Applicability of Section 274(1)(g) for Public Companies

This query is : Resolved

Guest

Guest (Querist)

28 March 2011 Dear Friends / Experts,

I need to know whether Section 274(1)(g) shall be applicable to all companies or it is applicable only to

- Public Company and
- Private Company, which is a subsidiary of Public Company

I noticed somewhere that Section 274(1)(g) shall not be applicable to a Private Company, which is not a subsidiary of any public company.

- - - - - - - - -

A friend of mine is working in an audit firm, who used to collect letter from each director of private companies (which are not subsidiary of any public company) in connection with Section 274(1)(g).

Also, the auditor of the above firm would mention in his auditor's report regarding Section 274(1)(g).

- - - - - - - - -

Though it may be a good practice to obtain such letter from directors of private companies (which are not subsidiary of any public company) and mention in the auditor's report regarding section 274(1)(g), my query / doubt is,

- whether Section 274(1)(g) is strictly
not applicable to a private company
(which is not a subsidiary of any public
company).

- whether auditor's report does not
require at all to mention anything about
Section 274(1)(g) in the case of a
private company (which is not a
subsidiary of any public company).

To understand something for the day, I request the Friends / Experts to express views on the above queries.

Thanks.

Jayashree S Iyer

Jayashree S Iyer (Expert)
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29 March 2011 Given below is the extract of Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003.

As per Clause 3 quoted below, the rules shall apply to all public limited companies registered under the Companies Act, 1956.

So it's applicable only in case of public limited companies.

Even in my case the auditors insisted for such an undertaking from the Directors of a private limited company, however on highlighting this provision, they agreed that it's not applicable to private companies.
------------------------------------------

PUBLISHED IN THE GAZETTE OF INDIA, PART II, SECTION 3(i), EXTRAORDINARY

Ministry of Finance

(Department of Company Affairs)

NOTIFICATION

New Delhi, the 21st October , 2003

G.S.R. 830 (E).- In exercise of the powers conferred by clause (b) of sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby makes the following rules to carry out the purpose of clause (g) of sub-section (1) of section 274 of the said Act, namely :-

1. Short title, commencement and extent.-

(1) These rules may be called the Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003.

(2) These rules shall come into force from the date of their notification in the Official Gazette.

(3) These rules shall apply to all public limited companies registered under the Companies Act, 1956.

2. Definitions -

In these rules, unless the context otherwise requires, -

(a) "disqualifying company" is the company in which the default has occurred on account of which a director stands disqualified;

(b) "appointing company" is the company in which an individual is seeking appointment as a director, including re-appointment as director.

3. Disqualifications under clause (g) of sub-section (1) of section 274 of the

Companies Act, 1956.-

(a) Whenever a company fails to file the annual accounts and annual returns, as described in sub-clause (A) of clause (g) of sub-section (1) of section 274, persons who are directors on the last due date for filing the annual accounts and the annual returns for any continuous three financial years commencing on and after the first day of April, 1999, shall be disqualified.

(b) If a company has failed to repay any deposit, irrespective of the enactment, rules or regulations under which the deposits have been accepted by the companies, or interest thereon, or redeem its debentures, or pay any dividend declared on the respective due dates, and if such failure continues for one year, as described in sub-clause (B) of clause (g) of sub-section (1) of section 274, then the directors of that company shall stand disqualified immediately on expiry of that one year from the respective due dates:

Provided that all the directors who have been directors in the relevant year, from the due date to the expiry of one year after the due date, will be disqualified:

Provided further that disqualification on account of the reasons cited under this Rule shall also apply to the reappointment as a director.

Explanation.- For the purpose of this rule, it is clarified that non-payment of dividend referred to in sub-clause (B) of clause (g) of sub-section (1) of section 274 due to the reason of dividend not being claimed or kept in separate bank account as required under section 205A of Companies Act, 1956 or paid into Investors Education & Protection Fund as required under section 205C of that Act shall not be deemed to be a failure to make payment of dividend.

4. Duty of Statutory Auditor to report on disqualification.-

(a) It shall be the duty of statutory auditor of the appointing company as well as disqualifying company, as required under section 227(3)(f) to report to the members of the company whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274 and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, any director of the company is disqualified for appointment as a director or not.

(b) It shall be the duty of the statutory auditors of the "disqualifying company" as required in section 227(3)(f) to report to the members of the company whether any director in the company has been disqualified during the year from being re-appointed as director, or being appointed as director in another company under clause (g), of sub-section (1) of section 274.

5. Duty of company to intimate disqualification.-

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 described in clauses (A) and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file a return in duplicate in Form 'DD-B', prescribed under these rules for this purpose, to the Registrar of Companies, furnishing therein the names and addresses of all the Directors of the company during the relevant financial years:

Provided that names of such directors who have been exempted from application of Section 274(1)(g) by the Central Government, from time to time, shall be excluded.

Provided further that no unusual abbreviations or short forms shall be used in filling up the Form 'DD-B', which shall give such details as may be necessary to distinguish and identify each director without any ambiguity.

6. Failure to intimate disqualification shall render director as officer in default.-

When a company fails to file the Form 'DD-B' as above within 30 days of the failure that would attract disqualification under Section 274(1)(g), officers of the company

listed in section 5 of the Companies Act, 1956 shall be officers in default.

7. (a) Upon receipt of the Form 'DD-B' in duplicate under Rule 5, the Registrar of Companies shall immediately register the document and place one copy of it in the document file for public inspection.

(b) The Registrar of Companies shall forward the other copy to the Central Government.

8. Names of the disqualified directors on the web-site etc.-

(a) The Central Government shall place on the web-site of the Department of Company Affairs the names and addresses and such other details including names and details of the companies concerned, as may be necessary, in respect of all the disqualified directors.

(b) The Central Government may also publicize the names of disqualified directors in such manner as it may consider appropriate.

(c) The Central Government shall take such steps as may be required to update its web-site to ensure that name of the person, in whose respect disqualification period has expired after 5 years, is deleted from the web-site.

9. Duty of every director.-

Every director in a public company registered under the Companies Act, 1956 shall file Form 'DD-A', prescribed under these Rules, before he is appointed or re-appointed.

10. If any question arises as to whether these rules are or are not applicable to a particular company, such question shall be decided by the Central Government.

11. Punishment for contravention of the rules.-

If a company or any other person contravenes any provision of these rules for which no punishment is provided in the Companies Act, 1956, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first, during which the contravention continues.

12. On the commencement of these rules, all rules, orders or directions in force in relation to any matter for which provision is made in these Rules shall stand repealed, except as respects things done or omitted to be done before such repeal.

[F. No.1/8/2002-CL.V]

Rajiv Mehrishi,

Joint Secretary

FORM 'DD-A'

Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003

Intimation by Director

[Pursuant to Section 274(1)(g)]

Registration No. of Company ______________

Nominal Capital Rs._____________

Paid-up Capital Rs. _____________

Name of Company__________________________

Address of its Registered Office___________________

To

The Board of Directors

of __________________________

I _______________ son/daughter/wife of _______________ resident of ___________________ director/managing director/manager in the company hereby give notice that I am/was a director in the following companies during the last 3 years:-

Name of the Company

1......

2......
Date of Appointment
Date of Cessation

I further confirm that I have not incurred disqualification under section 274(1)(g) of the Companies Act, 1956 in any of the above companies, in the previous financial year, and that I, at present, stand free from any disqualification from being a director.

or

I further confirm that I have incurred disqualifications under section 274(1)(g) of the Companies Act, 1956 in the following company(s) in the previous financial year, and that I, at present stand disqualified from being a director.

Name of the Company

1.......

2......
Date of Appointment
Date of Cessation

Signature

(Full Name)

Dated this _________ day of _________

FORM 'DD-B'

Report by a public company

[Pursuant to Section 274(1)(g) read with rule 5 of Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003]

Registration No. of Company ______________

Nominal Capital Rs._____________

Paid-up Capital Rs. _____________

Name of Company__________________________

Address of its Registered Office____________________

To

The Registrar of Companies,

It is hereby reported under section 274(1)(g) of Companies Act, 1956, that M/s. ___________ have failed to (i) file the annual accounts and annual returns for the last three financial years, or (ii) repay deposits or interest thereon on due date being ___________ or redeem its debentures on due date being _________ or pay dividend declared by the company since __________ or both. The period of one year has expired on ___________.

The name and address of directors at the relevant period are as under :-

(a) Director's name in full, without abbreviations

(b) Director's name as per company's records

(abbreviations may be expanded and shown)

(c) Address of the Director : - (i) Permanent

(ii) Present

(d) Positions held by the director in the last 5 years, prior to disqualification:

Signature

Designation*

Dated this _________ day of _________

*State whether Director, Managing Director, Manager or Secretary

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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29 March 2011 Sir

I do fully endorse the view of Jayasree Ji which I have expressed earlier through this forum.

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udit sharma

udit sharma (Expert)
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29 March 2011 Hi...

I slightly disagree from the eminent experts.....

I agree that the aforesaid rules are applicable only to a Public Limited Company, which means that a person to be appointed as Director/re-appointed as Director of the Company has to file Form DD-A at the time of appointment/re-appointment in a Public Limited Company. Such Form DD-A is not to be filed in case he is to be appointed/re-appointed as Director in a Private Limited Company.

But Section 274 clearly stipulates that the any person who suffers from any of the disqualifications stipulated under that section shall not be capable of being appointed/re-appointed in any Company(both Private and Public)

Therefore, in my opinion, a person who suffers from disqualifications stipulated under Section 274(1)(g), shall not be capable of being appointed as a Director of both Public and Private Limited Companies.

Further, as per the provisions of section 227 of the Companies Act, 1956, every Auditor is statutorily required to disclose in his report to the members that none of its Directors suffers from any of the disqualifications mentioned under Section 274(1)(g) and hence the Auditors persist that such a declaration be obtained from the Directors of both the Companies.

God Bless

CS Udit Sharma