Disqualification of Directors: A Complete Guide
Disqualification of Directors: A Complete Guide
Directors are the key office bearers of a company and play a crucial role in its management and decision-making. They are responsible for overseeing daily operations and taking strategic decisions essential for the company’s functioning and growth. Therefore, directors are expected to possess the necessary expertise and competence to effectively represent the company.
While the Companies Act, 2013 does not prescribe specific qualifications for appointing a director, it clearly lays down provisions relating to the disqualification of directors. Every company must carefully consider these provisions, as appointing or continuing a disqualified director can adversely affect the company’s compliance status and brand image. The circumstances under which a person may be disqualified from being appointed or continuing as a director are specified under Section 164 of the Companies Act, 2013.
Who is the Director?
Directors are entrusted with significant duties and powers to manage and conduct the business of the company for the benefit of its shareholders. Shareholders invest their capital in the company, and it is the responsibility of the directors to ensure that this investment is safeguarded and enhanced by maximizing shareholder value while driving the overall growth of the company.
Directors operate under the oversight of the shareholders and must perform their duties in accordance with the provisions of the Companies Act, 2013, as well as the restrictions and guidelines laid down in the company’s Articles of Association.
What are the Different Cases of Disqualification of Directors?
Section 164 of the Companies Act, 2013 lays down the circumstances under which a person is disqualified from being appointed or continuing as a director of a company. A person shall be disqualified if:
He or she is of unsound mind and has been so declared by a competent court
He or she is an undischarged insolvent
An application for adjudication as an insolvent has been made and is pending
He or she has been convicted by a court for an offence involving moral turpitude and sentenced to imprisonment for a term exceeding six months
A court or tribunal has passed an order disqualifying the person from being appointed as a director
He or she has failed to pay calls in respect of shares held, and six months have elapsed from the due date for payment
He or she has been convicted of an offence relating to related party transactions
He or she has not complied with the provisions of Section 152(3) of the Companies Act, 2013
He or she has not complied with the provisions of Section 165(1) of the Companies Act, 2013
These provisions ensure that only eligible and compliant individuals hold directorial positions, thereby protecting corporate governance and stakeholder interests.
Consequences of Disqualification of Directors
The disqualification of a director can have serious consequences, including vacation of office. Once a director becomes disqualified, he or she is required to vacate the position of director.
However, in cases where disqualification arises under Section 164(2) of the Companies Act, 2013, the director is required to vacate office in all other companies in which he or she is a director, except the company in which the default leading to disqualification has occurred.
Period of Disqualification of Directors
It is important to understand the period of disqualification of directors, as it determines how long a person is barred from being appointed or reappointed as a director. The period of disqualification varies depending on the nature of the disqualification, as explained below:
| Ground of Disqualification | Period of Disqualification |
|---|---|
| Unsound mind | For as long as the person continues to be of unsound mind |
| Undischarged insolvent | Until the person becomes solvent |
| Application pending for adjudication as insolvent | Until disposal of the application or until the person becomes solvent, as applicable |
| Conviction for an offence involving moral turpitude with imprisonment exceeding 6 months | Five years after the expiry of the sentence; however, if imprisonment exceeds seven years, disqualification is for a lifetime |
| Non-payment of calls on shares | Until the due amount is paid |
| Disqualification by order of a court or tribunal | For the duration the order remains in force |
Understanding these timelines helps companies and individuals ensure compliance with the Companies Act, 2013 and avoid regulatory consequences.
Penalty for Non-Compliance
If a person continues to act as a director despite knowing that he or she is disqualified and that the office has become vacant, such person is punishable with a fine of not less than ₹1,00,000, which may extend up to ₹5,00,000.
Further, in the event of a breach of the provisions of Section 164 of the Companies Act, 2013, the company and every officer in default shall be liable to a penalty of ₹50,000. In case of a continuing default, an additional penalty of ₹500 per day is levied for each day the default continues, subject to a maximum penalty of ₹3,00,000.
Compliances after Discharge from Disqualification
Once a director is released from disqualification, their position as a director is not automatically reinstated. To be eligible to act as a director again, the individual must file Form DIR-10 with the Registrar of Companies (ROC) to formally remove the disqualification and have their name deleted from the list of disqualified directors.
