SIGMA LEGAL (advocate CS CA IP) 21 February 2018

Disqualification of directors-option availaible to director?

Dear Professional Colleagues, As we all are aware that in September, 2017 the government of India steps up its fight against the black money. The Government of India with the help of Ministry of Finance, pushes ahead with the efforts to weed out shell companies (a term used for entities that have not been carrying out business for long and are allegedly used as conduit for illegal fund flows) has taken strict action against the shell Companies. 1. The first action was against those Companies that prima facie appears to be non-functional (also called “Shell Companies”). On 5th September, 2017 around 208,800 Companies were struck off from the data base of the Registrar of Companies (RoC); 2. The Ministry of Finance directed the branches of all the banks of those companies to restrict/stop the operation of the bank accounts of all such companies by their directors and authorized representatives; 3. Third step involves action against the defaulting Directors of those all Companies that did not filed their Annual returns or financial statements for the past three years. After MCA direction around 3,09,614 directors has been barred to continue on the board of Directors of any company in which they are Directors for the next five years. After this action the Digital signatures of all the disqualified directors can’t be used in filing of any document like annual reports and Balance sheet documents will not to be accepted by concerned RoC with which Company is registered. In this Article we will try to discuss on the option which are available to an Individual Director (i.e. directors who has been barred to continue on the board of Directors of any company for the next five years) to remove his disqualification. Please find attached the detailed article.

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4 Replies

Deeksha Chugh 07 June 2020

Thanks for the elaborate explanation sir.

Chandrani Mitra 18 February 2021

A director of a company is the caretaker of the company who conducts the affairs of the company on behalf of the actual owners of the company, i.e, the shareholders. Since the position of the directors are so important for contributing to the growth of the business, and hence the development of the economy. The Companies Act, 2013, prescribes, among other things, the criterion for the disqualification of lawyers. Section 164 of the Act states:

164. Disqualifications for appointment of director

(1) A person shall not be eligible for appointment as a director of a company, if —

(a) he is of unsound mind and stands so declared by a competent court;

(b) he is an undischarged insolvent;

(d) he 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:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f) he 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;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

(h) he has not complied with sub-section (3) of section 152.

(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) 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.

The Act prescribes that a director disqualified under the provisions of Section 164(2) shall remain disqualified for a period of 5 years. It also states the Act shall disqualify directors with retrospective effect. In this context, the Hon’ble High Court of Delhi was moved and it was observed that the disqualification shall be made applicable to defaulters with effect from 1^st April, 2014. The High Court of Gujarat, Madras, Karnataka were also of the same opinion.

Such disqualified directors may file a writ petition to the High Court of the state under whose jurisdiction the Company’s registered office is situated in order to make good the disqualification before the said period of 5 years.

In case all the directors of the company are disqualified under this section and the status of the company is at stake, in order to restore the ‘active’ status of the company, an application might be filed to the National Company Law Tribunal under whose jurisdiction the registered office of the company is situated.

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