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DISQUALIFICATION OF DIRECTORS

Disqualification of the directors can be grouped into two parts:

  • Disqualification at the time of appointment (Personal Disqualification)
  • Disqualification for re-appointment (Corporate Default)
Sec 164 and 167 of the Companies Act, 2013 - Directors Disqualification And Vacation Of Office

(A) DISQUALIFICATION AT THE TIME OF APPOINTMENT

Section 164(1) of the Companies Act, 2013 provides that, a person shall not be eligible for appointment as a director of a company, if:

  • he is of unsound mind and stands so declared by a competent court;
  • he is an undischarged insolvent;
  • he has applied to be adjudicated as an insolvent and his application is pending;
  • if the director has convicted in any offence by the court and sentenced to imprisonment for more than 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence.
  • an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
  • he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and 6 months have elapsed from the last day fixed for the payment of the call;
  • he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding 5 years; or
  • he has not complied with section152(3) with respect to DIN
  • he has not complied with the provisions of section 165(1) with respect to maximum number of directors.
 

(B) DISQUALIFICATION FOR RE-APPOINTMENT

Section 164(2) of the Companies Act, 2013 provides that, no person who is or has been a director of a company shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of 5 years from the date on which the said company fails to comply with the following:

  • Failed to file financial statements or annual returns for any continuous period of 3 financial years; or
  • 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 1 year or more,

Further, where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of 6 months from the date of his appointment.

A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in (A) and (B)

DIRECTORS OBLIGATION -RULE 14 OF COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014

Every director shall inform to the company concerned about his disqualification under section 164(2) of the Act, if any, in the Form DIR-8 before he is appointed or re-appointed.

COMPANY'S OBLIGATION -RULE 14 OF COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014

Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in section 164(2) the company shall immediately file FormDIR-9 to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years.

When a company fails to file the Form DIR-9 within a period of 30 days of the failure that would attract the disqualification under section 164(2) officers of the company specified in section 2(60) of the Act shall be the officers in default.

 

VACATION OF OFFICE OF DIRECTORS

Pursuant to the provisions of Section 167(1) of the Companies Act, 2013, the office of a director shall become vacant in case:

  • he incurs any of the disqualifications specified in section 164; (Provided that where he incurs disqualification under section 164(2) the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section)
  • he absents himself from all the meetings of the Board of Directors held during a period of 12 months with or without seeking leave of absence of the Board;
  • he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
  • he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;
  • he becomes disqualified by an order of a court or the Tribunal;
  • he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than 6 months:
  • he is removed in pursuance of the provisions of this Act;
  • he having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in section 167(1)

REMOVAL OF DIRECTORS' DISQUALIFICATION

Currently, there is no remedy available under the Companies Act, 2013 for removing such disqualification but however such director can file a writ petition under Article 226 of the Constitution of India.

In other case, the disqualification can be removed only after the end of 5 years from the date of disqualification by making an application in Form DIR-10

PENALTY FOR NON-COMPLIANCE

If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in section 167(1), he shall be punishable with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 5,00,000/-

APPOINTMENT OF NEW DIRECTORS THROUGH ROC’S BACKEND- SECTION 167(3)

According to the provisions of Section 167(1) read with section 164, if a director incurs any disqualification under these sections, the office such director shall become vacant in all the companies other than the defaulting company.

Now considering these provisions there might arise a situation where all directors of the company may incur disqualification under sub-section (2) of section 164 and vacant their office resulting into no active director on board.

In this case the promoters of the company may approach respective ROC to appoint new directors pursuant to section 164(3) and in the absence of promoters even Central Government may appoint new directors who shall hold the office till the directors are appointed by the company in general meeting.

PROCEDURE TO APPOINT NEW DIRECTORS THROUGH ROC’S BACK END

1. Hold board meeting for calling and approving the notice of extra ordinary general meeting.

2. Hold extra ordinary general meeting and pass the resolution for appointment of new proposed director.

3. Submit physical application to respective ROC along with following documents:

  • Cover Letter
  • Requisition from shareholders for holding EOGM
  • EOGM Notice along with explanatory statement
  • EOGM- Attendance Sheet
  • EOGM Resolution for appointment of new proposed director
  • MCA Screenshot of directors’ master data (new proposed director)
  • DIN Approval Status of new proposed director
  • Appointment Letter of new proposed director
  • NOC by existing directors to appoint new proposed director
  • Form DIR-8- Intimation by director
  • Form DIR-2- Consent to act as director
  • Pan Card and Aadhar Card of new proposed director
  • Form MBP-1- Interest of director in other entities
  • Affidavit by new proposed director on stamp paper (Rs. 100) duly notarized
  • Certificate by professional
  • List of old directors
  • List of Equity Shareholders
  • Copy of Share Certificates
  • Form MGT-1- Register of Members
  • Hard Copy of Form DIR-12 (without attaching DSC)
  • Miscellaneous Fees paid receipt

4. After submission of application, ROC will verify the same and if satisfied will appoint the proposed director.

5. Once the new director is appointed by ROC, the new appointed director may further appoint additional director as required by law.

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not legal advice.

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