Notification of Government to disqualify directors

Notification of Government to disqualify directors and demystify section 164(2) read with section 167 of Companies Act , 2013.

I have tried to demystify the section 164(2) read with section 167 to reach to a conclusion whether  the notification of Government to disqualify  the directors is bad in law because:

Section 164 of the Companies Act, 2013 provides as under:

164. (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.

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

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

(b) 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.

(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section

(1) shall not take effect-

(i) for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.

Section 167 of the Companies Act, 2013 which provides  grounds for vacation of office of a director is as under:

167. (1) The office of a director shall become vacant in case-

(a) he incurs any of the disqualifications specified in section 164;

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

(c) 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;

(d) 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;

(e) he becomes disqualified by an order of a court or the Tribunal;

(f) 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 six months:

Provided that the office shall be vacated by the director even if he has filed an  appeal against the order of such court;

(g) he is removed in pursuance of the provisions of this Act;

(h) 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.

(2) 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 subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

(3) Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

(4) 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 sub-section (1).

Sub section 1 of section 167 prescribes the grounds on which a director will vacate the office of a director. Sub section 1 of section 164 prescribes the disqualifications because of which a person  cannot be appointed as a director in  a company.

While sub section 2 of section 164 does not prescribe any disqualification , rather it provides  situations in which a director cannot be re-appointed as director  in that company  or appointed  in other company . Sub section 2 of section 164 is itself prescribes the situations and its consequences.

Section 167 will not applicable in case of section sub section 2 of section 164 because this does not prescribes the disqualifications of a person rather it prescribes situations in  a company when its directors cannot be re-appointed in that company or appointed in other company .

In case we analyse the section 164(2) minutely read with section 143(3)(g) it will become clear that vacation of office does not arise at all in case of situations mentioned under section 164(2), as it provides the circumstances  when  a director cannot be re-appointed as a director in that company or appointed  in other company of happening  of that situation. It is to be noted that the makers of act have intentionally mentioned that 'shall be eligible to be re-appointed as a director in that company or appointed in other company' and not mentioned 'shall be eligible  to be appointed as director in a company' in place of  'shall be eligible to be re-appointed as a director in that company or appointed in other company'

The interpretation of section 164(2) is that when such a circumstances happens in a company, then a director in that company cannot be re-appointed as director in that company, but he will continue till his term of appointment. And that director will not be eligible for appointment as director in other company. Here the word Other company means a company in which he is not already a director. It means happening  of that event does not automatically vacates the office of the director but  he is prohibited from being re-appointed as director  in that company and to be appointed in other company means where he is already not a director .

This  interpretation of 're-appointment of director in that company and appointment in other company' will also be clear from the wording used in the beginning of the section 164(2).

This begins with 'the person who is or has been a director'. 'The person who is' denotes the situation when director who is still a director in 'That company who has failed to file balance sheet or other circumstances happened' cannot be re-appointed on his expiration of his term of appointment in that company or appointed as a director in other company where he is already not a director. 'The person who has been' denotes the situation when a director who was a director in that company and ceased to be director after fulfilling his term ( resignation etc) as a director , cannot be appointed as a director in other company where he is not a director .

Section 164(2) imposes restrictions when he cannot be re-appointed or appointed, rather than automatically vacation of the office of director as provided  under  section 167 .So section 164(2) is itself provides situations and remedy and does not depend on section 167.

Moreover section 143(3)(g) requires a comment from a statutory auditors whether any director is disqualified to be appointed as director under  section 164(2). It is only because of the fact that shareholders should know who is a director who is disqualified being  appointed as director because of such a situation arises in one of those companies in which one of them is a director. It automatically presumes that , that director does not automatically vacates the office . In case that was not the situation then that comments need  not required to be given.

The auditor is not required to report whether any director is disqualified under section 164(1),because of the fact that , that director will no more be on the Board as per section 167 of the Act as it clearly prescribes  that in case a director incurs any disqualification  then he will automatically vacates the office.

In case we presume that, a director automatically vacates  the office in  such a situation as provided under section 164(2), then no person can ever be appointed as a director in that company because of the word used ' the person who is or……. Director' under that section. Whenever we will appoint a director in that company, he will be a director  in that company which has failed to file balance sheet for three years….etc, so that person  will vacate office immediately on his appointment under section 167, which cannot be the intention of the Act.

So it is pleaded that section 167 which deals with automatically vacation of office in case of incurrence of disqualification , it will be disqualification as mentioned under section 164(1) and not section 164(2) because of the fact that is not disqualification. This provides unique circumstances where existing director cannot be re-appointed as director in that company or appointed in other company. So I am of the opinion that notification  issued by Government is bad in Law.