in the Companies Act 2013 where through Section 167 it laids down the situations wherein office of director shall become vacant.

If the director incurs disqualification under Section 164(2) then the office of director shall become vacant in all companies in which he is a director, other than the company which is in default.

Disqualification of Director

Bring into effect the provisions of Section 164(2) and Section 167, Central Government disqualified the directors of non compliant company and companies struck off under Section 248 of Companies Act, 2013.

However the provisions of Section 164(2) has been challenged on constitutional validity in various High Courts and this issue alongwith other important issue of retrospective applicability of Section 164(2) and deactivation of DIN was dealt with by High Court of Allahabad in a recent judgement passed by it.

In matter of Jai Shankar Agrahari vs Union of India and another, High Court of Allahabad clarified and opined that:

  • Principles of natural justice such as audi alteram partem (opportunity of being heard) need not be complied with in all situations. In case of disqualification under Section 164(2) the disqualification is not made by statutory authority but by statute itself.
  • Three financial years relevant for attracting Section 164(2)(a) of Act, 2013 would commence from Financial year 2014-15 and onwards and not prior thereto.
  • The action of Central Government in deactivating the DINs of the petitioners-Directors along with the publication of the impugned list of Directors of “struck off” companies under Section 248, was not legally tenable.

For the purpose of law, it is important to understand from this judgement that the operation of 164(2)(a) is automatic and does not require order or declaration by any authority to disqualify a director. The errant directors who do not comply with provisions of the Act and not pay attention to Corporate Governance requirements will keep on attracting disqualification.

For the purpose of procedure adopted for disqualification, it is important to understand that executive authorities of the Government may have hurried themselves in publishing impugned list of directors who are disqualified (including directors of struck off companies) without understanding the applicability of the provisions of the Act and also deactivating the DIN of Directors without having any powers to do so as per DIN Rules.

Court time and public money spend on appointing counsels to defend the procedural action taken could have been easily avoided if the action would have been taken by following due procedure envisaged in the statue.

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December 2020