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Doubt regarding Section 274 of The Companies Act

R Nelson Ram (job seeker) (46 Points)

02 November 2010

According to Section 274, a person may be disqualified from appointment as a director of a company if he has not paid any call money in respect of the shares of the company held by him and 6 months have elapsed from the due date of payment of call money.

Section 283 also requires that he shall immediately vacate the office held by him.

Now my question is : Is he disqualified form appointment as director of the company for lifetime?

Suppose a director has failed to pay call money in respect of the shares of the company held by him within 6 months from due date. i.e 31st Dec 2009. On 1st July he vacates the office. But makes payment of the call on 1st July 2010.

He seeks appointment in the same company as diector after say 10 yrs. Is he eligible?

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7 Replies

vijay (CA Final) (55 Points)
Replied 02 November 2010

Hi Ram,

In this case director only disqualifies for 5 years. after completion of 5 years from the date of disqualification he can join again as a director.

if he paid the call money later and get permeation from the CG he can continue as director from the date on which he got the permeation.

1 Like

R Nelson Ram (job seeker) (46 Points)
Replied 02 November 2010

Originally posted by : vijay
	Hi Ram, In this case director only disqualifies for 5 years. after completion of 5 years from the date of disqualification he can join again as a director. if he paid the call money later and get permeation from the CG he can continue as director from the date on which he got the permeation.

The disqualificarion of 5 years only applies with respect to 274(1)(g) and additional grounds ike refusal to allow examination of books of accounts u/s 209 n removal of director by CLB or Central Govt. It is note written anywhere that disqualification of 5 years shall apply to 274 (1)(a) to (f). It is only mentioned with respect to Section 274(1)(a) to (f) that he shall be disqualified from appointment as a director. It is not expressly mentioned that how long disqualification shall remin in force.

vijay (CA Final) (55 Points)
Replied 02 November 2010

The Central Government may, by notification in the Official Gazette, remove-

the disqualification incurred by any person in virtue of clause (e) of subsection (1) of Sec 274

But i also saw one case law to support the 5 years period but i could not recollect the case law soon i will reply u

Jithin (Learner) (1057 Points)
Replied 03 November 2010

Dear Nelson & Vijay, pls read the clause given below carefully, especially the underlined part.

(1) A person shall not be capable of being appointed director of a company, if-

(e) he has not paid any call in respect of 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

Look at the words "has not". It clearly indicates that the call should be due at the present..I mean at time of appointment of the director. Suppose a person say Mr.X had made a default in payment of call of Y Ltd 6 years back. He paid call money after 7 months of the due date. Now X is proposed to be appointed as a director in Y. Now pls say..does not he fulfill the requirement of clause e..Will you say "he has not paid the call"..You can only say "he had not paid the call". So in my opinion, regarding ur case, he can be certainly appointed after 10 years. Actually he is eligible for appointment anytime after 1st July,2010 as he has already paid the call.

1 Like

vijay (CA Final) (55 Points)
Replied 03 November 2010

yes jithin, i agree with you

i read the same thing in one case law but i confused with the year ,in that case they went to court after 5 years so i thought that 5 years period is required.

thank u dear

R Nelson Ram (job seeker) (46 Points)
Replied 03 November 2010

Thanks jithin ...yes that would be the correct answer ..had thought about that answer ..bt did nt see ny case law supporing it....have nt seen ny such argument put in the Munish Bhandari's book which i follow...den in short ..the status of a person at the time of appointment is to be seen... But still there is a doubt i would like to share

Mr X is being proposed to be appointed as a director of a company on 1.7.2010 ... A call money was due in respect of shares held by him on 1-01-2010. He paid it on 30-6-2010. In this case he can easily be appointed ...bt den wat was the real intent of insertion of this section?

Jithin (Learner) (1057 Points)
Replied 04 November 2010

Hi Nelson..I am not an law expert(have just started reading directors from bhandari) & really dont know the background behind the various sections. But I shall explain from a student’s point of view..

The intention of clause e would not be to punish the defaulting person by depriving him of directorship. Its object would be to just ensure that the proposed person before his appointment has paid all calls due from him beyond a reasonable time limit(here law has prescribed 6 months as the limit). Lets take the case u mentioned. It is obvious that Mr.X had paid the call to comply with section 274(1)(e). If he had not been proposed as a director, he most probably would have delayed the payment. But does that mean he misused the provision of clause e to become a director? I would have said yes, If he could, after becoming a director, recover from the company the amount he paid as call. But we know he cant do that...

Default in payment of call is not an offence of the kind specified u/s 274(1)(d). Once the payment is made, default would be no longer an issue. We can see similar situations under other clauses like a & b. Lets take an example. Z is an undischarged insolvent disqualified under clause b. He is proposed to be appointed as a director on 1.7.10. On the same date he discharges all his liabilities & becomes eligible for appointment. Now take another example..Y is found to be of unsound mind by the Court & this finding is in force upto 30.6.10. From 1.7.2010 the court has made the finding ineffective as it is convinced Y is normal. Y is appointed on 1.7.10 as a director. Similar to the case of Mr.X, Y or Z could not have been appointed as a director if the court’s finding was made ineffective or the liabilities were discharged, one day later. But that does not mean these appointments are in any way against the intention of law. The fact that y was of unsound mind or Z was an insolvent does not in any way affect their functioning as directors since Y is now a normal person & Z is no longer an insolvent. Similarly the fact that X defaulted in payment of call & made the payment just within the time limit under clause e does not have any impact on the functioning of X as a director since at present no call payment is due from him.