DISQUALIFICATION OF DIRECTORS UNDER COMPANIES ACT, 2013

By / Companies Act

STATUTORY PROVISIONS UNDER COMPANIES ACT, 2013

Section 164 of the Companies Act, 2013 deals with disqualification of directors. As per the provisions of section 164(2)(a), a director in a company that has not filed financial statements or annual returns for three financial years continuously would not be eligible for re-appointment in that company or for appointment in any other company for five years from the date on which the said company fails to do so.

Section 164(1) : Grounds due to which a person shall not be eligible for appointment as a director of a Company:

  1. If declared by a competent court as a person of unsound mind;
  2. If he is an un-discharged insolvent;
  3. His application to be adjudged as an insolvent is pending;
  4. He has been sentenced to imprisonment: (1) for not less than six months – disqualification shall continue till five years after expiry of the sentence; or (2) for seven years or more – disqualification shall be permanent;
  5. If otherwise disqualified by a court or a Tribunal till the order is in force;
  6. He has failed to pay the call money on shares within a period of six months from the last date fixed for payment;
  7. If the person has been convicted for offence under section 188 dealing with ‘Related Party Transactions’;
  8. He does not have a Directors Identification Number (DIN).

Sub-section (2) of the section 164 makes a director ineligible for reappointment in a company or for appointment in any other company if he is or has been a director of a company which:

  1. has not filed financial statements or annual returns for any continuous period of three financial years; or
  2. has failed to repay the deposits 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.

The disqualification shall continue for a period of five years from the date on which the said company fails to do either of the acts.

Sub-section (3) of the section 164 provides that a private company may by its articles provide additional grounds for disqualification.

DISQUALIFICATION OF DIRECTORS UNDER SECTION 164 (2)

Section 164(2) disqualifies a director for reappointment in the same company or for appointment in any other company if either of the two specified defaults have been committed by the company in which he is a director. The first default is non-filing of financial statements or annual Returns for a continuous period of three financial years. The second default is failure to repay the deposits for period of 1 year.

REMOVAL OF DISQUALIFICATION UNDER SECTION 164 (2)

The provisions of section 164(2) have to be read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. As per Rule 14, every director is duty bound to inform the company in form DIR-8 about his disqualification under sub-section 2 of section 164 before his appointment or reappointment. Similarly, a duty has been cast on the company, which fails to file the financial statements or fails to repay any deposits as specified under sub-section 2 of section 164, to furnish the names and addresses of all directors of that company in form DIR-9. If the company fails to file form DIR-9 then officers of the company shall be the officers-in-default.

The Rule 14 also provides for the removal of disqualification of directors suffered under sub-section 2 of section 164. It states that an application for removal of disqualification of directors can be made in Form DIR 10. The application for removal of disqualification can be filed with the Registrar of Companies. However, it is important to note that there is no statutory provision under the Companies Act, 2013 which empowers the Registrar of Companies to remove disqualification of directors. Thus, the legal sanctity of Rule 14 has to stand the test of time.

Further, the Section 164 of the Act only provides for the Disqualification of Directors for 5 years without any reference to the penalty / prosecution on the concerned directors. Going by the plain reading one can say, such director shall be eligible to be appointed as director on the Board of any Indian Company, only after 5 year and has to apply for removal of disqualification in form DIR – 10 as stated in the applicable Rules.

I am also of the view that the disqualification as prescribed under Section 164 can neither be removed by compounding of offence for non filing of past financial & annual return nor by restoration of name of the Company under the provisions of the Section 252 of the Act by the order of the Hon’ble NCLT as these offence are covered under different provisions of the Act and has nothing to do with the disqualification of Directors.

RETROSPECTIVE OPERATION OF PROVISIONS OF SECTI ON 164(2)

It is a cardinal rule in law that every statute is prospective unless it is expressly or by necessary implication made to have retrospective operation.

The provisions of section 274 (1) (g) which were inserted by the amending act of 2000 in the Companies Act 1956 were retrospective in operation. This provision is akin to the section 164(2) of the Companies Act, 2013. Further, while interpreting the provisions of section 164(2) the National Company Law Tribunal in Vikram Ahuja v. Greenstone Investments (P.) Ltd. [2017] 136 CLA 131 (NCLT) held that the provisions of Section 164 are not retrospective in nature.

The Tribunal held that non–filing of financial statements before this enactment would not tantamount to disqualification to become director or to continue as director. New enactment has made non–filing of financial statements for three consecutive years as disqualification and amounts to an offence only to the act after 1st April, 2014. If this disqualification is construed as applicable to the past acts, it is obviously unfair to the people conducting the affairs of the company under the impression that non–filing of financial statements for three years is not a default and not an offence. Therefore, this provision has to be read as applicable to the situations where non–filing has started, at the most in the past and is continuing while this enactment has come to into existence and also to future non–filings but not to be considered as applicable to the past acts for it is an established proposition that an Act has to be considered retrospective only when it has been explicitly mentioned in the Act.

GENERAL CIRCULAR 41/2014 DATED 15.10.2014

Before interpreting the provisions of Section 164(2) and its applicability as prospective or retrospective, it would be important to refer to the General Circular 41/2014 dated 15.10.2014 issued by Ministry of Corporate Affairs.

The said circular dated 15.10.2014 was issued by the MCA on the clarification been sought by the Stakeholders that whether the directors of the Companies who have filed their (past) balance sheets or annual returns after 01.04.2014 but before the Company Law Settlement Scheme 2014 (CLSS-2014) [15.08.2014] will get immunity from disqualification under Section 164(2)(a). As per the said circular, the MCA has clarified that the disqualification will be applicable for the prospective defaults of such companies directors who have filed their Balance Sheets and Annual returns on or after 01.04.2014 but before CLSS-2014 i.e. before 15.08.2014. In other words, it can be said that the provisions of Section 164 (2) are not prospective in nature that is the three financial years will not be counted from 01.04.2014 (the day the section became effective) but even in case where the balance sheets or annual returns of previous years i.e. prior to 01.04.2014 have not been filed for consecutive period of three years and such default continues after 01.04.2014, the directors of such companies will be considered as disqualified. The prospective effect of disqualification will be applicable on such companies who have prior to 15.08.2014 have complied with filing of its past balance sheets or annual return as the case may be.

Going by the same methodology, MCA has notified 3 separate list (block of 3 years i.e 2011-2012 to 2013-2014, 2012-2013 to 2014-2015 & 2013-2014 to 2015-2016) of disqualified directors of such companies which have not filed their financials starting from the financial year 2011-2012.

OTHER EVENTS ATTRACTING DISQUALIFICATION

Through Articles of Association: A Private Company can provide additional grounds for disqualifications in the Articles of Association. Such articles have an overriding effect over provisions of the Companies Act including s. 274 (now s. 164).

Default In Repaying Deposits: No person who is or has been a director of the Company which has failed to repay deposits accepted by it or interest thereon etc. for one year or more.

By Operation of the Law: The disqualification for default in paying deposit and default in filing annual statements was inserted under section 274 (now 164) of the Companies Act, 1956 by way of amendment in 2000. In Nabendu Dutta’s case, while discussing the retrospective operation of this provision, the High Court of Calcutta held that language of the provision makes it implicit that the Legislature intends retrospective operation. Thus, it is evident from the language of clause (g) of sub-section (1) of section 274 (now 164(2)) that on the date of commencement of the Amending Act, any person who has been director in a defaulting company will be affected by the sub-section.

Scheme of Compromise and Arrangement on Default in Repaying Deposits: The scheme of compromise and arrangement sometimes defers the payment of deposits. In such cases, the default on repayment of deposits begins from the date of original default. It cannot be postponed or deferred on assumption that if the scheme would be sanctioned, the date of redemption would be different.

AFTER EFFECTS OF DISQUALIFICATION OF DIRECTORS

A person who’s name is mentioned in the Order as disqualified director, has to go through the after effects, which might stay for next 5 years (effectively 4 years, as disqualification is effective retrospectively from 01-11-2016). DIN of the all such directors are blocked for 5 years and cannot be used to file any e-form including Annual Filing forms, even if the financials are being signed by such directors. The problem is worse for the active Companies which has complied with the provisions of the Act and having only 2 directors who are named in the list of disqualified directors. In all those cases power to appoint new director on the Board is either with the Central Government or with the Shareholders who can appoint any new person as director and approach respective ROC to add the name/DIN of the newly appointed director in the list of signatory from backend manually.

Procedure for Request for insertion of Director (DIN) from back end as per MCA internal circular dated 06/10/2017

A request letter under Section 167(3) of the Act, [if the shareholder is also the disqualified director then let him/her sign as shareholder only and not as director] signed by the shareholder/s of the company explaining the facts that all the directors are disqualified and requesting for insertion of at least one director through back end of the e-portal with the following attachments.

  1. Appointment letter to the new directors under Section 167(3) of the Companies Act, 2013 by the promoters/shareholders.
  2. NOC from the all disqualified directors from the Company for appointment of new director.
  3. Physical copy of form DIR-12 manually signed for appointment of New Director along with requisite fees and additional as applicable paid through a Miscellaneous Challan (under Individual category) along with following documents.
    1. DIR 2- Consent letter of new director
    1. Address and ID proof of new director
    1. MBP-1- Notice of interest by the new Directors
    1. DIR-8- Intimation of director as per Sec 164(2) Rule 14 of Companies (Appointment and Qualification of Director) Rules 2014
    1. DIN status of the new directors – printout
    1. Print out of the names and CIN of companies where the new director is a director [Section 165 compliance].
  4. Proof of Shareholding of the Promoters/shareholders (who appoints the new director) like share certificates and Register of member updated till the date of the request letter along with certification by professional with membership number etc.
  5. A certificate from the Professional, stating that he/she has verified the Register of Members and other connected records and certify that the applicant/s are the majority share holder/s.
  6. Copy of the resolution, for appointment of the new directors along with copy of notice and explanatory statement.
  7. Along with the above said Hard Copies – submit all documents in soft copy in CD / Pen Drive.

Note:

(1) This procedure is applicable only for active companies where all directors are disqualified and not having a Company Secretary in the signatory details.

(2) The Newly appointed director through back end process within 6 month of his appointment has to file all the pending Annual Returns and Financial Statements of the company in which he/ she is appointed as a director or else he/she will also be disqualified under section 164(2) after the expiry of six month of appointment as director.

CONDONATION OF DELAY SCHEME 2018 MCA General Circular No. 16/2017 dated 29th December 2017.

Ministry of Corporate Affairs (MCA) with a view to giving an opportunity for the non-compliant, defaulting companies to rectify the default, in exercise of its powers conferred under sections 403, 459 and 460 of the Companies Act, 2013, the Central Government has decided to introduce a Scheme namely “Condonation of Delay Scheme 2018” [CODS-2018] as follows.

1)  The scheme shall come into force with effect from 01.01.2018 and shall remain in force up to 31.03.2018.

2)      Definitions – In this scheme, unless the context otherwise requires,-

  1. “Act” means the Companies Act, 2013 and Companies Act, 1956 (where ever applicable);
  2. “overdue documents” means the financial statements or the annual returns or other associated documents, as applicable, in the case of a defaulting company and refer to documents mentioned in paragraph 5 of the scheme.
  3. “Company” means a company as defined in clause of 20 of section 2 of the Companies Act, 2013;
  4. “Defaulting company” means a company which has notified its financial statements or annual return as required under the Companies Act, 1956 or Companies Act, 2013, as the case may be, and the Rules made there under for a continuous period of three years.
  5. “Designated authority” means the Registrar of Companies having jurisdiction over the registered office of the company.

3)   Applicability:- This scheme is applicable to all defaulting companies (other than the companies which have been stuck off / whose names have been removed from the register of companies under section 248(5) of the Act). A defaulting company is permitted to file its overdue documents which were due for filing till 30.06.2017 in accordance with the provisions of this Scheme.

4)      Procedure to be followed for the purposes of the scheme:-  

1) In the case of defaulting companies whose names have not been removed from register of companies,-

  1. The DINs of the disqualified directors de-activated at present shall be temporarily activated during the validity of the scheme to enable them to file the overdue documents.
  2. The defaulting company shall file the overdue documents in the respective prescribed e-Forms paying the statutory filing fee and additional fee payable as per section 403 of the Act read with Companies (Registration Offices and fee) Rules, 2014 for filing these overdue documents.
  3. The defaulting company after filing documents under this scheme, shall seek condonation of delay by filing form e-CODS 2018 attached to this scheme along with a fee of Rs. 30,000/- (Rupees Thirty Thousand only) as prescribed under the Companies (Registration Offices and Fee) Rules, 2014 well before the last date of the scheme.
  4. The DINs of the Directors associated with the defaulting companies that have not filed their overdue documents and the e-Form CODS, and these are not taken on record in the MCA21 registry and are still found to be disqualified on the conclusion of the scheme in terms of section 164(2)(a) r/w 167(1)(a) of the Act shall be liable to be deactivated on expiry of the scheme period.

2)   In the event of defaulting companies whose names have been removed from the register of companies under section 248 of the Act and which have filed applications for revival under section 252 of the Act up to the date of this scheme, the Director’s DIN shall be re-activated only NCLT order of revival subject to the company having filing of all overdue documents.

5)      Scheme not to apply for certain documents – This scheme shall not apply to the filing of documents other than the following overdue documents:

  1. Form Number 20B / MGT-7 Form for filing Annual return by a company having share capital.
  2. Form 21A /MGT-7 Particulars of Annual return for the company not having share capital.
  3. Form 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, AOC-4, AOC-4(CFS), AOC (XBRL) and AOC-4 (non-XBRL) – Forms for filing Balance Sheet / Financial Statement and profit and loss account.
  4. Form 66-Form for submission of Compliance Certificate with the Registrar.
  5. Form 23B / ADT-1 Form for intimation for Appointment of Auditors.

6)   The Registrar concerned shall withdraw the prosecution(s) pending if any before the concerned Court(s) for all documents filed under the scheme.  However, this scheme is without prejudice to action under section 167(2) of the Act or civil and criminal liabilities, if any, of such disqualified directors during the period they remained disqualified.

7)    At the conclusion of the Scheme, the Registrar shall take all necessary actions under the Companies Act, 1956 / 2013 against the companies who have not availed themselves of this Scheme and continue to be in default in filing the overdue documents.

Related Posts

Leave a Comment

Your email address will not be published. Required fields are marked *