A company director is a specified member of the Board of Directors who oversees and manages the affairs of the organisation, including strategy, governance and operations. The director has the principal duty of making policy decisions, maintaining adherence to laws and defending the interests of shareholders and other stakeholders. Being the representative, trustee and spokesperson of the firm, the director will make key decisions that lead to growth and sustainability. The number of directors the Companies Act 2013 mandates, at least in India or corresponding corporate laws applicable to other countries, is usually two for private companies and three for public companies. Directors can be classified into four categories: executive, non-executive, independent or nominee directors. They play an important role in effectuating effective corporate governance, ethical practices and long-term organisational success.
Section 2(10) of the Companies Act 2013 defined that “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.
Section 2(13) of the Companies Act 2013 defines a director as a “director appointed to the board of a company.”
Grounds for Disqualification of a Director
The Companies Act 2013 provides several disqualification grounds for the directors to be eligible and ensures that only qualified people are appointed to the directorship position. All these provisions mainly lie in Sections 164 and 165. The disqualification can be for legal, financial or other reasons, and above all, these provisions are framed to promote efficient corporate governance with the protection of the interest of stakeholders.
This provides for disqualification provisions under the Companies Act 2013 with the objective that accountability of directors with upholding high ethical standards may be ensured, and this kind of legislation does protect the interests of investors as well as the stakeholders by forbidding the nomination of individuals whose record is reflected in financial impropriety or criminal behaviour, or even deficient governance. It is crucial to carry out an in-depth review of a company’s directors for the proper handling of governance issues. The company also has a requirement to comply with these provisions.
1. Disqualification on Personal Grounds [Section 164(1)]
A person shall not be appointed or reappointed as a director of a company if such person falls under any of the following grounds:
(i) A competent court has declared that the person is of unsound mind, and the order stands valid.
(ii) Undischarged insolvent means a person who has not paid his debts after being declared insolvent.
(iii) An application for insolvency is pending for adjudication.
(iv) Convicted of offences related to moral turpitude or other crimes for which the sentence is at least six months. This prohibition is in place for five years after the end of the sentence. Those convicted and sentenced to seven years or more are permanently prohibited.
(v) Disqualified as a director based on a decision by a court or tribunal.
(vi) If he fails to pay for calls on shares held for a period of more than six months after becoming due.
(vii) Has been convicted for any offence or any offence dealt with, including that under the RBI Act, the SEBI Act, FEMA and other relevant economic legislations in which he has been sentenced for a term of not less than six months.
(viii) Failure to obtain a valid DIN as required under Section 152(3);
2. Disqualification on Company Related Matters [Section 164(2)]
A person shall not be reappointed in the same or any other company if they are or have been a director of a corporation that has:
(i) Not Filed Financial Statements or Annual Returns: The failure to submit financial statements and annual returns for three consecutive years.
(ii) Failure to Pay Debts or Dividends: A failure to repay deposits or interest, redeem debentures, pay dividends, or settle any dues for a period of one year or more results in a disqualification period of five years.
3. Disqualification under Section 165
There is a restriction on the number of directorships a person can hold under company law. A person cannot hold directorships in more than 20 companies simultaneously. Public companies are restricted to having a maximum of 10 directors. If the above limits are exceeded, then the person is disqualified.
4. Disqualification under other Laws
Directors may be disqualified under several provisions of the law, including the SEBI Act, 1992, in cases of fraudulent or unfair business practices. Financial malpractices fall under the RBI Act of 1934. The Income Tax Act of 1961 deals with tax evasion and nonpayment.
Effects or Consequences of Disqualification
A disqualified director under the Companies Act 2013 would involve a number of legal and practical consequences for both the individual as well as the concerned company. The details are primarily presented in Sections 164 and 167 of the Act. This kind of disqualification bars a director from holding or being appointed to any directorial positions, affecting corporate governance and the general management of the company. The immediate implications of disqualification include the loss of office of the director, possible legal punishment and restricted future appointments. For the company, this means loss of operations, damage to reputation and regulation attention. Therefore, companies need to maintain constant compliance with legal standards and directors need to be cautious in order not to get disqualified and maintain proper corporate governance.
A disqualified director needs to vacate all directorships except that of the company at which the disqualification took place under Section 164(2). Vacant positions would be filled up as per the Articles of Association of the Company or Board of Directors. In addition, a disqualified director cannot be reappointed to the same or any other company for five years subsequent to the date of disqualification, severely limiting their career scope in corporate circles. A disqualified person is barred from attending or participating in board meetings, decision-making processes, and any managerial functions. The actions or decisions of a disqualified director after disqualification are considered unlawful and cannot be enforced.
The imprisonment of the disqualified director for a term which may extend up to one year, or a fine which may extend up to ₹5 lakh, or with both, wherein the disqualified managerial directors or full-time directors are mainly essential for its viability for operations. This, therefore means that in case there is a board vacancy, it is critical that the organisation swiftly fills it. Failure to adhere to such regulation may mean the regulatory body punishes the firm, hence leading to action against it through enforcement. The ROC also has the power to do so. In case of a director’s disqualification, Form DIR-12 is to be filed with the Registrar of Companies. It is also obligatory for the companies to report the disqualification details within their Board of Directors reports and financial statements, which might have negative implications on the public image and reputation of those companies. The Ministry of Corporate Affairs (MCA) also bars disqualifying directors from participating in further corporate appointments by suspending their DIN. Only after obtaining relief through a proper legal recourse would the DIN again be resumed. If a director is associated with multiple companies, disqualification in one entity may influence their directorship in others, which can lead to governance issues and turnover in leadership across various organizations.
Disqualified directors can further appeal before the NCLT or High Court. Thus, until and unless there is a decision, the order of disqualification remains. Such disqualification damages the director’s professional reputation, thereby limiting the director’s potential future prospects. Investors might lose confidence, which would negatively affect the standing of the company in the market. Owners might perceive the organization as weak and not professionally managed, which would limit relationships and financial growth.
Removal Of Disqualification
The Companies Act 2013 explicitly outlines procedures for lifting the disqualification of a director, thereby restoring the individual’s eligibility to become a director. Disqualification arises under section 164 either due to the failure to file statutory documents or due to financial defaults. However, several legal and regulatory measures are present to deal with or mitigate this disqualification. To remove the disqualification of a director under the Companies Act 2013, any defaults need to be rectified, legal remedies pursued, and full compliance must be achieved with statutory obligations. Available remedies include appealing to the NCLT or High Court, compounding offences, and regularization of corporate filings. Disqualification can have severe implications for a director’s position and future prospects; however, swift remedial action can enable the reinstatement of directorship and minimize long-term effects. Directors and companies must make compliance and corporate governance a priority to avoid disqualification and maintain the sustainability of the business.
Remedies for removal of disqualification under Section 164(2)
- Company Compliance: In cases of disqualification on grounds of non-compliance, the company can file outstanding reports and financial statements to the Registrar of Companies. After achieving compliance and settling the late fees, the director may apply for removal of the disqualification.
- Petitioning the NCLT: The disqualified director can seek restoration of the company or relief from disqualification by filing a petition with the NCLT under Section 252. On approval, the DIN and DSC of the director will be restored.
- Writ Petition in High Court: The directors can challenge their disqualification by filing a writ petition under Article 226 of the Indian Constitution. The courts can grant relief in case the director proves he had made good-faith efforts to cure the defaults or where the disqualification was misused.
- Appeal Against Conviction: A convicted director can appeal to the higher court in case the director has been disqualified. In the case of a stay or overturn of conviction, the disqualification may be automatically revoked.
- Discharge from Insolvency: If a director is disqualified as an undischarged insolvent, he can apply for a discharge order from the insolvency proceedings. Once the discharge is received, the disqualification is removed.
- Medical Clearance: If a director is disqualified on the grounds of mental incapacity, he can get medical clearance and apply to the court to remove his disqualification status.
- The Ministry of Corporate Affairs initiates the disqualification process by deactivating the DIN and DSCs of the respective director. If the directors still want to do so, they have to file with compliance documents (DIR-10 for removal, for instance). After rectifying the defaults; MCA revives the DIN. MCA offers assistance plans to help them get compliant.
- Application for Compounding: Directors may apply for compounding of offences under Section 441 of the Companies Act if disqualification arises due to a technical or administrative mistake. Approval for compounding can be given by the RD or NCLT upon payment of a fine. After the completion of compounding, the disqualification can be removed.
- DIN and DSC revival: If the director’s disqualification has been successfully revoked, he must make an application to revive the DIN using DIR-10. In addition, the DSC needs to be updated so that the director can continue to make formal filings. Subsequently, all filings should meet the requirements of compliance so that no future occasion for disqualification arises.
Companies and directors should make timely submissions of annual reports and financial statements to avoid future disqualification. Consistent monitoring of statutory compliance and management of outstanding liabilities, such as dividends, debentures, and loans, is recommended. Professional advice on legal and regulatory changes is also advisable.
Conclusion
The disqualification of directors plays an essential role in fostering accountability and efficient corporate governance, as well as preventing companies from being supervised by unsuitable people. Still, directors are capable of lifting the disqualification imposed on them by various legal provisions, for instance, correcting their compliance failures, appealing or referring to the tribunal for intervention. Reinstatement of directorship can be reinstated only after due compliance with the statutory obligation to maintain adherence to regulatory standards.
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