Disqualification, Personal Liability and Other Penal Consequences for Directors of a Company
Disqualification of Directors as per Companies Act
Ineligibility Of Being Appointed As A Director
Section 164 of the Companies Act, 2013 prescribes certain conditions which make a person ineligible for appointment as a Director in any company. As per Sub-section (1) of this provision, a person cannot be appointed as a Director if:
a. He is of unsound mind and stands so declared by a competent court;
b. He is an undischarged insolvent;
c. He has applied to be adjudicated as an insolvent and his application is pending;
d. An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
e. He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
f. He has been convicted of the offence dealing with related party transactions at any time during the last preceding five years;
g. He has not complied with provisions pertaining to allotment of Director Identification Number; or
h. Due to a criminal conviction (as explained separately in detail below).
Further, as per Companies (Amendment) Act, 2017, vide a proviso, it is provided that the disqualifications relating to conviction or disqualification order of the court shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.
Disqualification Due To Criminal Conviction – Section 164(1)(D)
1. If a person has been convicted of any criminal offence by a court, whether it involves moral turpitude or otherwise, and has been sentenced for:
a. at least six months, then until a period of five years has elapsed from the date of expiry of the sentence he will not be eligible for appointment.
b. for a period of seven years or more, then under these circumstances, he will not be eligible to be appointed as a Director in any company, i.e., leads to permanent disqualification.
2. Section 167 of the Companies Act, 2013, provides for situations under which the office of a Director is liable to be vacated. The situations are same as set out in Section 164(1) mentioned above. Further, this section clarifies that the office of the Director shall be vacated even if he has filed an appeal against the order of the court.
3. Vide Companies (Amendment) Act, 2017, a proviso has been added to Section 167 to provide that the office shall not be vacated by the Director for 30 days from the date of conviction or order of disqualification:
a. Where an appeal or petition is preferred within 30 days against the conviction, resulting in sentence or order, until the expiry of seven days from the date of such appeal or petition is disposed of; or
b. Where any further appeal or petition is preferred against the order or sentence within seven days, until such further appeal or petition is disposed of.
4. The term ‘moral turpitude’ has nowhere been defined in the Act or under the Rules. Through a catena of judgments, the expression is understood to mean anything done contrary to justice, honesty, modesty or good morals. It can be defined as an act of biasness, vileness, or depravity in private and social duties owing to fellow men in general, contrary to accepted and customary rules. For instance, offences related to sexual harassment at workplace and gross ethical violations would constitute moral turpitude.
5. One of the most common instances pertaining to conviction of directors is the dishonour of cheque which is a criminal offence as per Section 138 of the Negotiable Instruments Act, 1881.
Ineligibility Of Being Re-Appointed As A Director
Sub-section (2) of Section 164 states that no person who is or has been a Director of a Company which has done the following, 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 company fails to do so:
a. Has not filed Financial Statements or Annual Returns for any continuous period of three Financial Years; or
b. Has failed to repay its Deposits accepted from public including interest or redeem its Debentures on due date including interest, pay any Dividend and such failure continues for a period of one year or more.
Further, as per the Companies (Amendment) Act, 2017, a person who is appointed as a Director of a company which is already in default of the above mentioned two conditions, shall not incur the disqualification for a period of six months from the date of his appointment.
Other References With Respect To Disqualification Of Directors
1. Under Section 143(3), the Auditor has to state whether any Director is disqualified from being appointed as a director under Sub-section (2) of section 164.
2. Under Section 152(4), every person proposed to be appointed as a Director by the company in general meeting or otherwise, shall furnish a declaration that he is not disqualified to become a Director under this Act.
Reporting Of Disqualification
Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides obligation of the Director to intimate the disqualification to the Company and thereafter, the Company has to inform the Registrar of Companies.
Serious Fraud Investigation
1. Section 212(8) which became effective form August 24, 2017, read with the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 provides that if the Officers of SFIO (Director, Additional Director or Assistant Director), has on the basis of material possession reason to believe (and the reason for such belief is recorded in writing) that any person is guilty of any of the following offences, he may arrest such person and shall inform him of the grounds for such arrest:
2. Section 447 of the Companies Act, 2013, defines fraud as:
Fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
In the definition above,
wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled; and
wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled.
Section 447 provides the penal consequence of fraud as under:
3. It is pertinent to note that the Special Court shall not take cognizance of any offence as mentioned above except upon a complaint in writing made by:
a. The Director of Serious Fraud Investigation Office; or
b. Any officer of the Central Government authorised, by a general or special order, in writing in this behalf by that Government.
Complaint Of Fraud Against The Company
1. The government, in order to encourage better compliance of the law, has introduced the Form SCP (Serious Complaint Form) for reporting the serious complaints relating to the companies. This is an e-form and can be filed on the website of the Ministry of Corporate Affairs. There is no fee for filing Serious Complaint Form.
2. Following category of persons can file this complaint:
3. Nature of the Complaint:
Liability Of The Directors Where The Name Of The Company Has Been Struck Off From The Register Of Companies
Section 248 of the Companies Act, 2013 provides for situations where the name of the company has been struck off from the Register of Companies and the company continues to carry out its operations/ business, then the directors/management and such other officers of the company will be held personally liable.
Lifting Of The Corporate Veil
1. The Companies Act, 2013, points out the person liable for any improper/illegal activity as officer who is in default under Section 2(60) of the Act, and also includes people holding the positions of directors and key-managerial personnel. A few instances when a Court may consider the lifting of the corporate veil of a company include:
2. On lifting of the corporate veil, the Court determines the directing mind / real agency behind the corporate façade and accordingly the liabilities/ penalties may ensue. The jurisprudence of piercing of corporate veil is derived from the landmark judgements of the Supreme Court of India, in:
a. Life Insurance Corporation of India v. Escorts Ltd. & Ors, 1986
b. State of Uttar Pradesh v. Renusagar Power Company, 1988
i. Liability of Directors under Prevention of Corruption Act, 1988
a. The Prevention of Corruption Act, 1988 was amended in 2018 to bring it in line with the United Nations Convention against Corruption 2005, which was ratified by India in 2011. The amendment provided to prevent corruption in Government departments and to prosecute and punish public servants involved in corrupt practices.
b. It also introduced implication of offering bribes by a Corporate
c. Iridium India Telecom Limited v. Motorola Incorporated & Ors 2011.
d. Mr. Sunil Mittal, CMD, Bharati Cellular Limited v. Central Bureau of Investigation, 2015
ii. Personal/Vicarious Liability Under Tax Statutes
1. Lifting Of The Corporate Veil
a. Section 179 of the Income Tax Act, 1961 imposes a vicarious liability on a director and such liability can be imposed by the Assessing Officer without adjudication by a court.
b. Where any tax due from a private company cannot be recovered, then every person who was a director at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
c. The onus will be on the director to prove his innocence.
2. Under The Goods And Service Tax Regime
a. If a private company does not pay its dues then the directors of the company will become jointly and severally liable for the dues. In this case, only the directors who were in office during the period when the tax was due will be held liable.
b. If a director can prove to the Commissioner that the non-payment was not due to any negligence or breach of duty due to his part, then he will not be held liable.
iii. Personal Liability under Insolvency and Bankruptcy Code, 2016
1. Personal Liability of The Director For Wrongful Trading: A director of the company can be held liable to contribute to assets of the corporate debtor if such director knew that the company has no prospect of avoiding commencement of insolvency process and he did not exercise any due diligence in minimising potential loss to creditors.
2. Personal Liability of The Director for Fraudulent Trading: Any person who is a party to any business of the debtor carried on with the intent to defraud creditors or any other fraudulent purposes may be liable to contribute to the assets of the company as determined by the National Company Law Tribunal.
3. Chapter VII of the Code prescribes certain acts which constitute an offence and the officers in default/ directors are held liable.
These offences include the following:
iv. Personal / Individual Liability under Competition Act, 2002
1. Section 48(1) of the Competition Act, 2002 states that, if a company is found to have contravened the provisions of the Act, then, every person who is in charge of and responsible for the company’s conduct shall be deemed to be guilty of the contravention, and shall be liable to punishment according to the provisions of the Act.
2. Further, the proviso to Section 48(1) provides that nothing contained in Section 48(1) shall apply, if the relevant individual can prove that the company’s contravention was without his/her knowledge or that he/she had exercised due diligence to prevent the commission of such contravention.
This Article is written under the guidance of Ms. Attreyi Mukherjee, Senior Corporate Counsel and Ms. Deepika Bhagwagar, Deputy Company Secretary.