DISQUALIFICATION OF DIRECTOR

The Companies Act, 2013 lays down various grounds under which a director may be disqualified from holding the office of a director in a company. The relevant provisions regarding the disqualification of directors are covered under Section 164 and the accompanying rules.

Section 164 deals with the various conditions under which an individual may be disqualified from being appointed as a director of a company. Conditions of Disqualification of director can apply either before their appointment or during their tenure as a director.

DISQUALIFICATION DUE TO PERSONAL ACTION

A person is disqualified from being appointed as a director in any company if:

He has been declared as of unsound mind by a competent court and the declaration has not been revoked.
He is undischarged insolvent, meaning that they have been declared bankrupt and their insolvency has not been resolved.
He applied to be adjudicated as an insolvent and their application is still pending.
He has been convicted of an offence by a court involving moral turpitude or any offence punishable by imprisonment for at least six months.

(If they have been convicted of any offence and sentenced to imprisonment for more than seven years, they are permanently disqualified from being a director.)

He has not paid any calls on shares held by them in the company or any other company within six months from the last date for payment.
He has been convicted of any offence under the Prevention of Corruption Act, 1988.
He has been disqualified by an order of a court or tribunal from holding the position of director.
He has no valid Director Identification Number (DIN), or if their DIN has been deactivated or they have provided false or incorrect information for obtaining the DIN.

DISQUALIFICTION FOR OFFENCE OF COMPANY

A director can be disqualified if the company in which they serve as a director Section 164(2) of Companies Act,2013:

1. Defaults in Filing Financial Statements or Annual Returns:

If the company has not filed its financial statements or annual returns for a continuous period of three financial years, any director in that company will be disqualified from being reappointed as a director in that company or in any other company for a period of five years.

2. Failure to Repay Deposits or Redeem Debentures:

If the company fails to:

Repay deposits or interest thereon,
Redeem any debentures on the due date, or
Pay dividends declared by the company (failure continues for one year or more) the directors of that company will be disqualified from being reappointed as a director in that company or in any other company (for a period of five years).

EFFECT

The effect of disqualification under the Companies Act, 2013, is significant as it directly impacts the ability of a person to continue serving as a director in a company and hold positions in other companies. Disqualification can arise under various sections of the Act, such as Section 164(1) and Section 164(2), and the consequences are designed to ensure compliance with legal standards and promote corporate governance.

Key Effects of Disqualification:

If a director is disqualified under Section 164, they must vacate their office as a director in all companies. (The disqualified director must step down from all companies where they hold a directorship, except for the defaulting company itself in cases under Section 164(2))

A disqualified person cannot be reappointed as a director in the defaulting company or appointed as a director in any other company during the period of disqualification.
During the period of disqualification, the individual cannot be reappointed to any company.
Any actions or decisions made by a disqualified director after the date of disqualification may be deemed invalid or illegal.
Continuing to act as a director after disqualification can attract penalties and fines under the Companies Act.
If the company does not take steps to address the disqualification (e.g., by notifying the Registrar of Companies or appointing a new director), it may face compliance issues and regulatory scrutiny.

Example of Disqualification under Section 164(2):

If a company fails to file its financial statements or annual returns for three consecutive financial years, the directors of that company will be disqualified for five years under Section 164(2). This means:

They must vacate their office in all other companies but can continue to hold office in the defaulting company.
They cannot be reappointed as directors in the defaulting company or appointed as directors in any other company for five years.

REMEDIES

Appeal to NCLT for relief against disqualification, especially in cases of technical or procedural defaults.
Company can rectify its default by filing overdue financial statements, annual returns, or repaying deposits.
Apply under the condonation of Delay Scheme provided by the Ministry of Corporate Affairs (MCA) to regularize their directorship and remove disqualification.
File a writ petition in the High Court seeking judicial relief if the disqualification is considered unreasonable or unlawful.
After the disqualification period (usually five years), the director can be reappointed once the company complies with its legal obligations.
In cases where the DIN has been deactivated, directors can apply for reactivation after completing all necessary compliance requirements.

CONCLUSION

Director disqualification under the Companies Act, 2013, ensures that individuals holding directorships meet essential legal and ethical standards. Disqualification can occur due to various reasons, including personal misconduct, failure to comply with statutory obligations, or company defaults. The consequences are significant, impacting the director’s ability to serve in any capacity in other companies and requiring them to vacate their positions.

Ensuring accurate and timely submissions helps maintain updated records and prevents the adverse effects of disqualification. By understanding and managing these regulatory obligations, companies can safeguard their operations and ensure that their directors remain compliant with the Companies Act, 2013, thus promoting robust corporate governance and legal adherence.

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