Directors play a vital role in the corporate governance of companies, ensuring compliance with laws and regulations while safeguarding the interests of various stakeholders. The Companies Act, 2013, enacted in India, introduced several provisions to enhance transparency, accountability, and corporate responsibility. One such significant provision is Section 164 of Companies Act, which deals with the disqualification of directors.
Director disqualification is a way of restricting a person from becoming a director or setting conditions under which they cannot be appointed as an executive of a company. Disqualification from the office of a director of a company further means that he cannot be appointed as a director of any company within the period fixed/determined by the court or tribunal
What does Section 164 of the Companies Act, 2013 specify?
Section 164 of the Companies Act, 2013 contains provisions for the disqualification of a director. Under the Companies Act, 2013, section 164 applies to the disqualification of directors of a company. Section 164(2) (a) states that an individual will face disqualification who has been a director of a corporation that has no financial statements or annual returns for 3 consecutive financial years.
Section 162(2) provides that no natural person who is or has been a director of a company that a) has not filed accounts or annual returns for any continuous period of 3 fiscal years may be re-appointed as a director of that company, corporation or a nominee in another corporation for 5 years from the date on which the said corporation fails to submit the necessary compliance documents.
The provisions of Section 164 (2) (a) of the Act deals with standards related to the disqualification of directors. The rule says that if the assessee company has not submitted the accounts or annual returns for any three consecutive years, the directors of the said company will be disqualified from office for 5 consecutive years.
Disqualification of Directors Under Section 164(2)
When the ROCs disqualify a director, he/she cannot be appointed as the director of any company for the period he/she is disqualified. Section 164(2) of the Act has a broad ambit. It brings a director under the purview of disqualification when there is a default committed by a company in which a director holds the directorship.
Section 164(2) states that a director is ineligible to be re-appointed as a director of a company or appointed as a director in another company for five years from the date on which the company of the director fails to comply with the following:
- Has not filed annual returns or financial statements for a continuous period of three financial years
- Has failed to repay any deposits accepted by it, pay interest on deposits, to redeem debentures on the due date, pay the interest due on debentures or pay any dividend declared and the failure to redeem or pay continues for one year or more
In 2017, various ROCs published the list of defaulting companies and the disqualified directors as per Section 164(2) provisions of the Act. The ROCs considered the companies that had defaulted in filing the financial statements and annual returns from the financial year 2014-2015 while compiling the list of defaulting companies and flagging the disqualified directors.
Grounds for disqualification of Director
- When the company does not pay interest on deposits or does not return the deposit received.
- If the organization fails to pay the required interest or repay the bonds by the due date.
- Failure to pay the declared dividend and continuing this activity for more than one year may result in the disqualification of the director of the company.
- If the director applied for a declaration of insolvency.
- If the director was previously disqualified by the court.
- Unless the board of directors discloses its or co-ownership interests in any company.
- If the director has been convicted of a criminal offense and sentenced by a court to imprisonment for more than 6 months.
- If the court determines that the director is mentally ill.
- If the director of the company is found guilty under section 188 of the Penal Code for party transactions carried out by the director in the previous five years.
- Directors who are still insolvent can be excluded by the court.
Consequences of Disqualification
The DINs of all the directors flagged as inactive due to disqualification under Section 164(2) by the ROCs in 2017 were debarred from appointment as directors in any other company for five years. As per the Act, once a director is disqualified under Section 164(2) of the Act, he/she will be eligible to be re-appointed as a director of a company after de-flagging the disqualification of DIN by the MCA. The MCA will de-flag the disqualified DIN after five years from the date of disqualification.
Remedies for Disqualification of Directors
The Companies Act, 2013 does not provide any remedial measure for removal of the disqualification of DIN. In case of DIN disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT) and temporarily ask for a stay order. Under the Act, the order disqualifying a director will not be effective until the next 30 days of passing the order.
As soon as a director initiates an appeal before the NCLAT, he/she will continue to be a director of the defaulting company for the next seven days. Within seven years, a director can file the annual returns to prevent the order of disqualification. However, there exists no procedure to reappoint a disqualified director. A disqualified director can only be reappointed after five years from the date of disqualification.
The directors can also appeal to the High Courts to remove director disqualification. However, different High Courts have different views regarding removing disqualification under Section 164(2). For instance, the High Court of Gujarat, Madras, Karnataka, and Allahabad have granted relief with certain directions and reversed the lists of ROCs, mentioning disqualified directors. In contrast, the Mumbai High Court does not provide relief for removing the director disqualification.
Effects on the Company
The disqualification of directors can have significant repercussions for the company. It may impact the decision-making process and the ability of the company to carry out its operations smoothly. Disqualification can also tarnish the company’s reputation, leading to a loss of investor confidence, and potential legal consequences.
De-Flagging of Disqualified Directors
The MCA can de-flag the disqualification of the DIN of the directors after five years have passed since the order of disqualification. Accordingly, the DIN of the directors that the various ROCs disqualified in 2017 were eligible for removal of the disqualification in October 2021, i.e. after completion of five years of the disqualification order.
Thus, the MCA issued a public notice on 10th November 2021 mentioning that all the concerned disqualified DIN on 1st November 2016 are eligible for defragging. The MCA is in the process of de-flagging the disqualified DIN and soon will change the DIN of such directors from ‘Disqualification’ to ‘Active’. Meanwhile, all the concerned disqualified directors have to file the form DIR-3 KYC to ensure there are no hassles for their re-appointment as directors.
FAQs
Q: How can companies avoid disqualification under Section 164?
Companies should ensure timely filing of financial statements and annual returns with the Registrar of Companies to avoid defaults that could lead to the disqualification of their directors.
Q: What is Section 164 of the Companies Act, 2013?
Section 164 of the Companies Act, 2013, specifies the circumstances under which a person is disqualified from being appointed or reappointed as a director of a company.
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida