Disqualification of Director under section 164(2) of Companies Act, 2013

The Ministry has struck off names of 2,17,239 companies from the records as on September 22 as these have not been carrying out business activities for a long period and have also defaulted on compulsory filings while more such companies are likely to face action. It has been informed that  as on September 22, a total of 3,19,637 directors have been identified and flagged as disqualified under Section 164 (2) (a) of the Companies Act, 2013 It is estimated that the final list may touch the figure of about 4.5 lakh (directors).

As per Companies Act, 2013, Section 164 pertains to disqualification for appointment of director. Under sub-section 164(2) (a), a person who has been a director with a company that has not filed financial statements or annual returns for three consecutive financial years will face disqualification.

The relevant extract of the provision under the aforesaid section(s) are as follows:

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; or

(b)…..,

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.”

As per ROC list of Disqualified Directors under section 164(2) has been issued which are disqualified from 1^st November 2016 to 31^st October 2021 for non-filing of Annual Return and Financial Statement for the year 2013-14, 2014-15 and 2015-16.

As per Section 167(1)(a) of the Companies Act, 2013, it has been mentioned that “The office of a director shall become vacant in case — he incurs any disqualification specified in Section 164”.

But section 164 is applicable at the time of appointment/reappointment of a person as a director of any company, section 167 is applicable when a person is already a director. Section 164 prescribes disqualifications which come into play at the time of appointment of a person as a director in any company. As against that section 167 applies only when a person attracts any of the grounds in relation to a particular company. This is clear from the words ‘A person shall not be eligible for appointment as a director of a company’ in section 164(1) and the words ‘The office of a director shall become vacant’ in section 167(1). So, the words ‘a person’ and the words ‘a director’ used in the two sections.

This may seem logical if one were to be disqualified under Section 164(1) i.e. become an undischarged insolvent or is declared as being of unsound mind by a Court. Most certainly such a person cannot continue as a director. However, Section 164(2) is on a different situation than Section 164(1). The failure to file financial statements or inability to repay deposit etc may be due to circumstances beyond the control of the Company or the particular Director. Section 164 (1) specifies disqualification due to personal default while Section 164 (2) specifies about disqualification arising due to corporate default

Also, we have brought about the intention of the law makers w.r.t. Section 164 (2) read with Section 167 (1) (a) of the Act. The relevant extracts from the Report of the Companies Law Committee, issued in February 2016 (available on the website of Ministry of Corporate Affairs), has been discussed below with respect to the stringent provision of disqualification and vacation of Director

The relevant extract of the same is as follows [Page No. 57 para 11 (Part 1)]:

Disqualifications from appointment as, and vacation of office of director

11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc.

The Committee acknowledged that this Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. In this regard, the Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

11.14 The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the non-compliance, and in case of a continuing non-compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant.

The Committee above has also referred that in case of disqualification incurred by any Director under Section 164 (2) of the Act will automatically vacate the office of the director under Section 167(1)(a) of the Act in all the companies in which at that point of time such person is a director.

In the new Company Amendment Bill, 2017, passed by Lok Sabha on 27^th July, 2017 the following has been inserted in Sec 164

“ in sub-section (2), the following proviso shall be inserted , namely :-

“Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.”

In Sec 167

“in subsection (1) of clause (a) , the following proviso shall be inserted , namely :-

“Provided that where he incurs disqualification under subsection (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 subsection”

However MCA in the press release dated 12.09.2017 advised to disqualified director to vacate the office as per sec 167.

Penal Provision :

Any person who contravenes the provisions of sec 164:

There are no specific penal provisions stated for the occurrence of default in that section , but same as be stated under section 172 of the Act, company and every officer who is in default of chapter IX shall be punishable with fine of Rs. 50000 to Rs. 5 Lacs

Contravention on continue as director even after attainment of disqualification (Sec 167)

He shall be punishable with the imprisonment for a term upto 1 year or with fine of Rs. 1 lac to Rs. 5 Lacs or with both

Penalty on non compliance of General Duties u/s 166:

1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company as well as other applicable Acts of the Company

It is duty of the directors to follow and comply with the provision of Companies Act and other legal compliances.

Consequently, one can opine that, if a director fails to comply with his duties then he is liable for penalty u/s 166(7) i.e. ‘fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.’

Remedy

As per The Companies (Appointment and Qualification of Directors) Rules, 2014 contain a provision pursuant to “application for removal of disqualification of directors shall be made in Form DIR-10.”

Rule 14(5) states that, “Any application for removal of disqualification of directors shall be made in Form DIR-10.” However this is physical form required to be file with other form with the appropriate authority. But that procedural part (filling DIR 10) is not yet observed.

At present, since there seems to be no remedy available as per the Companies Act, 2013, a Writ Petition can be made by the aggrieved director under Article 226 of the Constitution of India in the absence of any alternate remedy available.

On September 21, 2017, the Madras High Court has passed an interim order staying the RoC Chennai’s order of disqualification of Bhagavan Das Dhananjaya Das as the director of Birdies and Eagles Sports Technology, a private company. It is expected that in sometime from now, there will be several court rulings on the issue whether the removal of the name of a person was/was not right

The concern Director may approach to High Court to grant relief under section 463 of the Companies Act, 2013

(Author Details-   CS Saurabh Basu, ACS, ACMA & MBA(Finance) is a Practicing Company Secretary and can be reached at Email: pcs.saurabhbasu@gmail.com)

Disclaimer: This write up is intended to start academic discussion on few significant interpretations under Companies Act, 2013. It is not intended to be a professional advice and should not be relied upon for real time professional facts. Readers are advised to refer relevant provision of laws before applying or accepting any of the point mentioned above. Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.