This article explains the typical interpretation of this section in simple terms.
According to Sec 274(1)(g) of the Companies Act,1956, A director of a public company is disqualified from being appointed as director of any other public company for a period of 5 years, if the public company in which the individual is already a director,
A. Fails to File the annual Accounts and the annual returns for a continuous period of 3 years.
B. Fails to:
a. Pay dividend
b. Repay the deposit and interest thereon, or
c. Redeem debenture within the due date
And the default continues for a period of one year.
Analysis of sec 274(1)(g)
1. As the section specifies that the “director of a public company”, it should be interpreted that the Director of the private company is not liable for this disqualification. In other words, Sec274(1)(g) does not apply to a private company.
2. Point (a) of Sec 274(1)(g) specifies that, the disqualification applies only when the company fails to file BOTH the annual accounts and the annual returns. So, disqualification does not apply where the company files either of the annual accounts or annual returns.
3. The disqualification under this section applies only when the limit is completed. Which means the period of 3 years or 1year as the case may be must have been completed.
4. For example, if the company fails to repay the deposits within the due date, the disqualification does not apply immediately. It applies only if the company fails to repay for a period of 1 year from the due date of repayment.
5. Failure to Pay the interest on term loan taken from a Financial institution is not covered under sec 274(1)(g).
6. The Material date of determining the disqualified directors is the expiry of the 1 year or 3 years as the case may be.
7. Directors who have been appointed before the material date and continuing the office of the directors are liable for the disqualification u/s 274(1)(g).
8. Directors who appointed after the material date are not disqualified under this Section.
After Disqualification:
1. The disqualifying directors are not eligible for the appointment as the director in any other Public company.
2. Which means the disqualified directors can accept the position of directors in a private company during the disqualification period.
3. The disqualified directors are not eligible to be re-appointed in the Public company in which they are liable for retirement. Because, the appointment includes Reappointment.
4. It should be noted that the disqualified directors need not vacate the office on account of disqualification, because section applies only for the appointment or reappointment.
5. Therefore, Section 283 does not come into picture, when the disqualification u/s 274(1)(g) takes place.
Additional Points:
1. The following persons are not liable for disqualification under this section:
a. Directors of the Government company [GSR 829(E)]
b. Nominee directors appointed by the public financial institutions (Notification 8/2002) and companies set up under special Acts.
c. Small shareholders Director.
d. Directors appointed by the central government u/s 408 (or) by the Banking companies
2. This section equally applies to a private company which is subsidiary of a public company.
3. There is also a duty on the Auditor of the company u/s 227(3)(f), to report whether any of the directors are disqualified u/s 274(1)(g). Pursuant to this the Institute of chartered accountants of India has issued a GUIDANCE NOTE ON SECTION 227(3)(e) and (f) of the companies Act,1956 on the matter how to report such matter in his report.
4. According to Rule 9 of the Companies(Disqualification of directors u/s 274(1)(g) of the companies act,1956) rules,2003, Every director of the public company registered under the companies act,1956, shall file FORM- DD-A before appointment or reappointment. This applies to every director irrespective of the disqualification. Director who is not disqualified shall also file this form.
5. There is also a duty cast on the Disqualifying company, to file FORM ‘DD-B’ immediately on the attracting the disqualification.
THE END
Regards
Laxmi Narasimha
Contact; laxmi.pabbaraju@icai.org or laxmi.pabbaraju@gmail.com
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