Effect of Companies Act, 2013 on Directors Disqualification (Section 164)

CA Amit Bansal

Introduction: – Section 274 of Companies Act, 1956 describes the disqualification of a person for appointment as a director in a company. The above mentioned section is replaced by section 164 of Companies Act, 2013 and it make required changes and now all such disqualification will covers private company as well.

The article analyses the provision of section 164 of Companies Act, 2013 and what differences is it make in existing provisions of companies act, 1956.

Disqualification under Companies Act, 2013-

Section 164 of Companies Act, 2013 contains the provision related to Disqualification of Director, which is produced as under: – (text in red shows the new provisions inserted or changes made in existing provisions).

(1) A person shall not be eligible for appointment as a director of a company, 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) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence.

(Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company);

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f)  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;

(g) he has been convicted of the offence dealing with related party transactions under section 188 (Related Party Transaction) at any time during the last preceding five years; or

(h) he has not complied with sub-section (3) of section 152. (DIN No.)

(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) has failed to repay the deposits accepted by it, or pay interest thereon or

to redeem any debentures on the due date or pay interest due thereon or

pay any dividend declared and

such failure to pay or redeem continues for one year or more,

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.

(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section shall not take effect—

(i)  for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid  against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.

Analysis/Effects of Section 164:-

1. As per proviso in clause (d) of subsection 1 of section 164, a person convicted for any offence and sentenced to imprisonment of 7 years or more can’t be appointed as director in any company, even after 5 years of completion of such imprisonment. This was not cover by section 274 of Companies Act, 1956.

2. Two new clauses have been inserted for disqualification by clause no. (g) and (h).

3. Earlier Disqualification provided u/s 274(1)(g) was substituted by section 164(2), which affects earlier section as follows:-

a. Under Companies Act, 1956, disqualification was applicable only on the directors of the Public Companies, now word public company is being replaced by company, by virtue of this it become applicable to all companies whether public or private.

b. In clause (a) of subsection 2 the word inserted “or” instead of “and” used in section 274(1)(g) of companies act, 1956. Due to this, person will be disqualifying for appointment as director even if company in which he is already director doesn’t file either of Annual return or annual account continuously for 3 years. Earlier this disqualification incurs only if company defaults in filling both Annual account and Annual return for continuously 3 years.

c. As per Companies Act, 1956 such director shall be disqualified for appointing as director in any other public company, due to which director is still eligible to appointment in private company and reappointment in same public company.

Now, The word other public company is being replaced by “that company or other company” which covers both private as well as public company including defaulting company. So, now such person will not be eligible to appointment or reappointment as director in any of the company.

d. As per section 283 of companies act, 1956 director need not to vacate his office if any default has been made of section 274(1)(g).

Now section 283 of Companies Act, 1956 replaced by Section 167(1) of companies act, 2013 which deals with vacation of office by director. As per clause (a) of subsection 1 of section 167(1), any person who incurs disqualification of section 164, shall have to vacate his office, now it also covers the disqualification of section 164(2). Section 167(1)(a) is produced as under-

“167(1) The office of a director shall become vacant in case—

(i) he incurs any of the disqualifications specified in section 164;”

Applicabilty:  This section is not covered by MCA notification dated 12th Sep 2013 notifying applicability of 98 sections w.e.f. 12th Sep 2013. So, this section is not come into force by above said notification.

Conclusion: Section 164 of Companies Act, 2013 remove the some ambiguity, which was in 274(1)(g) related to reappointment of director in same company, which is now specifically cleared. Although Maximum provision was not changed, but major effects are made for disqualification in regard to Private Company. Provision related to disqualification for appointment of director of a private company is tighten.

(Author may be contacted at akb6792@gmail.com)