Provisions Regarding Disqualification of Directors

In India, the Ministry of Corporate Affairs (MCA) and Registrar of Companies (ROC) have the power to disqualify directors for non-compliance with various provisions of the Companies Act, 2013. Disqualification can be imposed on directors who are found guilty of non-filing of annual returns or financial statements, non-payment of statutory dues, and non-maintenance of registered offices, among other violations.

Related Provisions of Companies Act, 2013

Section 164 of the Companies Act, 2013 prescribes various disqualifications for the appointment of a Director in a company.

1. Defaults Done by Individual
2. Defaults Done by Company

Further, this Act also lays down, under section 164(2), two situations when the disqualification arises:

1. Non-filing of financial statements or annual returns for any continuous period of three financial years; or
2. Failure to repay interest on deposit/debentures or repayment of deposit/ debentures and such failure continues for a period of 1 year or more.

Under Section 2(41) of the Companies Act, 2013, 'financial year' concerning any company means the period ending on the 31st day of March of every year.

Under Section 137 of the Companies Act, 2013, a company is required to file its financial statement with the Registrar of Companies (ROC) within 30 days of the date of the Company’s annual general meeting (AGM).

Under Section 92 of the Companies Act, a company is required to file its annual return with the ROC, within 60 days of the date of the company’s AGM.

Under Section 96 of the Companies Act, 2013, a company is required to hold its AGM within a period of 6 months from the closing of the financial year.

The Consequences of such disqualification under Section 164(2) of the Companies Act, 2013, is that such a director becomes ineligible to be reappointed in that company and, becomes ineligible to be appointed as a director in another company as well for a period of five years from the date on which the said company fails to do so.

Further, The Registrar of Companies (ROCs) can disqualify the Director Identification Number (DIN) of a director under the above-mentioned Section.

DIN- It is an identification number allotted by the Central Government to individuals who are intending to be a director of a new company or an existing director. All directors must possess this number.

What legal remedies are available if a director has been disqualified under section 164(2) of the Companies Act, 2013?

An order disqualifying a director does not take effect within 30 days from the date of disqualification. Therefore, the disqualified director can either file returns or an appeal to stop the proceedings.

If a director has been disqualified by the Registrar of Companies (ROC) under Section 164(2) of the Companies Act, 2013, then they can seek the following remedies mentioned below: -

1. National Company Law Tribunal (NCLT)

The National Company Law Tribunal is the primary forum for hearing appeals against orders passed by the Ministry of Corporate Affairs. A disqualified director can appeal to the National Company Law Tribunal under Section 252 of the Companies Act, 2013.

2.National Company Law Appellate Tribunal (NCLAT)

If the NCLT upholds the disqualification, then the director can file a further appeal before the National Company Law Appellate Tribunal (NCLAT) under Section 421 of the Companies Act, 2013. The appeal to the NCLAT must be filed within 45 days of the NCLT’s order.

3. High Court

If the NCLAT also upholds the disqualification, then the disqualified director can approach the High Court for relief under Article 226 of the Constitution of India. The director can file a writ petition before the High Court seeking a stay on the disqualification order or any other relief as deemed fit.

In what circumstances does a High Court pass a stay order on a petition challenging the disqualification of directors?

It is pertinent to note that the decision to grant a stay order ultimately rests at the discretion of the High Court.

1. The disqualification is arbitrary in nature as the petitioners were not allowed to be heard. Therefore, the said action is violative of the principle of natural justice.
2. Section 164 of the Companies Act, 2013, being penal in nature, cannot be applied retrospectively.
3. The petitioners cannot be disqualified to act as a director of the company, under Section 164 of the Act, which has not defaulted in filing their annual returns and financial statements for a period of three consecutive years.
4. The default under Section 164 (2) of the Act results in the director being disqualified from being appointed/re-appointed as a director but does not result in them demitting office as directors.

Opportunity To Be Heard

The Court held that Section 164(2)(a) merely set out certain conditions which, if not complied with, would automatically disqualify a person from being appointed/ reappointed as a director.

In Bhagavan Das Dhananjaya Das v. Union of India, the Madras High Court held that the regulations of natural justice should be adhered to by issuing proper notice to all the directors concerned.

Retrospective Effect

The retrospective effect is defined in Judicial Dictionary by K.J. Aiyar, Butterworth as under: —

"Retrospective", when used concerning an enactment, may mean (i) affecting an existing contract; (ii) reopening up of past, closed, and completed transactions; (iii) affecting accrued rights and remedies, or (iv) affecting the procedure. Words and Phrases, Permanent Edn., Vol. 37-A, pp. 224-25, defines a “retrospective or retroactive law” as one which takes away or impairs vested or accrued rights acquired under existing laws. A retroactive law takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transaction or considerations already past.”

In Gaurang Balvantlal Shah (supra), the Gujarat High Court had observed: —

"Such provision of disqualification for the director of a company - public or private company, has been incorporated for the first time in Section 164(2) of the Act of 2013. Such being the case, the said provision has to be construed as having a prospective effect. If the retrospective effect is given to it, that would destroy, alter and affect the right of the Directors of the private company existing under the Act of 1956."

The Court held that if the Respondent had not contended that the Act would have a retrospective application then the Act would have only a prospective application.

The Court held that the defaults for the financial year ending 31 March should be considered while determining whether a director had incurred the disqualification under section 164(2) of the Act. This view is contrary to the view taken by the three High Courts, namely the Madras, Karnataka, and Gujarat High Courts in three other similar petitions.

Demitting Office as Directors

Further, the Court relied on the decision of the Bombay High Court in Kaynet Finance Limited v. Verona Capital Limited.

 Accordingly, the Court held that the Petitioners would not demit their office in other companies where they are directors but would be disqualified to act as directors of the defaulting company. Further, the rule of interpretation could not be applied in Section 167 (1)(a) of the Act.

However, given Section 167(1)(a) of the Act, if the directors suffer any of the disqualifications after 7 May 2018, such directors would have to demit their office in all companies and not just the defaulting company.

Can a disqualified director continue to hold shares in the company?

Yes, a disqualified director can continue to hold shares in the company, but he/she cannot exercise any rights of a shareholder, including voting rights, until the period of disqualification is over.

CONCLUSION

It can be concluded that the decision to grant a stay order ultimately rests at the discretion of the High Court and there are still a lot of divergent views among the High Courts of the country. But the final onus is of the Apex Court to come to the finality.

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