Companies Act governs the incorporation, winding up, documentation, appointment, and disqualification of directors, eligibility criteria, and other related things to companies in India. Directors play a very important role in the incorporation of a company. A particular number of directors is compulsory for the registration of a company. For example, private limited company registration requires a minimum of two directors, similarly for a public limited company minimum of seven directors is required. Directors play a very important role in making a company successful. However, there are many situations when removing a director becomes mandatory. And these situations affect both the company and the director equally. In the current blog everything regarding the disqualification of directors mentioned under section 164 of the Companies Act, will be discussed. This will give the readers a clear picture of the situations when a person can be disqualified to be a director.
Who is the Director of the Company?
Before going deep into the disqualification of directors it’s important to understand the meaning of director first. As per section 2(34) of the Companies Act, director refers to a person who is appointed to a company’s board of directors. It is the responsibility of the director to look after the company’s management, take all the necessary decisions on behalf of the company, and ensure that all the legal and financial requirements of the company are met. The success of any company is in the hands of directors. They are solely responsible for most of the things in a company. Hence it is necessary that a qualified person should become the director of the company.
Section 164 of the Companies Act
Grounds for disqualification of directors have been given under section 164 of the Companies Act. Disqualification of directors means to become a director of any kind of company because of some particular reasons. A director’s disqualification can be based on various circumstances that have been given in section 164 of the Companies Act. If someone reads this section all the doubts regarding the disqualification of the director will be solved. If anyone is disqualified from serving as a director of a company during the time period specified by the court or tribunal, they are not eligible to be appointed as the director of any other company.
Grounds for Disqualification of Directors
The Companies Act, 2013, provides various grounds for the disqualification of directors under section 164. These grounds are given below:
Subsection (1) of Section 164 Companies Act
Anyone who has the following conditions cannot be appointed as the director of the company:
- A person with an unsound mind and so declared by any competent court
- An undischarged insolvent is not eligible to become the director
- A person who is adjudicated as insolvent and his application is still pending with respect to the same
- A person who was convicted for any offense, with respect to moral turpitude or otherwise.
- If any court or tribunal passed any order and made any person disqualified from becoming the director of the company
- If any calls were not paid in respect of any shares of the company either held jointly or alone, even after the expiry of the time period.
- If anyone who was convicted under section 188 regarding “related party transaction” in last preceding five years
- Non-compliance with section 152(3) of the Companies Act.
Section 164 Sub Section (2) of the Companies Act
If any person while being the director of any company did any of the following acts mentioned below:
- has not filed financial statements or annual returns continuously for three financial years.
- Directors accepting deposits that remain unpaid or failing to repay accepted deposits or interest.
- Directors failing to redeem debentures or pay due interest.
- Directors failing to pay declared dividends for a year or more.
- Such directors cannot be re-appointed in the same company.
- Such directors cannot be appointed in any other company.
- The disqualification period lasts five years from the date of the failure.
Subsection (3) of Section 164 of the Companies Act
Here are the points outlining the provided information under section 164(3). First is that private companies have the authority through their articles to establish additional director appointment disqualifications beyond those stated in sub-sections (1) and (2). And second is about the exceptions that are applied to disqualifications in clauses (d), (e), and (g) of sub-section (1) of the Companies Act.
Effect of Directors’ Disqualification
The effect of disqualification of directors does not just happen to the directors but also to the companies. Companies’ operations are disturbed if a disqualified director plays a critical role in the company. Reassembling the board of directors for the company might be necessary, which is a time-consuming and expensive operation. The corporation may also be subject to fines and penalties if they breach the Companies Act. The most serious impact on the director is that his career got serious and his reputation got destroyed.
What are the available Remedies after the Directors’ Disqualification?
A director has a number of options available to them if they are denied the right to serve as a director of a firm. The following list of important treatments is discussed:
- A director can appeal to the National Company Law Appellate Tribunal against the order of the National Company Law Tribunal
- After appealing to the National Company Law Appellate Tribunal, which is popularly known as NCLAT one is not satisfied with the decision, then he or she can again appeal to the High Court and then the Supreme Court in the end.
- A director who is about to be disqualified has the option of leaving their post prior to the disqualification going into force. A voluntary action that can assist the director in avoiding disqualification is resignation.
Conclusion
Directors play a vital role in Indian companies, but they can face disqualification under the Companies Act, 2013, due to reasons like insolvency, legal violations, or non-compliance. Disqualification of directors not only affects directors but also disrupts company operations and reputation. Directors can appeal disqualification decisions at different levels, and a preemptive resignation is an option. Understanding these provisions is essential for maintaining corporate integrity and stability in India.
