Whether the expression ‘other company’ in Section 164(2) of the Companies Act, 2013 means all other companies except non-defaulting company in which he was already a director?

A person who has incurred the disqualification under section 164 (1) of the Companies Act, 2013 (‘the Act, 2013) is not eligible for being appointed as a director of any company. Any person who has incurred the disqualification under sub-section (2) of section 164 of the Act, 2013 is not eligible for being re- appointed as a director of the company that has defaulted in terms of clause (a) and (b) of subs-section (2) of section 164 of the Act, 2013. He is also disqualified for being appointed to any other company for a period of five years.

In terms of Section 164 of the Act, 2013, a person who has incurred the disqualification is not eligible for appointment as a director. The disqualification under Sub-Section (2) of Section 164 of the Act, 2013 is applicable only to a person who is or was a director. Such disqualification thus, operates on his reappointment in the defaulting company or for an appointment in any other company.

Please note that a plain reading of Sub-Section (2) of Section 164 of the Act, 2013 indicates that his functioning as a director in companies, in which he holds such office at the time of incurring the disqualification, is not affected. Such disqualification triggers in respect of appointment in the future after he has incurred the disqualification.

It would be necessary, first, to refer to the provisions of Section 164 of the Act, 2013 which sets out circumstances in which a person is disqualified for being appointed as a director. The said Section reads as under:-

“164. Disqualifications for appointment of director.– (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 at any time during the last preceding five years; or

(h) he has not complied with sub-section (3) of section 152.

(i) he has not complied with the provision of sub-section (1) of section 165.

Section 164(2) of the Act, 2013 disqualifies a director from being re- appointed in a company for a period of five years, if the company has

(a) not filed financial statements or annual returns for any continuous period of three financial years; or

(b) 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.

In addition, a director of such a company is also disqualified from being appointed in any other company for a period of five years.

Section 164 of the Act, 2013 has replaced the provisions of Section 274(1) of the Companies Act, 1956, which was in force prior to 01.04.2014, also contained similar provisions for disqualifying a director of a company that had failed to file the requisite returns for a consecutive period of three years. Section 274(1)(g) of was inserted in the Companies Act, 1956 with effect from 13.12.2000. The said provision was only applicable to directors of a public company, which had defaulted in filing its annual accounts and annual returns for a period of three financial years or had failed to meet its specified payment obligations and was wholly inapplicable to private companies. The sweep of Section 164(2) of the Act is wider; it not only includes public companies but private companies as well.

As mentioned above that any person who has incurred the disqualification under sub-section (2) of section 164 of the Act, 2013 is not eligible for being re- appointed as a director of the company that has defaulted in terms of clause (a) and (b) of subs-section (2) of section 164 of the Act, 2013. He is also disqualified for being appointed to any other company for a period of five years.

The first logical question which has been raised before the Hon’ble High Court of Delhi in respect of the disqualification under sub-section (2) of section 164 of the Act, 2013 is –

‘person may be disqualified to act as directors of the concerned companies that had committed defaults as contemplated under Section 164(2)(a) of the Act, 2013 i.e. had failed to file financial statements or annual returns for a continuous period of three financial years, but they are not disqualified to act as a directors of companies that are not in default’.

It was stated that a director of a defaulting company is disqualified from being appointed in any company in which he was not serving as a director at the material time. In other words, if a person was a director of a defaulting company but was also a director of other companies that were not in default, he would be disqualified from being re- appointed in defaulting company or for being appointed in any company other than the non-defaulting companies in which he was already a director.  But he could be re-appointed in those non- defaulting companies where he had been appointed as a director prior to incurring the disqualification under section 164(2) of the Act. It was stated that the expression “other companies” ought to be read as non-defaulting companies in which the director was not holding the office of a director at the material time.

The second question arise that the word ‘appointed’ and ‘re-appointed’ cannot be read as synonyms. It was stated that since two separate expressions – ‘appointed’ and ‘reappointed’ – have been used by the legislature in the same statutory provision, the same must be given different meanings. On the strength of the aforesaid principle, it was stated that a person who has incurred the disqualification under Section 164(2) of the Act, 2013 cannot be appointed in any other company but can be re-appointed. In view of the above, there was no impediment for a director to be re-appointed in a company that had not committed any default as specified in clauses (a) and (b) of Section 164(2) of the Act, 2013.

The Hon’ble Delhi High Court in the matter of Mukut Pathak & Ors. vs Union of India & Anr. (4th November, 2019) has taken a different view and held that the above contention is unsubstantial. A plain reading of Section 164(2) of the Act, 2013 does not indicate this legislative intent. It provides that no person who is or has been a director of company shall be eligible to be re-appointed as a director of ‘that company’ or appointed in any ‘other company’. The expression ‘other company’ is used to refer to all companies other than the company which has committed the defaults as specified in clauses (a) and (b) of Section 164(2) of the Act, 2013. It is also relevant to note that the term appointment would include any ‘reappointment’ as well.

Remarks:

We would like to submit that the following questions that should be positively considered by the Ministry of Corporate Affairs to make the operation smoothly-

1. A director of a defaulted company [u/s 164(2) of the Act, 2013] should be disqualified from being appointed in any other company in which he was not serving as a director at the material time.

[It seems logical pursuant to provisions of Section 164(1) of the Act, 2013 as a person who has incurred the disqualification under section 164 (1) of the Companies Act, 2013 is not eligible for being appointed as a director of any other company. Therefore, Section 164(1) of the Act, 2013 should be amended by MCA to incorporate a new disqualification after the clause (i) as under- “He is director of any company which is in default under section 164(2)”].

2. A director of a defaulted company [u/s 164(2) of the Act, 2013] should be disqualified from being re-appointed in that company for further period.

[Provisions already there. Section 164(2) of the Act, 2013 disqualifies a director from being re- appointed in a company for a period of five years. Further his functioning as a director in companies, in which he holds such office at the time of incurring the disqualification, should not be affected].

3. A director of a defaulted company [u/s 164(2) of the Act, 2013] should be permitted to re-appointed in that company in which he is already director and are not in default.

[It seems logical as why operation of non- defaulting company should be suffered unnecessary. Therefore Section 164(2) of the Act, 2013 should be amended by MCA to exclude non defaulting company from the purview of the Section 164(2) of the Act, 2013.]

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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