NOTE ON

DISQUALIFICATION OF A DIRECTOR UNDER SECTION 274 (1) (G) OF THE COMPANIES ACT, 1956.

·            PURPOSE OF THE DISQUALIFICATION

The Department of Company Affairs vide its General Circular No. 2/5/2001-CL.V, clarifies that the provisions of section 274 of the Companies Act, 1956 were amended through Companies (Amendment) Act, 2000, w.e.f. 13-12-2000 and a new clause (g) was inserted to sub-section(1) of this section. Through this clause a director of the public company, which has made default in filing of annual accounts and annual returns and in repaying deposits/interest thereon on due date or redeeming its debentures on due date or in paying dividend for period specified in that section, is disqualified to be appointed as a director of other public companies for a period of 5 years from the date such public company so defaulted.

The intention and purpose of the above amendment was to disqualify the errant directors not only in the defaulting companies but becoming directors in other companies too, protect the investors from mismanagement, ensure compliance in filing of annual accounts and annual returns which are means of disclosure to all stakeholders, increase the compliance rate of filling of the statutory documents and infuse good corporate governance in the regulation of corporate affairs in the country.

·                    

The disqualification stated in clause (g) is confined to directors of Public company only.

The word used in section 274(1)(g)  is appointment. Wherever the Legislature has intended that the word appointment should include re-appointment. A proviso to Rule 3(b) provides that both the disqualifications would apply to appointment and re-appointment of a director.

·                    

Even though powers have not been delegated to the Government to accord the exemptions, Government companies are exempt from the applicability of section 274(1)(g). The Private Companies are also exempt from the applicability of the Disqualification of Directors Rules, 2003.

Nominee directors appointed on the Board of assisted concern or other public companies by (a) public financial institution within the meaning of section 4A of the Companies Act, 1956; (b) Central or State Government; and (c) banking companies are also exempt from the provisions of section 274(1)(g) of the Companies Act, 1956.

It may be noted that nominee directors appointed by the public financial institutions and banks constituted under Central enactment and director appointed by BIFR under section 16(4) of the Sick Industrial Companies (Special Provisions) Act, 1985 or by Central Government will not attract this disqualification.

Rule 8A has been inserted by Notification No GSR 133(E) dated 3-3-2006, which provides that an application can be made to the Central Government in e-Form-DD-C for seeking exemption from disqualification of a director.

This disqualification will not apply to small shareholders’ director because Rule 5 of the Companies (Appointment of Small Shareholders’ Directors) Rules, 2001 has not included this in the list of disqualification applicable to such director.