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.

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.