All about disqualification of Directors

Have you ever wondered how the disqualification of directors happens? Here’s how

Section 164 of the Companies Act 2013, deals with disqualification of Directors.

According to Section 164 (1) of the Companies Act 2013, the following conditions can be reasons for disqualifying a Director

1. The Director is of unsound mind and stands so declared by a competent court.

 

2. The Director is an undischarged insolvent.

 

3. The Director has applied to be adjudicated as an insolvent and his application is pending.

 

4. 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:

 

5. An order disqualifying the Director for appointment as a director has been passed by a court or Tribunal and the order is in force.

 

6. 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.

 

7. 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.

 

8. Director has not complied with sub-section (3) of section 152.

Section 164 (2)

1. No person who is or has been a director of a company which—
2. has not filed financial statements or annual returns for any continuous period of three financial years; or
3. 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 (3)A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

A person can be disqualified from being a director, if a company on which the person is a Director has not filed MCA annual return for a continuous period of three years. Hence, it’s important for all private limited company, one person company and limited company to file MCA annual return on time and maintain compliance under Companies Act, 2013.

Comparison of Section 164(1), 164(2) & 164(3)

Aspect	Section 164(1)	Section 164(2)	Section 164(3)
Who it applies to	Individual Director (personal disqualification)	Company level (affecting directors of defaulting company)	Private company (can add extra disqualifications in Articles)
Key Reasons	Unsound mind, insolvency, criminal conviction, unpaid share calls, related party violation etc.	Non-filing of financial statements/annual returns for 3 consecutive years, default in deposits, debentures, dividends.	Additional grounds decided internally by the company’s Articles of Association.
Effect	Director cannot be appointed/reappointed for 5 years.	All directors of the defaulting company are disqualified for 5 years.	Depends on company’s Articles; may restrict appointments.

Process of Director Disqualification

Consequences of Director Disqualification

• Ineligibility for Reappointment: A person who has been disqualified under Section 164 cannot be appointed as a director in any company. They remain disqualified from acting as a director for the duration of 5 years from the date of disqualification period.
• Vacation of Office: If a director is disqualified under this section, their office as a director in any company shall automatically be vacated.
• Prohibition on Future Appointment: Disqualified directors cannot be appointed to the board of directors of any company, whether private or public, for the specified period or unless the disqualification is lifted.

Until recently, the MCA has not strictly enforced this provision of the Companies Act. However, from September 2017 the MCA has begun strictly enforcing these provisions of the Companies Act and has published names of disqualified Directors on its website.

Hence, it’s important for all persons who are Director of a Company to ensure that compliance is maintained properly.

Now, we hope this article was able to clear all your doubts on disqualification of directors, please visit us for further queries.

Case Study: Director Disqualification for Non-Filing

Example: A private company failed to file its annual returns for three consecutive years. As a result, all directors were automatically disqualified under Section 164(2). The directors could not be reappointed in any company for 5 years.

Steps Taken to Restore:

• The company filed overdue annual returns with MCA.
• A compounding application was filed to settle penalties.
• The directors approached the NCLT for relief and eventually got their names restored.

FAQs on Director Disqualification

Can a disqualified director be reappointed?

No, a disqualified director cannot be reappointed for 5 years from the date of disqualification. After this period, eligibility is restored.

How to remove director disqualification from MCA list?

A disqualified director can file an appeal with the NCLT or approach the High Court. In some cases, filing overdue returns and compounding of offences may help restore eligibility.

Is director disqualification permanent?

No, it generally lasts for 5 years unless extended by law or specific court orders. After this period, the individual may be eligible again.

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