Concept of sec.274(i)g

Earlier prior to the companies amendment act 2000, the directors of the company need not use to file the annual returns & accounts of the company nor they used to pay the dividend , redem the debentures as per the required timelines.  

Thus to keep a check on these malpractices followed by the directors the companies Act 1956 was amended by inserting a new clause (g) in section 274.  As per this section if any of the directors default in submitting the annual returns/accounts for a continous period of 3 years from 1.4.99 or defaults in payment of dividend, payment of public deposits, redeem its debentures then such directors are not eligible for appointment as directors in a new company.  also if the director is an director is an director in more than one companies then he is also not eligible for reappointment in the other companies other than the one in whihc the default is being made for a period of 5 years.

The provision was being inserted in order to protect the intersts of the shareholders, public and other persons who are in financial interests with the company.

Also the auditor of the company is requried to report if any of the directors is disqualified for appointment in the public companies.

Section 274 of Companies Act provides Disqualification of Directors.

As mentioned in Section 274(1)(g) A person shall not be capable of being appointed director of a company, if such person is already a director of a public company which-

has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April, 1999; or

has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or pay dividend and such failure continues for one year or more :

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (b)

The above provision states various events and instances disqualifying a person from being a director. An analysis of the above provision would reveal the following :

(1) Failure to file annual accounts and annual returns for three continuous financial years ;

(2) Failure to repay deposits or interest thereon on the due date ;

(3) Failure to redeem its debentures on the due date ; and

(4) Failure to pay dividend, if declared

This provision clearly provides that clause (g) of sub-section (1) of section 274 has following effects, 

(1) Prohibits a director disqualified under this clause from accepting appointment/ as director in another public company ;

(2) The disqualification incurred is not a permanent one and is only for a period of five yearsHowever, this is a blanket disqualification to all the directors irrespective of the period of office held by him and irrespective of the fact that he is not a party to the failure.

Two important points to be noted are  that the non compliance under Sec 274(1)(g) is made by Director of a Public Company , and he is not eligible to be appointed as Director of Public Limited Company. 
 

Whenever a company fails to file the annual accounts and returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as described in clauses (A) and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file a return in Form 'DD-B', prescribed under these rules for this purpose, to the Registrar of Companies, furnishing therein the names and addresses of all the Directors of the company during the relevant financial years.
 

Every director in a public company registered under the Companies Act, 1956 shall file Form 'DD-A', prescribed under these Rules, before he is appointed or re-appointed.

Basically the concept of section 274(1)(g) is only for public companies because in case of any default under section 274((1)(g), the director shall not be eligible to be appointed as a director of any other public company for a period of five years.

The above default will not have affect on the appointment of director in the same company or other private companies.

However, in view of the CARO, the said reporting is to be done in case of Private Companies as well.

I would like to ask further applicability of section 274(1) (g)  relating to defaults of inter corporate deposits and interest due thereon by public company.  Whether such deposit is covered under section 274 (1)(g) or 274 (1)(g) covers public deposit only.

Thanks & regards,