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Sec 274(1)(g) to pvt. co.'s

CA Sahil Singla.. (Service Tax ) (3746 Points)

22 August 2011

I was reading 13th Edition by CA Munish Bhandari for CA Final. As per this edition, Sec. 274(1)(g) is not applicable to Private Limited Co.'s .

So, it menas that director of Public Co. defaulting U/s 274(1)(g) can become director in pvt co. ?

or a director of a pvt. co is not disqualified as per Sec 274(1)(g) ?

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17 Replies

CA MANIK KUMAR (Manager ) (710 Points)
Replied 22 August 2011

director of a pvt. co is not disqualified as per Sec 274(1)(g)

CA Sahil Singla.. (Service Tax ) (3746 Points)
Replied 22 August 2011

but if Director of Public Co. is qualified u/s 274 1 g then can he be appointed as director in Pvt Co. ?

(Guest)

the section speaks that he can be appointed in any other public company. It means that he can be appointed in private company.

My doubt is whether he can be appointed in the same public company in which commited that default?

CA Sahil Singla.. (Service Tax ) (3746 Points)
Replied 22 August 2011

no the defaulting director can't be re-appointed in the the defaulting co....but he need not vacate the office after default u/s 274(1)(g)

vivek (CA Final) (296 Points)
Replied 22 August 2011

as per sec 274 , a defaulting director cant be appointed or reappointed but there is an exception that sec. 274(1)(g) is not applicable to a director of private company

Jayesh (.) (38 Points)
Replied 22 August 2011

Dear Sahil,

you have correctly construed 274 (1) (g) that Director of Private Company not get disqualifed under 274 (1) (g)

But Director disqualified under 274 (1) (g) cant be appointed in Private Company

read Sec.274 starting line

Regards,

Jayesh

CA YOGESH GARG GMG PLYWOODS (BUSINESS OF PLYWOOD and PARTNER IN GUPTA & MALHOTRA CHARTERED ACCOUNTANTS) (248 Points)
Replied 22 August 2011

director of a pvt. co is not disqualified as per Sec 274(1)(g)..the sec is only for Public company dear..

CA Sahil Singla.. (Service Tax ) (3746 Points)
Replied 22 August 2011

wat abt in reverse situation ? whether director of Defaulting Public co. , be appointed as director in Pvt Co. ?

(Guest)

but in munish bhandari hand book of 8th edition, pg no.11, for the may 2006 question he has given the answer that he cannot be in the company in which the default is committed. Pls clarify friends.

(Guest)

pls reply friends.

Jayesh (.) (38 Points)
Replied 25 August 2011

but if Director of Public Co. is qualified u/s 274 1 g then can he be appointed as director in Pvt Co. ?

Ans: NO

(Guest)

@ Jayesh

If a director is dis-qualified As per sec 274(1)(g) he cannot be appointed in any other public company. Implies that he can be appointed in private company.

My quesion is whether he can be in the same public company in which the default is committed?

CS,CA F,Numrologi TusharSampat (CS CA F Numerologist Astrologer Graphologist Face reader Vastu Expert) (85930 Points)
Replied 25 August 2011

Originally posted by : asdf
	@ Jayesh If a director is dis-qualified As per sec 274(1)(g) he cannot be appointed in any other public company. Implies that he can be appointed in private company. My quesion is whether he can be in the same public company in which the default is committed?

Ans is NO.

Jayesh (.) (38 Points)
Replied 25 August 2011

DISQUALIFICATION OF A DIRECTOR UNDER SECTION 274 (1) (G) OF THE COMPANIES ACT, 1956.

The Company has no physical existence but only legal existence. In view of this the management of its affairs is entrusted to its directors. The Board of Directors may appoint a person to an office to carry out certain functions. Such a person can be regarded as an Officer. Both the word Director and Officer are defined under the Companies Act, 1956.

Section 2 (13) states “Director includes any person occupying the position of a director.” According to the clarification of Department of Company Affairs, the Scheme of the Companies Act, 1956 shows that the ultimate control and management of the affairs of the company vests in the Board of Directors.

Section 2 (30) states “Officer includes any director, manager or secretary or any person in accordance with whose terms or instructions, the Board of Directors or any one or more of the Directors is or are accustomed to act. A person who is accustomed to act under the directions or instructions of director is referred to as “Shadow Director.”

The scheme of the Companies Act, 1956 is such that it attempts to transfer the ultimate authority to the shareholders and vests effective authority in day-to-day matters in their elected representatives viz. Directors.

To ensure that the management of the company vests in the right kind of people, Section 274 of the Companies Act, 1956, lays down grounds on which a person becomes disqualified for being director of a company. A person cannot be disqualified for appointment as a director of a public company on any other ground. However, a private company may by its Articles of Association, provide for additional grounds for disqualification of directors.

The Companies (Amendment) Act, 2000 has prescribed additional disqualification of a director by introduction of sub-section (g) to the section 274 (1) of the Companies Act, 1956. The purpose of the amendment is to disqualify certain persons from directorship in public companies.

DISQUALIFICATION OF DIRECTORS

Section 274 (1) of the Companies Act, 1956 states that a person shall not be capable of being appointed as director of a company, if (a) he is of unsound mind; (b) he is an undischarged solvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a court for any offence involving moral turpitude; (e) he has not paid any call in respect of the shares of the company held by him; (f) an order disqualifying him for appointment as director has been passed by the Court in pursuance of Section 203 of the Companies Act, 1956 and is in force; (g) such person is already a director of a public company which –

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

(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due 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 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).”

Thus, a company proposing to appoint or reappoint any person as director will have to satisfy itself as to whether any such person has attracted disqualification in terms of Section 274 (1) (g).

The Auditors’ Report shall also state that whether any director is disqualified from being appointed as a director under Section 274 (1) (g). Auditor should require the director to submit the written representation in Form ‘DD-A’ as prescribed under The Companies (Disqualification of Directors Under Section 274 (1) (g) of The Companies Act, 1956) Rules, 2003, as on the balance sheet date as to whether or not each public company of which he is a director has not defaulted in terms of Section 274 (1) (g). Auditors should also insist that the written representation should be taken on record by the Board of Directors of the Auditee Company.

SCOPE OF DISQUALIFICATION U/S 274 (1) (g)

It is clearly understood by reading section 274 (1) (g) that :

1. A present director of a company, who has committed default in past, will not attract any disqualification;

2. A person, who was a director of a public company which had defaulted in terms of section 274 (1) (g) prior to commencement of the Companies (Amendment) Act, 2000 came into force and who ceases to be a director of the Company, will not attract any disqualification.

3. If a person was a director of a public company, which has committed default under section 274 (1) (g) and ceased to be director of that public company would not be disqualified from being appointed as a director of a private company. The reason behind this contention is that the provisions of section 274 (1) (g) are applicable to the appointment of such director in another public company

DISQUALIFICATION APPLICABLE FOR APPOINTMENT OF A DIRECTOR OF A PRIVATE COMPANY

Disqualification under section 274 (1) (g) is applicable for appointment of directors both in public as well as private companies. Thus, a person who has attracted disqualification, will not be capable of being appointed as a director even of a private company.

DATE ON WHICH THE DISQUALIFICATION HAS TO BE CONSIDERED

Disqualification u/s 274 (1) (g) should be considered on the following dates:

1. A Company intending to appoint any person as an additional director will have to determine whether such person has attracted disqualification as on the date of board meeting at which the appointment is considered.

2. Any company, which intends to appoint any person as a director for the first time or reappoint any director, by resolution at the general meeting, will have to determine whether such person has attracted disqualification as on the date of such general meeting.

3. The Auditor is required to report on the accounts as on the balance sheet date.

DISQUALIFICATION UNDER SUB CLAUSE (A) OF SECTION 274 (1) (g)

Under sub-clause (A), a person shall not be capable of being appointed as a director of any company, if he is a director of a public company and such public company has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999.

Thus, Failure should be to file both - annual accounts and returns, and failure to file any one of theme will not be a failure, as contemplated in sub-clause (A) to attract the disqualification. Also, the failure to file annual returns and annual accounts should be for a period commencing from 1^st April, 1999 and not prior to that.

Failure to file annual accounts and annual returns should be for a continuous period of three years. Therefore, any intermittent failures for three years will not attract disqualification.

Also, it is to be noted that the disqualification under sub-clause (A) is for appointment as a director in both public and private companies, but ineligibility for a period of five years under proviso applies for directorship in a public company only. Therefore, a person, who is a director of a public company, which has committed default under sub-clause (A) can be appointed as a director of any private company after he has resigned as a director from the public company, which has committed default or even if he continues to be such director after the public company has filed the annual accounts and annual returns even though belatedly when failure no longer continues.

DISQUALIFICATION UNDER SUB CLAUSE (B) OF SECTION 274 (1) (g)

Under sub-clause (B), a person shall disqualified from being appointed as a director of a company, where any public company of which also he is a director:

(i) has failed to repay the deposits on due date; or

(ii) has failed to pay the interest on deposits on due date; or

(iii) has failed to redeem its debentures on due date; or

(iv) has failed to pay dividend, and

such failure continues for one year or more.

The failure to pay dividend means failure to pay dividend after the same has been declared. The disqualification would be attracted only when there is failure to pay dividend within 30 days from the date of declaration as provided under Section 207 of the Companies Act, 1956.

The person should be a director of a public company at the relevant time when the default under sub-clause (B) takes place. Therefore, if a person is a director of a company, which has failed to repay the deposits on due date or interest thereon on due date or redeem its debentures on due date or pay dividend and if such persons resigns as director before completion of one year of such default then, such a person would not attract the disqualification.

Also, it is to be noted that the disqualification under sub-clause (B) is for appointment as a director in both public and private companies, but ineligibility for a period of five years under proviso applies for directorship in a public company only. Therefore, a person, who is a director of a public company, which has committed default under sub-clause (B) can be appointed as a director of any private company after he has resigned as a director from the public company, which has committed default.

DISQUALIFICATION DOES NOT ENTAIL VACATION OF OFFICE

Section 274 prescribes only the disqualification of a director, while Section 283 prescribes when the office of director shall become vacant. Since Section 283 is not amended, the disqualification u/s 274 (1) (g) will not entail vacation of a office by a director. Only implication will be that he cannot be appointed as a fresh director in any company nor can he be re-appointed after he retires by rotation or otherwise.

DUTY OF THE COMPANY TO INTIMATE

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 discussed above, the company shall immediately file a return in duplicate in Form ‘DD-B’ prescribed under The Companies (Disqualification of Directors Under Section 274 (1) (g) of The Companies Act, 1956) Rules, 2003, to the Registrar of Companies, furnishing therein the names & addresses of all the Directors of the Company during the relevant financial years, within 30 days of the failure that would attract disqualification u/s 274 (1)(g)

GENERAL INTERPRETATION

Section 274 (1) (g) implies that the person should be a director of a company committing a default, at the time the default is committed. Thus:

(i) A present director of the company, who had committed default in past, will not attract any disqualification;

(ii) A person who was director of a company which had defaulted u/s 274 (1) (g) prior to the Companies (Amendment) Act, 2000 came into force and who had ceased to be a director of that company, will not attract disqualification;

(iii) If a person was a director of a public company which has defaulted in terms of Section 274 (1) (g) and ceased to be a director of that public company would not be disqualified from being appointed as a director of a private company because the proviso to this Section is only applicable to the appointment of such director in another public company.

The Department of Company Affairs (DCA) has issued a clarification with regards to Section 274 (1) (g) the Companies Act, 1956 vis-à-vis Section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) vide Circular No. 11/2001 dated 25^th May, 2001, stating therein that provisions of Section 274 (1) (g) shall not apply to special directors appointed to the Board of Companies by the Board for Industrial and Financial Reconstruction (BIFR) u/s 16 (4) of SICA.

CONCLUSION

The purpose of the provisions of Section 274 of the Companies Act, 1956, is not to punish those who are disqualified but to save the community from the consequences of mismanagement. The wider impact of this section is to protect the shareholders as well as the public against the future conduct by persons whose past record as director show them to be a danger to creditors and others.

Thus, the intention and purpose of the provisions of Section 274 (1) (g) of the Companies Act, 1956 is to disqualify the errant director, protect the investors from mismanagement, ensure compliance in filling of annual accounts and annual returns which are the means of disclosure to all the stakeholders, increase the compliance rate of filing the statutory documents and infuse good corporate governance in the regulation of corporate affairs in the country

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