Analysis of disqualification of Director under Companies Act

As per Section 164(2) of the Companies Act, 2013 ('the Act'):

No person who is or has been a director of a company which -

Has not filed financial statements or annual returns for any continuous period of three financial years; or

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.

As per Section 167(1) of the Act :

The office of a director shall become vacant in case -

  1. he incurs any of the disqualifications specified in section 164;
  2. ***
  3. ***

Section 164 (2) of the Act provides that a person will be ineligible for re-appointment as a director of the defaulting company and also for appointment as a director in other companies for a period of five years.

Section 167 provides for grounds for vacation of office of a person who is already a director of a company.

Thus, Section 164 applies at the time of appointment and re-appointment whereas Section 167 applies during the continuation as a director in a company.

Section 164 divided into three sub-sections.

  • Sub section (1) states disqualification like: unsound mind, undercharged insolvent, convicted for an offences involving moral turpitude, not paid call money, offences relating to related party transaction, not obtained DIN etc.
  • Sub section (2) states that Company fails to file financial statements or annual return for a continuous period of three years ; or failed to repay the deposit etc.
  • Sub section (3) states that private companies may by its Articles provide some additional ground for disqualification.

Interpretation of Section 164 (2) and Section 167.

If we go by literal interpretation of Section 167 (1) (a) it appears that when a person incurs any disqualification under section 164, he will have to vacate his office of director in all the companies in which he is a director.

When there is any conflict between two provisions of a statute then it is a well-settled rule of construction that the provisions of a statute should be so read as to harmonise with one another and the provisions of one section cannot be used to defeat those of another unless it is impossible to effect reconciliation between them.

The rule of construction is well settled that when there are, in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is what is known as the rule of harmonious construction.[1]

Every word and expression used by the legislature has to be given its proper and effective meaning as the legislature uses no expression without a purpose or meaning; a meaning must be given if possible, to every word of a statute, for a statute is never supposed to use words without a meaning, and no word should be considered as redundant.

Section 164(2) of the Act specifically provides the consequences of the disqualification, namely that a director of the defaulting company 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 said company fails to do so.

If one applies literal rule and consider that a director who incurred disqualification u/s 164 (2) vacates the office as per section 167 then phrase used in section 164 (2) as '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' will become redundant or meaningless.

Therefore, both the section should be read together and effect should be given to both. By harmonious construction it appears that provision in section 167(1)(a) would apply in the cases covered by section 164(1) and it would not apply in the cases covered by section 164(2).

Notice appears on MCA website:

As per the notice appears on MCA website:

'Any person disqualified under section 164(2) of the Companies Act, 2013 [the Act] is advised not to act as director during the period of the disqualification and not to file any document or application with MCA as the same shall be summarily rejected.

However, this shall be without prejudice to the  liability of the said person for violation of section 164(2) read with section 167 of the Act including the action under section 448 r/w 447 of the wherever warranted.'

MCA has mentioned both section 164(2) and 167 in the notice. Thus, it appears that MCA is in opinion that the provision in section 167(1)(a) would apply in the cases covered by section 164(1) and covered by section 164(2).

Whether all the directors of strike off companies will be disqualified?

Section 164 (2) of the Act was made effective from 1st April 2014. It is settled principal of law that a statue will not apply retrospectively unless specifically stated.

Whether any non-filing under the Companies Act, 1956 for the earlier years will also attract S 164(2) disqualification?

Section 164(2) was not applied retrospectively, therefore, in my view it should not be applicable to the defaults made under the Companies Act, 1956. However, MCA has already issued ROC wise list of directors at MCA website who are disqualified u/s 164(2) even though three years deadline under the new Act yet to be completed.

This matter will invite lots of litigations and will get settled after any judgment by the apex court or by any clarification issue by Ministry of Corporate affairs in this regard.

Disclaimer : Kindly note that the entire content of this Article have been developed on the basis of relevant statutory provisions and as per the information existing at the time of preparation of i.e Act, Rules, notification, clarification, circulars, issued by MCA, SEBI or any other statutory authority. Though we have made upmost efforts to provide authentic information, however, we do not undertake any liability in any way whatsoever, to any person in respect of anything arising by reliance upon the content of this article. It shall not be used as a legal opinion and not to be used for rendering any professional advice.

The author can also be reached at csshashikant.sharma@gmail.com

[1] Venkataramana Devaru v. State of Mysore AIR 1958 SC 255

More »


Shashikant Sharma 
on 13 September 2017
Published in Corporate Law
Views : 2604
Other Articles by - Shashikant Sharma
Report Abuse






×
close x
Get Companies Act App    |    x