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Understanding Section 164, Companies Act and Director Disqualification Removal

Shweta 
on 02 April 2021

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Any company can conduct its operations through its directors only. A Director is a professional who acts on behalf of a company in all matters related to its operations and compliance. They are hired by the company to direct its daily affairs and are considered equivalent to an officer by the Government of India.

Accordingly, Company law in our country does not prescribe any requisite qualifications for the appointment of directors. Therefore, the Indian companies may lay down rules for qualifications for Directors.

Understanding Section 164, Companies Act and Director Disqualification Removal

Disqualification of Directors

Since the year 2013, the Ministry of Corporate Affairs (MCA) can disqualify a director for any of the following reasons under Company law.

  • He/She is an irrational person or unsound mind.
  • He/She is an
  • He/She is in the process of declaring insolvency and his/her application is
  • If an order has been passed for disqualifying him/her as a directory of the company by Court or
  • He/She had been convicted by a court of any
  • If he/she had bit paid any calls with respect to any shares of the company held by
  • He/She has been convicted of offences dealing with related party transactions at anytime during the last preceding 5
  • He/She had failed to acquire a Director Identification Number(DIN).

What is DIN?

Director Identification Number is like a basic ID no. allocated by the authority of the Government of India to any individual who wishes to become a Director or an existing director of a corporate. It was introduced in India through the Company Amendment Act, 2006.

 

What Does Section 164 Act Indicate?

Section 164 of the Companies Act 2013 states the provisions for the disqualification for application of director. In line with the Companies Act 2013, Section 164 is applied to disqualify directors of a company. As per sub- section 164(2)(a), an individual who has been a director with a corporation that has not field financial statements or annual returns for 3 consecutive financial years shall face disqualification.

Section 162 (2) states that no individual who is or has been a Director or an corporation which (a) has not filed financial statements or annual returns for any continuous period of 3 fiscal years shall be eligible towards being reappointed as a director of that corporation or appointed in other corporation for 5 years from the date on which the said corporation fails to file the necessary compliance related documents.

Section 164(2)(a) of the Act deals with the norms related to disqualification of directors. The rule states that if the company under review has not filed its financial statements or annual returns, for any three consecutive years, the directors of the said company will be disqualified from his/her position for 5 continuous years.

No person shall be appointed as a director of any company under section 152 (3) unless the director identification number has been allotted to him under section 154. Every individual who’s been intending to be appointed as a director of a company is required to make an application for the allotment of DIN to central government in such a manner as prescribed in section 153. Section 154 states that Central government shall allot a DIN to an applicant as prescribed in section 153 within a month from the receipt of application. If an individual has already been allotted DIN under section 154 then he is prohibited from obtaining or applying for or for possessing another DIN under section 155. The procedure for applying for DIN allotment and How to allot DIN are prescribed in Rules 9 and 10 of said rules of 2014 and it further states that DIN that is allotted by central government’s authority under the said rule would be considered valid for applicants’ lifetime and cannot be allotted to any other person.

 

Reviewing Some Important Case Laws

Jai Shankar Agrahari Vs Union of India And Ors in Allahabad High Court

High court quashes a list published by ROC of disqualified directors in public gazette. It was held by Allahabad high court that only on the grounds of director disqualification under section 164(2) (a) or on his office becoming vacant under section 167(1) (a) ROC gets no power to de-activate DIN.

Delhi High Court's Judgement in Mukut Pathak (supra)

None of the provisions of the COMPANIES ACT or rules made under this act stipulate deactivation or cancellation of DIN on the account of director suffering disqualification under section 164(2) of this act. An amendment with effect from 05.07.2018 was made in Rule 11 of the company (appointment and qualification of directors) rules 2014 to provide for the deactivation of DIN in event of failure of form DIR-3-E-KYC within the stipulated period under rule 12A of the said Rules. Even after the amendment was made the central government doesn’t get the power to deactivate or cancel DIN of the disqualified directors.

Here the important point is as a DIN is necessary for any person to become director or to act as the director but this doesn’t mean that it is necessary for a person with DIN to be appointed as a director. As under section 164(2) a director is disqualified only for a temporary time period of five years before any person can be appointed or re-appointed as director. Thus, deactivation of DIN of such directors is not necessary.

Under section 167(1) of the Act on the account of the disqualification of the director the office of that director becomes vacant so it is important to know that under sub-section 2 of section 167 of the act it is punishable if any person functions or acts as a director even after his office become vacant on the account of section 167(1). Section 167 includes a mechanism for enforcing rigors of section 167(1) of act. In this case, respondents have asked to deactivate/cancel the DIN of the directors under section 164(2) of Act. This is clearly not

supported by any statutory provision and has only been done to enforce the provisions of section 167(1) . This court is of viewpoint that when central government is the one who framed the rules in which the conditions in which DIN might get cancelled are specified, can’t cancel the DIN on any other grounds without referring to those rules.

Also, there is no clear provision in support of the respondents action of cancelling digital signature certificates (DSCs) of many directors. The said action is therefore unsustainable.

Telangana High Court in Venkata Ramana Tadiparthi (supra)

The Court Said “Rule 11 clauses (a) to (f) as extracted above, informs about the circumstances under which DIN can be cancelled or deactivated. But the said grounds are not same as grounds envisaged under section 164(2) (a) of act. So, there is alleged violation under section 164 of act, due to which DINs cannot be deactivated or cancelled, except when it is in accordance with Rule 11 of the rules.

In view of the above circumstances and facts and the judgment referred to supra, the deactivation of the DINs of the company directors for alleged violations under section 164 of the act, cannot be sustained.”

Lucknow High Court’s bench headed by Tariq Siddiqui (supra) quoted in ex tensio, the view taken by the Gujarat High Court and allowed writ petition. Operative part of its judgment read:

“Considering the above cases, filing of writ petitions to challenge deactivation of the DIN is allowed. It was deactivated on account of their dis-qualification in one company affecting DIN for the other companies. The opposition parties are directed to reactivate the DIN of petitioners for use with other company. The respondent parties would however have the liberty to take legal action against the said petitioners for any non-compliance or statutory default of the provisions of the Companies Act of 2013. It would obviously have to be in accordance with the stated provisions of law.”

If the petitioners have incurred disqualification under section 164 of the act, 2013 then the actions of the respondents and in particular of ROC, in deactivation of DIN od petitioners, cannot be sustained in absence of any provisions.

Writ petitions have to be allowed partly and the actions of the respondents should be quashed in deactivation of DIN of the petitioners as a consequence lead by the above discussion.

Effects of Disqualification

Once a person is disqualified, then he/she is not eligible for being appointed as Director of that or any other companies. The restrictions remain valid for five years.

Recently, the disqualified Directors names are been published on the government website. The High Court of Delhi on November, 2019 clarified its position on director disqualification related cases during the hearing of Mukut Pathak and Ors. V. Union of India and anr. This said judgement resonated with other similar judgments passed by High Courts of Madras, Gujarat, and Karnataka, under Section 164(2)(a) of the Companies Act, 2013.

The judgement led to directors of many different companies collectively approach the Delhi High Court after disqualification from being appointed/reappointed as directors by MCA. The disqualifications were a result of their companies failing to file financial statements or annual returns for the past three years, and hence, the directors were disqualified under Section 164(2)(a).

Remedies Against Disqualification

If any company did not take advantage of CODS 2018, will they not be allowed to revive their

company and subsequently the directors can’t get their DINs reactivated?

To no one’s surprise, the answer is NO. But what are other ways to do the above tasks?

If any company fails to submit their financial statements or annual returns for 3 years continuously then it gets disqualified and because the director if the company is responsible for the functioning of the company his office gets vacant and his DIN get deactivated. Under CODS, the DIN of a director gets reactivated temporarily so he can submit the documents of the company and once the company gets revived, the director can also apply for the removal of his disqualification.

So, one of the similar remedies to this is applying to NCLT for relief. It is basically for directors who also intend to revive their company along with getting their disqualification removed. And another remedy available out there is filing a writ petition, this remedy is for directors who only want their disqualification to be removed. Let’s discuss both the remedies in detail:

Applying to NCLT: Companies which get disqualified due to default in submission of documents can apply to the National Companies Law Tribunal to get the revival order for their company and once the NCLT has approved the revival of their company, they can apply for the reactivation of DIN and obviously removal of disqualification.

Writ Petition: This method is preferably used by directors who only want their DIN to be reactivated can file a writ petition in High Court. And filing a writ petition in high court is a constitutional right of any person under Article 226 of constitution. Taking legal assistance might work in this case as filing a writ petition might come out as an tedious and time consuming option for any director who does not have legal knowledge. Procedure of filing writ petition might be difficult task as you can see below;

Drafting of writ petition

  • It requires a list of dates and events of
  • An urgent application with notice of motion is to be
  • Document stating a reasonable justification for the failure of documents submission to
  • Information related to current status of company and about directors seeking
  • The list of companies where petitioner holds the office of
  • A copy of impugned press release or notice having the list of the disqualified directors issued by
  • Personal information of director and designation of each memo of
  • This drafted application along with affidavits are required to be filed in High
  • An advocate needs to appear in the
  • Receive the final order from the respective High
  • If the order is in favour of the petitioner then one requires to file the same to the

Appeal Against the Decision of Disqualification of Director

A Director who has been disqualified can appeal the decision within 30 days of notice. Companies Act 2013 states that an order disqualifying a Director dies not take effect within 30 days of conviction resulting in sentence or order. Once, an appeal is initiated, the person would continue to be Director until the expiry of 7days from the date on which the appeal or petition is disposed off. Hence, any person who has received an order can file the return and appeal within 2:30 days to stay the order of director disqualification.

Anyways there is no process in place currently for the MCA to make disqualified Director, a Director again before the end of 5 years period.

Appointing a new director is the first step is be taken by promoters after disqualification is to file the overdue returns. Since the existing Directors are disqualified, their digital signature certificates are also rendered invalid and therefore they cannot digitally sign the new director’s appointment application for filing with MCA. Hence, the existing Directors must execute resolutions for the appointment of new Director of Company.

Since 2017, in many cases High Courts are of opinion that the related provisions of the Companies act are ambiguous and lack clarity. Many factors have been raised by learned advocates that needs clarity by MCA. Some of those factors are;

Principle of Natural Justice: Many of the companies do not receive any notice by the RoC asking for clarifications about the default that company made even though it is a mandatory clause. This is against the principle of natural justice, one should get the chance to clarify himself/herself.

Date of Implementation: The companies act, 2013 was implemented from 01.04.2014 and court took a stand that applying provisions retrospectively will be unjustified.

Contradiction in the acts: Companies act, 1956 had no provision for disqualification of directors of private companies for non-compliance so imposing of the new act on them in 2017 seems unjustified.

Why do you need legal help?

As we know, a director needs to file a writ petition to get his/her disqualification removed without worrying about the revival of his struck off company. It is definitely not easy for any businessman to have the complete knowledge of how the legalities related to this petition work. For drafting a writ petition and filing it in the Honourable High Court, any director would require legal assistance. By hiring an expert representative working for a reputed legal firm, a director can rest well thinking that they would do the job of filing writ petition as prescribed under law perfectly for him. The legal representative will also represent the petitioner during the court proceedings. If you hire a knowledgeable advocate from a reputed firm, he/she will give arguments in court accordingly making it easier to get relief from disqualification. Once he/she has helped in receiving the relief orders from Court and they will assist in filing the specified documents to RoC to complete the whole process.


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