Disqualification of Director - Whether Right or Wrong

Disqualification of Director - Whether Right or Wrong

According to the Company Act, 2013 enumerates two conditions for the disqualification of directors i.e. non-filing of annual returns and financial statements and the nonreturn of deposits or the nonpayment of dividends. under Companies Act, 1956 which also had similar conditions for disqualification but did not result in the automatic vacation of the office of director.

If the director incurs disqualification under Section 164(2) then the office of director shall become vacant in all companies in which he is a director, other than the company which is in default.

The provisions of Section 164(2) have been challenged on constitutional validity in various High Courts and this issue along with another important issue of retrospective applicability of Section 164(2) and deactivation of DIN was dealt with by High Court.

Opined that Clarified by High Court:

1. Where the disqualification considering any financial year “prior to 01-04-2014 as well as subsequent thereto” while reckoning the continuous period of three financial years under Section 164 (2)(a) of the Act, is made irrespective of whether the petitioners are directors of public companies or private companies, is bad in law.
2. Writ petition would stand dismissed if the disqualification of the directors has occurred under the provisions of the 1956 Act in respect of the public companies.
3. Directors would stand disqualified if the disqualification was on the basis of three continuous financial years subsequent to 01-04-2014, irrespective of whether the petitioners are directors of public companies or private companies among other things.

The Court further directed the respondents to restore the DIN of those directors whose disqualification has been quashed by the Court. And those petitioners who have challenged only the striking off of the companies in which they are directors have an alternative remedy of filing a proceeding before National Company Law Tribunal

Effects of Disqualification:

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently published the names of the disqualified Directors on the government website.

Remedies against Disqualification:

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT). He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a director does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person will still continue to be a director for the next seven days. However, there exists no procedure to reappoint a disqualified director. He can only be reappointed after a period of five years has elapsed from the date of disqualification.