Introduction
The Companies Act, 2013 has linked section
164 to section 167 leading to an impression that disqualification under section
164 leads to automatic vacation. Section 164 of the Companies Act, 2013 states
various disqualifications for appointment/ reappointment of Director in a
company. Further, Section 167 of the Act states the instances for the
occurrence of the vacation of the office of director. Additionally, a statutory auditor is also mandated under
Section 143 (3) (g) of Act, 2013 to report whether any director is disqualified
from being appointed as a director under Section 164 (2) in the Auditor's
report. This article intends to discuss the applicability of one such
provision as specified under Section 164 (2) of the Act read with Section 167.
Position under old Act
Please note that that Section 164(2)
correspond to Section 274(1)(g) of Companies Act, 1956, with the difference
that Section 274 (1) (g) was not applicable to private companies, however in
case of Section 164(2) there is no such distinguishment between Private Company
or Public Company.
Further, note that Section 167 corresponds to
Section 283 of Companies Act, 1956 pertaining to vacation of office of a
director. Section 167 (1) provides the premises when office of a director shall
become vacant and Section 167 (2) specifies the consequence if a director
continues to hold the office despite attracting any of the premises under
Section 167 (1).
In present piece of writing, author has made
efforts to make reader understand the effect of clause (a) of sub section (2)
of section 164 read with clause (a) of the sub-section (1) of section 167 of
the Act to the extent. Further it may be noted that sub section (1) of section
164 has different footing than section 164 (1). Author would like to divert the
reader towards a point that Section 167(1)(a), mentions that "he incurs
any disqualification specified in Section 164". The section collectively
talks about the disqualification under Section 164 without further bifurcating
as disqualification specified under Section 164(1) or Section 164(2).
Therefore, let's begin with interpretation
and clear understanding of Section 164 (1) and Section 164 (2) of the Act.
Disqualifications for Appointment of Director
(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.]
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.”
Exception/ Modification/
Adaptation
1. In
case of Government company - Sub-section (2) shall not apply . - Notification dated 5th june, 2015.
Rule 14 of Companies (Appointment and Qualification of Directors) Rules, 2014-Disqualification of Directors Sub-section (2) of Section
164
(1) Every director shall inform to the company concerned
about his disqualification under sub-section (2) of section
164, if any, in Form DIR-8
before he is appointed or re-appointed.
(2) Whenever a company fails to file the financial
statements or annual returns, or fails to repay any deposit, interest,
dividend, or fails to redeem its debentures, as specified in sub-section (2) of
section
164, 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.
(3) When a company fails to file the Form
DIR-9 within a period of thirty
days of the failure that would attract the disqualification under
sub-section (2) of section
164, officers of the company specified in clause (60) of section
2 of
the Act shall be the officers in default.
(4) 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.
(5) Any application for removal
of disqualification of directors shall be made in Form DIR-10
(Annexure – 1)
Rule 14(5)
states that, 'Any application for removal of disqualification of directors
shall be made in Form DIR-10.' However it does not provide any procedure to be
followed.
Section 2
(60) "officer who is in default", for the
purpose of any provision in this Act which enacts that an officer of the
company who is in default shall be liable to any penalty or punishment by way
of imprisonment, fine or otherwise, means any of the following officers of a
company, namely:—
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial
personnel, such director or directors as specified by the Board in this behalf
and who has or have given his or their consent in writing to the Board to such
specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate
authority of the Board or any key managerial personnel, is charged with any
responsibility including maintenance, filing or distribution of accounts or
records, authorises, actively participates in, knowingly permits, or knowingly
fails to take active steps to prevent, any default;
(v) any person in accordance with whose
advice, directions or instructions the Board of Directors of the company is
accustomed to act, other than a person who gives advice to the Board in a
professional capacity;
(vi) every director, in respect of a
contravention of any of the provisions of this Act, who is aware of such
contravention by virtue of the receipt by him of any proceedings of the Board
or participation in such proceedings without objecting to the same, or where
such contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of
any shares of a company, the share transfer agents, registrars and merchant bankers
to the issue or transfer;
Presently every director so disqualified by
the Ministry of Corporate Affairs is due to the implication of clause (a) of
Sub Section 2 of Section 164 of the Companies Act, 2013 so we should analyse
it.
Section 164 (2) (a) describes that “No person
who is or has been a director of a company which has not filed financial
statements, or Annual returns for any continuous period of three financial
years; 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.”
By the inside interpretation of this section,
we can get the following remarks
1. Company did not file its Financial Statements and Annual Returns
for a continuous period of 3 years.
2. Disqualified Directors can not be re-appointed as Director in that
company or appointed as Director in another company for 5 years.
3. The disqualification is by virtue of operation of law.
4. Section does not mention anywhere that Notice should be served to
the directors before giving the status of disqualified directors.
Vacation of Office of Director
167. (1) The office of a director shall become
vacant in case—
(a) he incurs any of the disqualifications specified in section 164;
(a) he incurs any of the disqualifications specified in section 164;
(2) If a person, functions as a director even when he knows
that the office of director held by him has become vacant on account of any of
the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term
which may extend to one year or with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees, or with both.
(3) Where all the
directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors
who shall hold office till the directors are appointed by the company in the
general meeting.
On the
combined reading of both the sections 164 and section 167 it seems that if any
person got any disqualification mentioned under Section 164, he shall have to
vacate his office under section 167.
By having disqualification he shall not be
re-appointed as director in that company and shall not be appointed in another
company for a period of 5 years by virtue of section 164.
The author wanted to enlighten the intension
of the lawmaker in respect of Section 164 read with section 167. Government is
providing a platform for ease of doing business but as a consequences if we do
a strict interpretation of the section 164, every director has to vacate his
office only because of non-filing of Financial Statements and Annual Returns,
therefore the Board will attract a complete vacuum and the members of the Board
shall be liable to be removed from their positions from all other Companies
where they are Directors.
This is the serious in nature
issues and creating more problems in the corporate world.
Some of the relevant extracts from
the Report of the Companies Law Committee, issued on 01st Day of
February 2016 (available on the website of Ministry of Corporate Affairs), have
been discussed below in respect of stringent
provision of disqualification and vacation of Director.
The
Committee was set up on 04th Day of June, 2015 by the Ministry of
Corporate Affairs, to make recommendations to the Government on issues arising
from the implementation of the Companies Act, 2013 as well as on the
recommendations received from the Bankruptcy Law Reforms Committee, the High Level
Committee on CSR, the Law Commission and other Agencies.
The
relevant extract of the same is as follows [Page No. 55 para 11]:
Disqualifications from appointment
as, and vacation of office of director
11.13 Section 167(1)(a) dealing with vacation
of office by a director triggers an automatic vacation of office of the
director if he incurs any of the disqualifications stipulated under Section
164. Section 164(1) provides for disqualifications which are incurred by a
director in his personal capacity such as being an undischarged bankrupt, of
unsound mind, convicted of an offence etc., and Section 164(2) lists out
disqualifications related to the company such as non-compliance of annual
filing requirements, etc. The Committee acknowledged that this Section created
a paradoxical situation, as the office of all the directors in a Board would
become vacant where they are disqualified under Section 164(2), and a new
person could not be appointed as a director as they would also attract such a
disqualification. In this regard, the
Committee recommended that the vacancy of an office should be triggered only
where a disqualification is incurred in a personal capacity and therefore, the
scope of Section 167(1)(a) should be limited to only disqualifications under
Section 164(1).
11.14 The
Committee also recommended that a disqualification under Section 164(2) be only
applicable to a person who was a director at the time of the noncompliance, and
in case of a continuing non-compliance, there should be a period of six months’
time allowed for a new Director to make the company compliant.
Unfortunately, that’s the truth!!!
Since 13.09.2017, our over enthusiastic
government and MCA, in crackdown on black money has blocked filing of ALL Forms
of Defaulting Company with the DSC of Disqualified Directors. Additionally, MCA
has also blocked the filing of forms of non-defaulting company, but having the
DSC of disqualified Director.
So, it seems that the Ministry has done a
work beyond its powers and suspension of DIN and DSC of the directors of
Non-filing Companies is very strict decision. ROC has the power only to Strike
off the Company and neither MCA nor ROC has power u/s 164 to declare any
director as Defaulting Director. It is also important to have a look on the
provisions of Powers of Central Government / Regional Director to Cancel or
Surrender or Deactivation of DIN as envisaged in Rule 11 of “The Companies
(Appointment and Qualification of Directors) Rules, 2014 whereas the Rule 11
prescribes:
Cancellation or surrender or
Deactivation of DIN.-
The Central
Government or Regional Director or any officer authorized by the Regional
Director may, upon being satisfied on verification of particulars or
documentary proof attached with the application received along with fee as
specified in Companies (Registration Offices and Fees) Rules, 2014 from any
person, cancel or deactivate the DIN in case –
a. the DIN is found to be duplicated in respect of the same person
provided the data related to both the DIN shall be merged with the validly
retained number;
b. the DIN was obtained in a
wrongful manner or by fraudulent means;
c. of the death of the
concerned individual;
d. the concerned individual
has been declared as a person of unsound mind by a competent Court;
e. If the concerned individual has been adjudicated an insolvent:
Provided that before cancellation or deactivation of DIN pursuant to clause
(b), an opportunity of being heard shall be given to the concerned individual;
f. on an
application made in Form DIR-5 by the DIN holder to surrender his or her DIN
along with declaration that he has never been appointed as director in any
company and the said DIN has never been used for filing of any document with
any authority, the Central Government may deactivate such DIN:
In the present scenario, Government has
cancelled / deactivated all the DIN of Directors of Non-filing Companies.
I do not know, under which provisions of the
Companies Act 2013, MCA and ROC has got power to disqualify the Directors and
also barred the filing of forms with DSC of defaulting Director.
Action taken by the Government
In April
2017, various Registrars of Companies issued public notices, those are
available on the website of Ministry of Corporate Affairs w.r.t. powers of the
Registrar of Companies in relation to suo–moto action for removal of the name
of the company from its register and accordingly the Registrar of Companies
started strike – off name of these companies from their registers.
A notice has
also been placed on homepage of MCA website read as under – Any person
disqualified under section 164(2) of the Companies Act, 2013 is advised not to
act as a director during the period of the disqualification and not to file any
document or application with MCA as the same shall be summarily rejected.
However, this shall be without prejudice to the liability of the said person
for the violation of section 164(2) read with section 167 of the Act including
the action under section 448 read with section 447 of the wherever warranted.
A press
release issued by Minister of Corporate Affairs which has been place on the
website of Press Information Bureau and that press release has similar
communication. That press release has two important points –
§ Department of Financial Services (DoFS) issued instructions to all
the Banks on 5th September 2017, the Directors (ex-) or their authorized
signatories had been restricted from operating the Bank accounts of such
companies and they cannot siphon off money from the accounts of these “struck
off” companies.
§ It has been decided that in
case the Director or authorized signatory of any “struck off” company tries to
unauthorized siphon-off money from its bank account, he/she may attract
punishment of imprisonment of not less than six months extendable to 10 years.
If it is found that the fraud involves public interest, the punishment shall
not be less than 3 years (imprisonment) and fine may also be imposed which
would be three times the amount involved.
From the above press release it seems like
that government may try to invoke Section 447 & 448 of the Companies Act,
2013 which deals with fraud under corporate law.
Director who is shareholder
Note that if the director is disqualified and
removed/ stands vacated from office as a director, this will not usually affect
the director's position (if he/she has one) as a shareholder in the company.
This is often a relevant consideration in private companies, where often a
director is also a shareholder.
So opinion can be drawn where such situations
prevails in companies where promoters, directors and shareholders are same
person specially in case of 'private limited companies', provisions of Article
of Association can be entrenched making it more stringent providing that a
shareholder who ceases to be a director is deemed to have given the company a
transfer notice in respect of his or her shares, so that the shares can, in
effect, be compulsorily acquired.
In nutshell, powers to appoint new Board of
directors in company rely with shareholders of Company
Removal of
Disqualifications: The Companies (Appointment and Qualification of Directors) Rules,
2014 contain a provision empowering the Registrar of Companies to remove the
disqualification.
Rule 14(5) states that, 'Any application for
removal of disqualification of directors shall be made in Form DIR-10.' However
it does not provide any procedure to be followed.
Remedies for disqualified directors
of strike – off companies
FUTURE
COURSE OF ACTION
The pertinent question, now, is about the
future course of action from these directors and their companies.
It is
suggested that their disqualification under Section 164(2) shall be for 5 years
only. However, their silence may be harmful and be recorded in the files of Registrars
of Companies (RoCs) and of Serious Fraud Investigation Office (SFIO). Further,
many of these “strike – off” companies have bank balances, properties, loans,
other liabilities, disputes among promoters and directors, and need
restoration.
So the
aggrieved person can take the following action:-
1. If the name has been removed erroneously file form DIR 10 as an
enclosure to CG 1 to the Ministry for removal of Disqualification.
2. If name has been removed as
a reason of non-filing of Financial Statements or Annual return for a
continuous period of three years, Apply to ROC for appointment of other
directors (Company has to give the name of other two directors in application
cum request letter and accordingly ROC will physically associate the DIN of those
two directors and Company would then be able to file the Balance Sheets and
Annual Returns.
3. Directors removed / suspended may file a writ Petition / PIL
against the action of Ministry / ROC with Hon’ble High Court or Hon’ble Supreme
Court of India.
Are this offence Compoundable?
As per provision of Section 441 (1) of the
Act, 2013-Any offence punishable under this Act, whether committed by a company
or any officer thereof, with fine only, may, either before or after the
institution of any prosecution, be compounded to the extent, if default is made
good. Power of Compounding of offence is with NCLT/ Regional Director/ Person
authorized by Central Government. Amounts exceeding Rs 5,00,000 will be
adjudicated upon by the NCLT and the amounts lesser than Rs 5,00,000 by the RD
or the Central Government authorized person.
As per the current scenario, where two lakhs
companies have been struck off, where more than one lakh directors have been
declared disqualified under section under section 164 (2) seems non-compoundable
and under section 167 Offence seems to be compoundable for officers only.
Further note that any offence under section 447[4] and 448[5] of the Act are
non-compoundable.
Who will represent the company in further
proceedings, if any before tribunal, if all directors are ineligible for
re-appointment under sub section (2) of section 164 of the Act?
Dear reader would request to refer Case law:
Arvind Mohan Johari v/s M/s Mohan Carlton Hotel Pvt Limited interim order dated
21/11/2016 as the case is pertaining to 'Mismanagement and Oppressions' affairs
of company where all directors are disqualified under section 164(2). Final
order is yet to be passed.
Annexure - 1
FORM 'DIR-10'
FORM OF APPLICATION FOR REMOVAL OF
DISQUALIFICATION OF DIRECTORS
[Pursuant to
Section 164(2) read with rule 14(5) of Companies (Appointment and Qualification
of Directors) Rules, 2014]
Registration
No. of Company Nominal Capital Rs.
Paid-up Capital Rs.
Name of Company
Address of its Registered Office
Grounds under which director(s) are
disqualified
 |
Date of disqualification
Details of the application
Signature Designation*
Dated this
day of
*State whether Director, Managing Director,
Manager or Secretary
DISCLAIMER: The entire
contents of this document have been developed on the basis of relevant
information and are purely the views of the authors. Though the authors have
made utmost efforts to provide authentic information however, the authors
expressly disclaim all or any liability to any person who has read this
document, or otherwise, in respect of anything, and of consequences of anything
done, or omitted to be done by any such person in reliance upon the contents of
this document.
READER SHOULD SEEK APPROPRIATE COUNSEL FOR
YOUR OWN SITUATION. AUTHOR SHALL NOT BE HELD LIABLE FOR ANY OF THE CONSEQUENCES
DIRECTLY OR INDIRECTLY.
1. The use of the specific words 're-appointed' and 'appointed' in
the concluding portion of subsection (2) is significant. These words must be
interpreted according to their natural meaning in the context of the provisions
of the Companies Act concerning directors. Section 152 of the Act indicates
that the word 're-appointment' is used to refer to a director who is liable to
retirement by rotation under section 152 and who is appointed again at an
annual general meeting at which his current term office as a director comes to
an end.
2. When there are in an enactment two provisions which cannot be
reconciled with each other, they should be so interpreted that; if possible,
effect should be given to both. This is what is known as the rule of harmonious
construction. (Venkataramana Devaru v. State of Mysore AIR 1958 SC 255)
3. Officers in default is defined
4. Punishment for fraud
5. Punishment for false statement.
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