PROVISIONS DEALING WITH DISQUALIFICATIONS OF DIRECTOR UNDER COMPANIES ACT, 2013

Section 164 (2) of Companies Act, 2013

No person who is or has been a director of a company which:-

  • has not filed financial statements or annual returns for any continuous period of three financial years; or
  • 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.

Vacation of office of Director – Section 167 of Companies Act, 2013

Sub-section 1 – The office of a director shall become vacant in case:-

  • he incurs any of the disqualifications specified in section 164;
  • he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
  • he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
  • he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;
  • he becomes disqualified by an order of a court or the Tribunal;
  • he is 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:

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;

  • he is removed in pursuance of the provisions of this Act;
  • he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

Sub-section 2 – If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Section 149, Sub-section 12 of Companies Act, 2013

Notwithstanding anything contained in this Act :-

  • an independent director
  • a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Decoding and resolving :

The government may have applied the Companies Act, 2013, retrospectively when it disqualified the directors of over 200,000 companies that did not file their financial statements or annual returns for three straight years.

These directors have been banned from 1 November 2016 to 31 October 2021. The 1 November date is relevant because norms say that companies have to conduct their annual general meeting of shareholders by September and file their returns within another month.

Rule 14 – Companies (Appointmentand Qualification of Directors) Rules, 2014

(Disqualification of directors sub-section (2) of section 164) :-

  1. Every director shall inform to the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8before he is appointed or re-appointed.
  2. Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years.
  3. When a company fails to file the Form DIR-9 within a period of thirty days of the failure that would attract the disqualification under sub-section (2) of section 164, officers of the company specified in clause (60) of section 2 of the Act shall be the officers in default.
  4. Upon receipt of the Form DIR-9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection.
  5. Any application for removal of disqualification of directors shall be made in Form DIR-10.

Outcome

It is duty of Company to file e-form DIR-9 with the ROC in case of Company fall u/s 164(2).  In DIR-9 company have to mention the name of the Directors who was directors of the Company during such period.

The purpose of this form is to inform the ROC by the Company about the Disqualified Directors so that ROC can debar them from appointment in another Companies or Incorporation of new Companies.

Therefore, all the Companies which have not filed such form DIR – 9 with ROC shall be liable for non compliance of Rule 14.

Remedy – Disqualified Directors of active company’s may file DIR-10 to Central Government in e-form CG-1 to remove disqualifications under section 164 (2) of Companies Act, 2013. 

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