Background
The appointment of directors is a matter of paramount importance in corporate governance, as directors bear fiduciary responsibilities towards the company and its stakeholders. The legislative framework has established certain disqualifications to prevent individuals with questionable backgrounds, financial irregularities, or legal impediments from occupying such positions of trust and responsibility.
Disqualifications under Section 164(1)
Section 164(1) of the Act enumerates specific circumstances under which a person shall not be eligible for appointment as a director of a company. These disqualifications are absolute in nature and apply to all types of companies unless otherwise specified. The following subsections detail each ground of disqualification:
A person who is of unsound mind and stands so declared by a competent court shall be disqualified from appointment as a director.
A person who is an undischarged insolvent shall be disqualified from appointment as a director.
A person who has applied to be adjudicated as an insolvent and whose application is pending shall be disqualified from appointment as a director.
A person who has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months, shall be disqualified for a period of five years from the date of expiry of the sentence.
If a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.
A person against whom an order disqualifying him for appointment as a director has been passed by a court or tribunal, and such order is in force, shall be disqualified from appointment.
A person who has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call, shall be disqualified from appointment as a director.
A person who has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years shall be disqualified from appointment as a director.
A person who has not complied with sub-section (3) of Section 152 shall be disqualified from appointment as a director.
Disqualifications under Section 164(2)
Section 164(2) introduces a category of disqualifications that apply to persons who are or have been directors of companies that have committed certain defaults. These disqualifications are consequential in nature and extend to re-appointment in the defaulting company as well as fresh appointments in other companies.
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.
No person who is or has been a director of a company which 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.
Suspension of Disqualification under Section 164(3)
The proviso to Section 164(3) recognizes the principle of natural justice and provides for the suspension of certain disqualifications during the pendency of appeals or petitions challenging the conviction or order. This provision is applicable only to disqualifications arising under clauses (d), (e), and (g) of sub-section (1).
Suspension Period – First Thirty Days
The disqualifications referred to in clauses (d), (e), and (g) of sub-section (1) shall not take effect for thirty days from the date of conviction or order of disqualification.
Suspension during Pendency of First Appeal
Provision: Where an appeal or petition is preferred within thirty days against the conviction resulting in sentence or order, the disqualification shall not take effect until expiry of seven days from the date on which such appeal or petition is disposed of.
Suspension during Pendency of Further Appeal
Where any further appeal or petition is preferred against the order or sentence within seven days, the disqualification shall not take effect until such further appeal or petition is disposed of.
ADDITIONAL DISQUALIFICATIONS FOR PRIVATE COMPANIES
Section 164(3) of the Act empowers private companies to prescribe additional grounds of disqualification through their Articles of Association, over and above those specified in sub-sections (1) and (2). This flexibility allows private companies to tailor directorship eligibility criteria to their specific requirements and governance philosophies.
RULE 14: PROCEDURAL REQUIREMENTS AND COMPLIANCE
Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the procedural framework for implementing the disqualification provisions under Section 164. It mandates specific disclosures, filings, and timelines to ensure transparency and regulatory oversight.
Director’s Disclosure Obligation – Rule 14(1)
Every director shall inform the company concerned about his disqualification under sub-section (1) or sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or re-appointed.
Compliance Requirements:
- Every person proposed to be appointed or re-appointed as a director must file Form DIR-8, which is a declaration regarding disqualifications, incapacities, and interests.
- The form must be submitted to the company before the appointment or re-appointment takes effect.
- The director must disclose all disqualifications, whether arising under sub-section (1) or sub-section (2) of Section 164, in a truthful and complete manner.
- Failure to disclose disqualifications or providing false information may result in penal consequences under the Act and may render the appointment void.
Company’s Filing Obligation – Rule 14(1A)
Whenever a company receives the information in Form DIR-8, the company shall, within thirty days of such receipt, file Form DIR-9 with the Registrar.
Compliance Requirements:
- Upon receiving Form DIR-8 from a director or proposed director, the company must file Form DIR-9 with the Registrar of Companies within thirty days.
- Form DIR-9 is a notice of resignation or cessation of directorship, or intimation of disqualification of a director, and serves as a formal notification to the Registrar regarding the director’s status.
- This filing is mandatory to ensure that the public registry of directors is kept current and accurate.
Filing Upon Defaults Under Section 164(2) – Rule 14(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.
Compliance Requirements:
- When a company commits a default that triggers disqualification under Section 164(2), it must immediately file Form DIR-9 with the Registrar.
- The form must contain the names and addresses of all directors who held office during the relevant period when the default occurred.
- This filing creates a public record of directors who are subject to disqualification, enabling other companies to verify the eligibility of prospective directors.
- The word ‘immediately’ indicates that the filing should be done without undue delay, preferably as soon as the company becomes aware of the disqualifying event.
6.5 Registration and Public Inspection – Rule 14(4)
Upon receipt of Form DIR-9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection.
Application for Removal of Disqualification – Rule 14(5)
Any application for removal of disqualification of directors shall be made in Form DIR-10 and filed before the Regional Director.
Penalty & Punishment
Officers in Default – Rule 14(3)
When a company fails to file 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.
Section 172: If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.
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