Tax & Compliance

ANALYSIS OF PROVISIONS GOVERNING-DISQUALIFICATION OF DIRECTORS

AUTHOR : CS DEEPAK P. SINGH

ANALYSIS OF PROVISIONS GOVERNING DISQUALIFICATION OF DIRECTOR

Dear Friends 

As you know a body corporate being a legal entity run by its management and management of body corporates consist of human beings called directors. The directors as combined force called Board of Directors. The BOD of a company os the mind behind all decisions ,acts and transactions. They act according to the instructions of members /shareholders of the company, who are the true owners.

In india only an individual can be appointed as director of a company. The Companies Act, 2013 ,  SEBI (LODR) Regulations, 2015 and other acts specified some disqualifications on occurring of which a pension cannot be appointed as director of a company.

LET’S US CHECK LIST OF DISQUALIFICATION FOR DIRECTORS;

A person getting appointment as director is required to fulfil eligibility criteria as prescribed under provisions of Section 164 of the Companies Act, 2013. If any person is suffering from any of such disqualifications , as prescribed ,such person cannot be termed as an eligible person to get appointed as a Director and a Director is required to fulfil these eligibility criteria during tenure of his/her directorship otherwise he/she is liable to vacate office under provisions of Section 167 of the Companies Act, 2013.

SECTION 164(1)(a): – If proposed director is of unsound mind and stands so declared by the competent court. Affect;  in this case person is disqualified immediately and permanently. Please Note That : Section 3(5) of the Mental Healthcare Act,2017 provides that the determination of a person’s mental illness shall alone not imply or taken into consideration that he/she is of unsound mind unless declared by a competent court.     Supreme Court in Sona Bala Bora Vs. Jyotirindra Bhatacharjee, [MANU/SC/0274/2005] held that under Section 12 of the Indian Contract Act, 1972 a person is said to be of sound mind for the purpose of making the contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest. A person of unsound mind is thus not necessarily s lunatic. It is sufficient if a person is incapable of judging consequence of his acts. The unsound ness of mind may be established by proving such conduct as was not only not in keeping with any reasonable basis.  Kerala High Court in case of Sathy M.P. Vs. Sarasa [MANU/ke/0863/2014] held that once a lunatic is not always lunatic , a person of unsound mind is not necessarily a lunatic. Likewise, a person cannot be branded as insane or incapable to enter into a contract for the reason that he was not sane. A person can be sane as well as insane at times. Insanity may come and go intermittently. 
SECTION 164(1)(b); If proposed director is undischarged insolvent.Affect: the person is disqualified immediately and permanently. Please Note That : A discharge order is required to be obtained under Section 138 of the Insolvency. And bankruptcy Code, 2016  from NCLT to be appointed as director. 
SECTION 164(1)(c): If the proposed Director has applied to be adjudged as an insolvent and his application is pending.Affect;  in this case person is disqualified immediately and permanently. 
SECTION 164(1)(d): If proposed Director has been convicted by the court of any of offence ,whether involving moral turpitude. Or their wise, and sentenced in respect thereof to imprisonments for not less than six months.Affect: disqualification would apply for 5(five) years from the expiry of the sentence. Please Note That :i) Hon’ble Supreme Court in Allahabad Bank Vs. Deepak Kumar Bhola ,1997(4)SCC 1 held that “ what is an offence involving Moral Turpitude must depend upon the facts of each case… “ Moral Trupitude “ is an expression which is used in legal as also societal parlance to describe conduct which is inherently base, vile, depraved or having connection showing depravity….The expression “ moral turpitude”” is not define anywhere. But it means anything done contrary to justice, modesty or good morals. It implies depravity and wickedness of character. Or disposition of the person charged with particular conduct. Every false statement made by a person may not be moral turpitude , but it would be so if it discloses vileness or depravity in the doing of any private and social duty which a person owes to his fellowmen or to the society in general. If therefore the individual charged with a certain conduct owes a duty, either to another individual or society in general to act in a. specified manner or not to so act and he still acts contrary to it and does so knowingly , his conduct must be held to be due to vileness and depravity. It will contrary to accepted customary rule and duty between man and man”. ii) If a person has been convicted of any offence and sentenced in. respect thereof to imprisonment for a period of seven(7) years – the said person shall not be eligible to be appointed as a director in any company. This is permanent disqualification. Please note that – The Companies ( Amendment ) Bill 2017 (. As passed by the Lower House on 27th July, 2017) proposes that the disqualification shall take effect even though appeal or petition against above order is filed. 
SECTION 164(1)(e): If an order disqualifying a person for appointment as a Director has been passed by a court or tribunal and order is in force. Affect : the said person shall not be eligible to be appointed as a director in any company. This is permanent disqualification. Please note that – The Companies ( Amendment ) Bill 2017 (. As passed by the Lower House on 27th July, 2017) proposes that the disqualification shall take effect even though appeal or petition against above order is filed. 
SECTION 164(1)(f): If proposed Director 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 lapsed from the last day fixed for the payment of the call. Please Note That: The disqualification is applicable after a period of 6 months have been elapsed from the last date fixed from the payment of call.In case of companies whose AOA requires Qualification Shares to be taken be taken  as a criteria and if company calls for unpaid amount on such shares the director is required to pay unpaid amount on such shares.  If Director fails to pay unpaid amount on shares ,then he will be disqualified to be appointed as Director of the company. 
SECTION 164(1)(g): If a person has been convicted of the offence dealing with related party transactions under Section 188 of the Companies Act, 2013 at any time during the last preceding year. Please note that – Section 188 read with Rule 15 fo the Companies ( meeting of the Board & its Powers) Rules, 2014 requires the company to provide relevant information in the agenda, participating in the meeting, disclosures in the explanatory statement etc., where the related party transactions are required to be approved. Non compliance of above provisions attracts disqualification of a Director. The Companies ( Amendment ) Bill 2017 ( As passed by the Lower House on 27th July, 2017) proposes that the disqualification shall take effect even though appeal or petition against above order is filed. 
SECTION 164(1)(h) if proposed Director has not complied with Section 152(3) of the Companies Act, 2013. Please Note That: Section 152 of the Companies Act, 2013 delays with appointment of Directors. Section 152(3)  provides that no person shall be appointed as director of a company unless he holds a valid DIN. 
SECTION 164(3): In case. Of a Private Company ,, the AOA of the company may specify certain additional points in respect of disqualification of a person to get appointed as director , in pursuance of provisions of Section 163(3) and in that case , any additional condition with respect to an individual shall e regarded as an additional eligibility criteria for his appointment as a director in the company.  
SECTION 164(2) : Specifies the disqualification attracted due to non-performance/s or defaults on the part of the Company/its , in which proposed director is already holding position of a Director. As per the provisions of this section ,if such company , in which the director is already holding a position as a director, makes default as specified in that section then, such director is; Disqualified from getting appointed as a director in any other company for a period of 5(five) years from the date of such default and Disqualified from getting re-appointed in the same company for a period of 5(five) years from the date of such default. LIST OF EVENTS IN A COMPANY ATTRACTING DISQUALIFICATIONS UNDER SECTION 164(2)  SECTION 164(2)(a)Non-filing of Financial Statements or Annual Returns for any continuous period of three Financial Years.SECTION 164(2)(b)Default in repayment of the deposits accepted by any Company or default in payment of interest thereof; or SECTION 164(2)(c)Default in redemption of any debentures on the due date or default in payment of interest due thereof; or SECTION 164(2)(d)Default in payment of any dividend declared. Please Note that: The default in (b) to (d) shall continue for one year from the date of respective default to earn the disqualification. The Companies ( Amendment ) Bill, 2017 proposes that where a person is appointed as a director of a company which is in default of Section. 164(2)(a) to 164(20(d) above he shall not incur disqualification for a period of six(6) months from the date of his appointment. It means a opportunity given to these directors to comply with provisions of filing of Annual returns and financial statements of the company.  Please Note That:  In case of a Government Company provisions of Section 164(2) are not applicable [ Notification dated 5th June,2015]. The condition for availing this exemption is that the Government Company is not having committed a default in filing the financial statement  and annual Returns.  

CONCLUSION:  The Companies Act, 2013 define “ Director” to mean a director to the Board of a Company. A Director must be a human being and fulfills criteria as may be prescribed under provisions of the Companies Act,2013 and AOA of a private limited company. The government to improve compliance requirements and Corporate Governance in companies amended various provisions of the Companies Act,, 2013 and other related laws ,rules and regulations. 

DISCLAIMER: the article produced above is only for knowledge and information of readers. The article has been prepared on the basis of available material and information at the time of preparation. It is advisable to consult  with professionals for more clarification.

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