Directors in the company are considered as the Mind of the company. Directors are one who are responsible for the company's management and are involved in the day-to-day operations of the company.
For successful running of business it is must to choose competent personnel to be a part of the Board of Directors (BOD). The competency of personnel with the work and managerial skills can be defined by the company on its own by way of introducing a policy or otherwise. In addition to competency of the proposed director for the work associated, the company shall confirm the aptitude of the proposed Director as per the provisions laid down under Companies Act, 2013 (hereinafter referred as "the Act").
The personnel, who is eligible for the position of the Director in the company has to qualify on the grounds prescribed under Section 164 of the Act. The provisions instead of providing the qualification for the appointment prescribe the grounds for disqualification of appointment as a Director.
In this article we are discussing the grounds prescribed for the disqualification, which shall be taken care while making an appointment of a director in any company. In addition to same, a glimpse over recent actions taken by MCA and its consequences including the petition filed in Delhi High Court regarding the Disqualification of Directors is also provided.
Grounds of disqualification provided u/s 164:
The grounds for the disqualification of the directors provided under the stated Section can be classified mainly into two heads being Personal Defaults and Corporate Defaults:
Personal Defaults:
Sub-section 1 of the Section 164 prescribes the grounds where the directors are disqualified due to personal inability and by attracting any of the clause provided below, the person is not eligible for the appointment as a director in any company. Few of the conditions are beyond the control of the personnel offering his eligibility for the appointment or re-appointment as a director in the company.
Following are the conditions where a person is not eligible for the appointment as a director of the company -
- he is of unsound mind and stands so declared by a competent court;
- he is an undischarged insolvent;
- he has applied to be adjudicated as an insolvent and his application is pending;
- 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; - an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
- 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;
- 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
- he has not complied with sub-section (3) of section 152. (The stated provision provides for procurement of DIN u/s 154.)
Section 167(1)(a) calls for immediate vacation of the office when attracting any of the abovementioned situation.
Corporate Defaults:
Sub-section 2 of Section 164 does not provide personal disqualification rather states the situation where the person, in his capacity of the director of the company, has made a default.
The provision states that 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.”
Section 164, further under sub-section 3, provides that a Private Company may provide additional grounds of disqualification by its Articles of Association.
The grounds of vacation of the directors will be discussed in the next blog in the detailed manner, for which you are requested to stay connected here.
Actions by MCA and consequences:
Here, we are emphasizing on the directors of the Private Limited Company. In the previous Act of 1956, the provisions of Section 164(2) were not applicable on the private limited company. However, the ambit of the latest Act has covered directors of the Private Company into umbrella of the concerned provisions.
Pursuant to the ground of disqualification u/s 164(2)(a)- as a part of Corporate Default, the Ministry of Corporate Affairs has posted a list of directors in a company which has not filed financial statements or annual returns for any continuous period of three financial years. Here, the emphasis has been given on continuous default for filing any of the statement or return.
As this provision has been applicable with prospective effect, the directors of the company which has failed to filed the statements and returns continuously since the financial year 2014-15, are declared as disqualified.
This considerable step has been taken by Ministry saying that same will help for breaking the networks of the shell companies.
The corresponding section in the Act of 1956 has excluded the Private Company from the ambit of respected provisions. The aim for the applicability only on the Public Company has been considered to protect the interest of the public involved in the Limited Companies. The operations of the many private companies have been affected due to this step of disqualifying the directors where no interest of the public is involved in the same.
Further, the attraction of disqualification under this provision will stop the directors to be appointed or re-appointed as director in any other company for next five years.
Consequent to this and considering is as a ground of objection, the action of the Central Government has been objected by way of petition in the Delhi High Court by petitioners Mr. Sushen Mohan Gupta & others. Considering same the respected court has also issued notice to the Central Government questioning the applicability of the provision of directors of the Private Limited Company.
The stated matter is yet pending in the Court and will be heard on January 28, 2018 by the respected Court.
The author is co-founder at LegalWiz.in, India's premier online Legal Service Provider. You may reach to the experts at LegalWiz.in at support@legalwiz.in for changes & appointment of directors along with incorporation of Private Limited Company.
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