The role of a director is critical to the governance and functioning of a company. However, certain legal provisions exist to ensure that only qualified individuals are entrusted with such responsibilities.
Section 164 of the Companies Act, 2013 lays down the framework for disqualification of directors. It defines the circumstances under which a person cannot be appointed or continue as a director and specifies the consequences of such disqualification.
This section is designed to maintain corporate integrity, protect shareholders, and prevent fraudulent or irresponsible management. It identifies both personal grounds (such as insolvency or criminal conviction) and company-related defaults (such as failure to file statutory returns) that lead to disqualification.
Table of Contents
What is the Disqualification of a Director as per Section 164(2)?
Section 164(2) addresses disqualification arising from company defaults in statutory compliance. According to this provision, a person is disqualified from being appointed or continuing as a director if the company fails to file its annual returns or financial statements for three consecutive financial years.
Key consequences include:
- Deactivation of Director Identification Number (DIN): Once flagged by the Ministry of Corporate Affairs (MCA), the director’s DIN is deactivated, preventing them from being appointed in any other company.
- Five-Year Ineligibility: The director cannot be appointed in any company for five years from the date of disqualification.
- Reappointment Conditions: Reappointment is possible only after the disqualification is removed or after five years' lapse. Directors can appeal to the National Company Law Tribunal (NCLT) for temporary relief while the matter is under consideration.
Related Read: KYC of Directors: Form DIR-3 Requirements, Fees, Penalty
Disqualification of Directors
Section 164 of the Companies Act, 2013, outlines various scenarios where a director may be disqualified. The disqualification framework is broadly classified into the following categories:
1. Personal Grounds:
- Declared of unsound mind by a competent court.
- Declared insolvent and not discharged.
- Convicted by a court and sentenced to imprisonment for two years or more.
- Fails to repay calls on shares or debentures.
2. Company-Related Defaults:
- Failure to file annual returns or financial statements for three consecutive years.
- Failure to repay deposits accepted by the company.
- Failure to redeem debentures on maturity.
- Failure to pay interest or dividend within the prescribed time.
3. Additional Provisions:
- Articles of Association (AoA) may impose extra restrictions based on the nature of the business or governance structure.
Reasons for Disqualification of Directors
Directors are disqualified for various reasons, primarily to protect the integrity of business practices and stakeholders’ interests. Some common grounds include:
- Failure to repay deposits or dividends within the stipulated time.
- Insolvency: Inability to meet financial obligations.
- Criminal conviction: Imprisonment for offence like fraud, financial misconduct, or corruption.
- Mental incapacity: Declared unsound mind by a court.
- Non-disclosure of interests: Concealing personal interests or conflicts of interest.
- Court-ordered restrictions: Being barred by court orders from holding managerial positions.
What is the effect of the disqualification of directors?
The disqualification of a director has significant implications for both the individual and the company:
- The director cannot be appointed or continue on any company’s board for more than five years, or as prescribed by applicable regulations.
- The director’s DIN is deactivated, blocking them from participation in corporate filings or board-related matters.
- Board decisions may be affected if the director’s absence impacts quorum or governance.
- Legal repercussions may arise if the disqualification is not addressed within the stipulated time.
What remedies are available for the disqualification of directors?
The Companies Act provides avenues for directors to challenge disqualification:
- Appeal to NCLT: A director can file an appeal within 30 days of disqualification to the National Company Law Tribunal (NCLT) seeking relief.
- Temporary Stay Order: During the appeal process, NCLT may grant a temporary stay, allowing the director to continue in office until the matter is adjudicated.
- Corrective Action: If the default arises from non-compliance, the company can file pending returns or documents to seek relief.
- Higher Courts: Directors may approach the High Courts if they believe the disqualification was unfair or based on incorrect facts.
Important solutions for Disqualification of Directors u/s 164(2)
Directors disqualified under Section 164(2) due to failure in filing statutory returns can explore the following remedies:
- Appeal to NCLAT or High Courts: Directors can file an appeal seeking relief and challenge the disqualification.
- Compliance Rectification: The company can update missing filings to address the issue.
- Wait for Reappointment: If relief is not granted, the director becomes eligible for appointment after completing the five-year period.
- Case Variability: Different High Courts may adopt distinct approaches; some grant stay orders, while others strictly adhere to statutory provisions.
Although there is no direct process for immediate reappointment, compliance and judicial recourse offer pathways to overcome disqualification.
Reappointment of Disqualified Directors
A disqualified director may seek reappointment after the prescribed period or upon removal of the disqualification. To ensure compliance, certain documents must be filed with the Registrar of Companies (ROC):
Essential Documents:
- Financial Statements
- Board’s Report
- Annual Return
- Auditor’s Report
- Shareholder Resolutions
- Director Disclosures
Frequently Asked Questions (FAQs)
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
Frequently Asked Questions
How long does the disqualification of a director last?
The disqualification of a director typically lasts for five years from the date of disqualification, as per Section 164(2) of the Companies Act, 2013. During this period, the director cannot be appointed or continue as a director in any company.
What happens if all directors of a company are disqualified?
If all the directors of a company are disqualified, the company faces a governance crisis. In such cases:
- The company may be unable to conduct board meetings or make decisions.
- The Registrar of Companies (ROC) can intervene and appoint new directors to ensure continuity.
- The company may face penalties for non-compliance with statutory requirements.
- In extreme cases, the company could be moved toward winding up if no compliant board can be formed.
Can disqualification be removed before the 5-year period?
Yes, disqualification can be removed before the completion of the five-year period, but only through legal remedies. A disqualified director can:
- Appeal to the National Company Law Tribunal (NCLT) within 30 days of disqualification.
- Seek a temporary stay order, which allows them to continue functioning as a director until the matter is resolved.
- Approach the High Court in case further relief is required.
Can a disqualified director apply for the revival of the company?
A disqualified director cannot directly apply for the revival of the company while being disqualified, because they are legally barred from participating in board activities.
Can a disqualified director become a shareholder in a company?
Yes, a disqualified director can still be a shareholder in a company. Disqualification applies only to the role of director, not ownership. A disqualified individual may hold shares, receive dividends, and participate as a shareholder, as long as they are not appointed or acting as a director.
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Akash Goel is an experienced Company Secretary specializing in startup compliance and advisory across India. He has worked with numerous early and growth-stage startups, supporting them through critical funding rounds involving top VCs like Matrix Partners, India Quotient, Shunwei, KStart, VH Capital, SAIF Partners, and Pravega Ventures.
His expertise spans Secretarial compliance, IPR, FEMA, valuation, and due diligence, helping founders understand how startups operate and the complexities of legal regulations.
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