FAQs on Disqualification of Director

Short Summary

In this editorial, the author shall discuss the Quick bites on 'Disqualification of Director'. Here we have attempted to clarify all those questions relating to same.

QUICK BITES

1. How do you know a director is disqualified? Or What is the meaning of disqualified by ROC u/s 164 2?

Section 164(2) provide conditions for disqualification of director.

• A director can be disqualified under Section 164 of the Companies Act, 2013 for the following reasons:
• The Director is of unsound mind and stands so declared by a competent court.
• The Director is an undischarged insolvent
• The Director has applied to be adjudicated as an insolvent and his application is pending.
• The Director 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. Also any person who has been convicted of any offence and sentenced to imprisonment for a period of seven years or more, will not be eligible to be appointed as a director in any
• company.
• An order disqualifying the Director for appointment as a director has been passed by a court or Tribunal and the order is in force.
• The 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 elapsed from the last day fixed for the payment of the call.
• The Director has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.
• A company in which the Director is a part of the Board has not filed financial statements or annual returns for any continuous period of three financial years.
• The company 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.

2. Can a disqualified director of a Company file an affidavit in court on behalf of the Company?

If a person has been disqualified in any Company due to section 167(1) such person shall be considered as Ceased in all other Companies wherever he was appointed as a Director. Therefore, he is not allowed to sign any document on behalf of Company

3. What if all the directors of Company disqualified?

If all the Directors of Company disqualified, in such case promoters of Company shall call an Extra Ordinary General Meeting and appoint new directors in such EGM.

4. Can a disqualified director sign a Financial Statement?

Once a director is disqualified, he shall be ceased to become director of company from the date of disqualification. Therefore, he is not allowed to sign financial statement of Company.

5. How do restore din of Disqualified Director? / How do you get rid of disqualification US 164 (2)?

Provisions

As per the Companies Act, 2013, once a director is disqualified u/s 164(2) the director so disqualified shall continue to be disqualified for a period of 5 years. Even the power is not vested with the NCLT, Regional Directors, Registrar of Companies to remove the disqualification of Directors.

However, in the last 2-3 years, several writ petitions have been filed with the Hon'ble High Courts of India for the removal of the Disqualification of Directors. The Hon'ble High Court has passed several orders for the 'interim stay' on the disqualification until the issuance of the final order from the Hon'ble Supreme Court.

Process of Activation of DIN

The following process has to be followed to obtain a stay from the Hon'ble High Court on the disqualification of Directors and the Activation of the DIN from the Registrar of Company: 

STEP - I: Drafting of a Writ Petition

The disqualified person shall draft a writ petition including:

• Facts of the Disqualification
• Reason for the relief from the disqualification etc.
• The disqualified person shall prepare an affidavit verifying the petition.
• The disqualified person shall authorize any professional for filing of the writ petition with the High Court.

STEP- II: Filing of a Writ Petition

• The Authorized person shall file the writ petition with the Hon'ble High Court
• The Hon'ble High Court shall provide a date of hearing.
• An interim stay order shall be provided from the disqualification if, after the hearing, The Hon'ble High Court is satisfied on the grounds of the petition.

STEP-III: Filing of the copy of the Order with the Registrar of the Company

• The disqualified person shall prepare an application regarding the High Court Order.
• Based on the High Court order, the Registrar of Companies shall change the status of the DIN from 'disqualified' to 'Active'.

Note: If the disqualified director has not filed the DIR-3 KYC at the present date, then the ROC shall change the status of the DIN as "Deactivated due to the non-filing of DIR-3 KYC".

The disqualified director can file e-form DIR-3 KYC with the ROC and can get the status of DIN as 'Active'.

6. Can a disqualified director be a director in another company?

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years.

7. Can a disqualified director be a shareholder in India? Or Whether disqualified director can act as shareholder in Companies?

Yes, disqualified director can freely continue as Shareholders in all the Companies irrespective they are disqualified u/s 164 and vacant office u/s 167. Disqualification impact only directorships of the Director.

8. Can a disqualified director be a partner in LLP?

Disqualification of such person shall be limited on Companies Act not on the other Acts. Therefore, he is eligible to get appointment as designated partner.

9. Does the disqualifications of section 164 167 of Companies Act 2013 apply on whole time director or manager or managing director as well?

Yes, disqualification is relating to director. It covers all type of Directors like: (MD, WTD, Additional Director, Alternate Director etc.)

10. Whether the disqualified directors of the disqualified company can be a part of suit for removal of struck off company?

Disqualified director ceased from the company from position of Director. Disqualified Director can't be part of suit of removal of struck off Company.

11. Can a disqualified director Grant loan to his private limited company?

Private Company can't accept loan from outsiders except (Directors, Relative of Directors and shareholders). Once a person disqualified the ceased from position of director. Therefore, Private company can't accept loan from disqualified director.