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Director Disqualification, Consequences and process of Removal of Disqualification

February 18, 2020
DIRECTOR DISQUALIFICATION

DIRECTOR DISQUALIFICATION

Background:

A Director is responsible for controlling, managing and directing the affairs of a Company and faces the risk of disqualification, if he/she fails to fulfill the legal responsibility prescribed under Companies Act, 2013 (Act). A detailed note on Director disqualification, consequences and process of removal of disqualification is mentioned below.

Director Disqualification as per Section 164 of Companies Act, 2013:

The term “Director” has been defined under Section 2(34) of the Act which means a director appointed to the Board of a Company. The Act does not prescribe any specific qualification for a person to be appointed as a Director of any Company. However, a Company can prescribe the qualification in its Article of Association (AOA) for appointment of a Director.

Section 164 of Companies Act, 2013 provides for “Disqualifications for appointment of Director”. As per the section,

(1) A person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f) he has not paid any calls in respect of any 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;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
(h) he has not complied with sub-section (3) of section 152.

(i) he has not complied with the provisions of sub-section (1) of section 165.

(2) No person who is or has been a director of a company which—
(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon 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, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

[Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.]

(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

[Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.]

Consequences of disqualification:

Section 164(2)(a) states that if a person is appointed as a Director in any Company, and such Company has not filed financial statements or annual returns for a continuous period of three financial years, then the Director incurs disqualification as a result of which,  such person:

  • cannot be appointed as a Director in any other Company or
  • reappointed in the existing Company for a period of five years

and such Director will have to vacate office of a Director in all the Companies other than the Company which is in default as per the provisions of Section 167 of the Act.

If any person is appointed as a director of a company which is in default of Section 164(2) of the Act, then he shall not incur the disqualification for a period of six months from the date of his appointment.

If a person acted as a Director even when he knows that the office of director held by him has become vacant on account of disqualification u/s 164 of the Act, he shall be punishable with imprisonment for a term which may extend to one year or fine of one lakh rupees which may extend to five lakh rupees, or with both.

Filing of forms and intimations to Registrar of Companies (ROC)

Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014 read with Section 164(2) of the Act:

  1. Intimation by the Director- The disqualified Director shall inform the Company about his disqualification attracted under Section 164(2) in e-form DIR-8 before he is appointed or re-appointed. Upon receipt of the same, the Company has to take on record the same in a Board Meeting and file e-form DIR-12 with ROC for vacation of office as Director if applicable.
  2. Intimation by the Company - The Company has to file form DIR-9 to the Registrar of Companies (ROC) when it fails to file financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures within 30 days from the date that would attract the disqualification under Section 164(2) of the Act.

The ROC will take on record the form DIR-9 filed by the Company and ensure the same is available for public inspection.

Action by the Ministry Of Corporate Affairs (MCA) to Strike Off the Non-Compliant Companies leading to Disqualification of Directors

The Ministry of Corporate Affairs (MCA) undertook the massive drive of striking off companies for non-compliance as per Section 248 of Companies Act, 2013. As a result, lakhs of companies were identified which had not done their Annual Filings and their names were struck off assuming that they were either shell or fraudulent companies This also resulted in over 3 lakhs directors’ disqualification of such companies, as mandated by Section 164(2) of Companies Act, 2013. The MCA blocked the DIN of all the disqualified directors in order to take preventive measure not to be appointed in other active companies.

This action by MCA caused a lot of administrative inconvenience to the Companies and the Directors holding multiple directorships are started looking for remedies to remove the disqualification or active their DIN’s.

Remedy available to the Disqualified Director whose DIN has been de-activated

The remedy available to the dis qualified director is that he can approach the High Court for activation of the DIN and for passing a stay order on the action taken by Registrar of Companies. Alternatively, they can approach NCLT for revival of struck off companies and for activation of DIN as the case may be. The two common scenario’s are explained below.

Situation I:

  1. When the status of the Company appears under ‘strike off’ and the Directors do not intend to revive the Company but wants to activate the DIN

The concerned Director has to file a Writ Petition before the High Court under Article 226 of the Constitution in the State where the Registrar of Companies (ROC) deactivated the DIN’s of the Directors with the request to activate the DIN on any the following grounds:

  1. Violations of principle of Natural Justice
  2. Retrospective implementation of provisions of Companies Act, 2013
  3. Filing of pending e-forms with ROC for the active companies where he was appointed as Director.
  4. Proposed incorporation of new Company.
  5. Proposed appointment as a Director in any existing active company.

Order passed by High Court needs to be filed before the ROC to activate the DIN.

Flow of activities:

Flow of activities for removal of Director Disqualification

Flow of activities for removal of Director Disqualification

Situation II:

When the status of the Company is under ‘strike off’ and the Director intends to revive the Company and activate the DIN:

  • A petition for revival of the Company has to be filed before the National Company Law Tribunal (NCLT) within three years from the date of publication of list of strike off companies in official gazette in form STK-7 by ROC. The said petition can be filed by the Promoters/ Directors/Shareholders/Creditors of the Company under Section 252 the Act.
  • NCLT normally passes favorable orders for revival of a Company, when the Company has Operations/fixed assets/amount to be paid to creditors/government or amount to be received from stakeholders.
  • Once the order for revival is passed by NCLT, the appellant shall comply with the conditions as specified in the Order to revive the Company including filing of form INC-28 with ROC within 30 days from the date of the order.
  • The name of the company proposed to be revived will be published in the official gazette by ROC
  • ROC will activate the Company name and DIN's of the Directors
  • The Company has to file all the pending e-forms including Financial Statements and Annual return with the ROC

If the petition is rejected by NCLT then the Company can file appeal before the Appellate Tribunal (NCLAT) for revival of the Company.

Flow of activities:

Flow of activities for removal of Director Disqualification

Flow of activities for removal of Director Disqualification

 

Removal of Disqualification:

The above process would only allow the Directors to activate their DIN but not remove their dis-qualification. Therefore, a separate process will have to be undertaken for removal of dis-qualification after the expiry of five years from the date the default if made good.

The concerned Director shall be eligible to be re-appointed as a director of that company or appointed in other company after a period of five years by filing Form DIR-10 as an attachment to Form CG-1 to Central Government for removal of disqualification attracted under Section 164(2) of the Act.

Upon approval of Form CG-1, intimation has to be made to the concerned ROC for removal of disqualification and for updating the DIN status in their records.

Conclusion:

The Companies Act, 2013 does not have any specific provisions for removal of disqualification of directors. Therefore, it is important for a Director to ensure that before being inducted in any Company, the provisions of Section 164 of the Act are complied with to avoid the consequences of disqualification stated under the Act.

Disclaimer:

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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