April 24, 2023

Disqualification of director- Conditions, Consequences & Revival

A company is an artificial person and managed by natural persons, i.e., Directors of the company collectively known as board of directors. Only an Individual, i.e., a natural person, can be appointed as directors of the company.

Company is an artificial person having a separate legal entity from its directors. Since, the company is run and represented by directors, only company can’t be punished in case of non-compliance. Specified penalties and punishments are also applicable on directors.

Section 164 of Companies Act, 2013 specified certain cases where a director is disqualified from being appointed as director of the company. During the period of disqualification, a person can’t be appointed as director of the company.

In this article, we have analyzed the provisions related to disqualification like conditions of disqualification, consequences, how to restore the same etc. So, if you are also a director of any company, then this piece of write-up will help you know what disqualifications can restrict you to remain on board for another term or if you are a disqualified director, how you can revive your directorship.

1. Criteria for disqualification for directors of a company

The intention and the purpose of having disqualifications of a director in the law is to appoint a suitable person as director to protect the investors from mismanagement, ensure compliance of filing of annual accounts and annual returns, increase compliance rate of filing statutory documents and infusing good corporate governance in the regulations of corporate affairs and to protect the interest of the investors.

Disqualification of directors is managed by Section 164 of the Companies Act. Section 164 disqualifies a director either for his own default or for default of the company in which he is a director.

1.1 Disqualification due to personal actions of the directors

As per Section 164(1), following person shall not be eligible to appoint as director of the company:

Person of unsound mind and stands so declared by a competent court;
Undischarged insolvent;
Person who has applied to be adjudicated as an insolvent and his application is pending;
Any person who has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for 6 months or more and a period of 5 years has not elapsed from the date of expiry of the sentence. Therefore, after expiry of sentence, a person is ineligible to be appointed for next 5 years.
However, if a person has been convicted of any offense and sentenced to imprisonment for such office for 7 years or more then he shall not be eligible to be appointed as a director in any company;
Where an order, disqualifying him for appointment as a director, has been passed by a court or Tribunal and the order is in force;
Any person who has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and 6 months have elapsed from the last day fixed for the payment of the call;
he has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding 5 years; or
he has not complied with section 152(3), i.e., DIN has not been allotted to him.
he has not complied with the provisions of section 165(1), i.e., a director can’t hold directorship, including alternate directorship, in more than 20 companies at the same time.

1.2 Disqualification for offenses of company

Any non-compliance by the company have an impact on the directors as well. As per Section 164(2) of Companies Act, in following cases, a director shall be disqualified from being appointed as director due to non-compliance by company:

Non-filing of Financial statements or Annual return for continuous 3 Financial year.
1. Any person who is or who has been a director of a company which has failed to file its annual return or Financial statement for a continuous period of 3 Financial years shall be disqualified from being appointed as director.
Failure to repay deposits or interest or redeem debentures, etc.
1. Similarly, if a company defaults in making following payments or redemption for a continuous period of one year or more:
  - Repay the deposit accepted by the company or pay interest thereon; or
  - Redeem any debentures on the due date or pay interest due thereon; or
  - pay any dividend declared

Then any person who is or who has been been a director of such company shall be disqualified from being appointed as director.

Therefore, all the directors who are holding directorship during the relevant period shall be disqualified irrespective of the fact whether they are directors when the due date of filing of Financial statements or annual return of 3rd year has expired or when 1 year from due date of payment expired.
Disqualified directors shall not be eligible to be re-appointed as a director of same defaulting company or any other company for a period of 5 years from the date on which the said company fails to do so.
However, where a person is appointed as a director of a company which is involved in above mentioned defaults then such new director shall not incur the disqualification for a period of 6 months from the date of his appointment.

2. Consequences of Disqualification

a. Vacation of Office of Director in Existing Company

Any person who is disqualified u/s 164 of Companies Act, 2013 shall vacate his office of director.
However, in case of disqualification u/s 164(2), the director shall vacate his office in all companies other than the company which is in default.

b. Disqualified from appointment or re-appointment as director

Any disqualified director can’t be appointed or reappointed as director in any other company for the following period:

Nature of Disqualification	Period of Disqualification
Unsound Mind	Till such state continues
undischarged insolvent	Court has disqualified him for appointment as a director
Application is filed to be adjudicated as insolvent	Till such application is not disposed off. If such person is declared as insolvent then he shall disqualify till he is an undischarged insolvent
5 years from date of expirey of the sentence	Till such state of mind continues
convicted of any offence and sentenced to imprisonment for 7 years or more	Lifetime Disqualified
Convicted for offenses of related party transactions	Till such order remain in force
Non-payment of calls in respect of shares	Till such calls remains unpaid
Till such default continues	5 Years
Disqualification u/s 152(3), i.e., not holding DIN or u/s 165, i.e., holding directorship in more than 20 companies at the same time	Non-filing of Financial statements or Annual Returns
Non-repayment of Deposits, debentures or dividend	5 years from the date on which the said company fails to do so
Non repayment of Deposits, debentures or dividend	5 years from the date on which the said company fails to do so

3. Forms to be filed in case of disqualification of directors

a. Form to be filed by the Director

Every director shall inform the company about his disqualification under section 164 in Form DIR-8 before his appointment or re-appointment.

b. Forms to be filed by the Company

On receipt of information in form DIR-8, the company shall file form DIR-9 with RoC within 30 days of such receipt.
Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend u/s 164(2), 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.

If a company fails to file Form DIR-9 within a period of 30 days of the failure that would attract disqualification under Section 164(2) then officers of the company shall be the officers in default.

C. Updation of records by RoC

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.

4. Penalties for Non-Compliances

If a person functions as a director even when he knows that the office of director held by him has become vacant then he shall be punishable with fine which shall not be less than INR 1 Lacs but which may extend upto INR 5 Lacs.
In case of non-compliance of Section 164, The company and every officer of the company who is in default shall be liable to a penalty of INR 50,000. Further, in case of continuing failure, an additional penalty of INR 500 per day during which such failure continues, subject to a maximum of INR 3 Lacs in case of a company and one lakh rupees in case of an officer who is in default.

5. Renewing directorship of disqualified director of a company

Once the period of disqualification expires or the event that has triggered disqualification has been removed such as undischarged insolvent, unsound mind then disqualification of director shall come to end.

However, directorship doesn’t restore automatically. a director is required to file DIR-10 to the Registrar for removal of disqualification and removal of his/her name from the list of disqualified directors.

6. Frequently Asked Questions

a. What disqualification has any Impact on the shareholding of disqualified director of a company ?

Where a director holds shares of company and is a registered member of company, disqualification of a director will not impact the shareholding even if he has vacated the office of director.

b. What action is to be taken if all directors of the company are disqualified?

It may happen that all the directors of a company get disqualified by virtue of default(s) committed by that company. In such a scenario, promoters of a company will appoint the required number of directors till the time new directors are not appointed by shareholders in a general meeting.

c. Whether criteria of disqualification mentioned above is applicable to all companies and directors?

Above criteria for disqualification apply to all companies, be it private companies, one-person companies, small companies and public companies (whether listed or not).

d. How to check the disqualification status of any director?

For the past few years, the Ministry of Corporate Affairs (MCA) has been strict in enforcing the provisions of the Companies Act, 2013. In this sequence, it is publishing names of disqualified directors on the MCA portal according to the jurisdiction of the Registrar.
RoC only issued list of directors who are disqualified in pursuance of Section 164(2)(1) only and not others
List of disqualified directors issued so far can be accessed at Here.
The list of disqualified directors contains DIN of director, name of director, Corporate Identity Number (CIN), name of the company and period of disqualification. So, one can easily find out the name of a disqualified director and his period of disqualification.

e. What are the Remedies availed to a disqualified director of a company?

The remedy available to a disqualified director is that he/she can approach the High Court through a writ petition for the upliftment of disqualification and activation of the DIN and for passing a stay order on the action taken by the Registrar of Companies. Alternatively, a disqualified director can approach NCLT.
It may also happen that MCA may bring any amnesty scheme for a particular period to allow erring companies to file their pending returns or financial statements of past periods and activate the DIN of disqualified directors.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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