DISQUALIFICATION UNDER
SECTION 164 READ WITH SECTION 167
This article
is written in relation to recent MCA notices for the disqualification of
directors under section 164 (2) of the Companies Act. Efforts have been made to
make reader understand the section 164 along with section 167 of the Act.
Notice
appears on MCA website:
As per the notice appears on MCA website:
“Any
person disqualified under section 164(2) of the Companies Act, 2013 [the Act]
is advised not to act as director during the period of the disqualification
and not to file any document or application with MCA as the same shall be
summarily rejected.
However,
this shall be without prejudice to the liability of the said person for
violation of section 164(2) read with section 167 of the Act including the
action under section 448 r/w 447 of the wherever warranted.”
MCA
has mentioned both section 164(2) and 167 in the notice. Thus, it appears
that MCA is in opinion that the provision in section 167(1) (a) would apply
in the cases covered by section 164(1) and covered by section 164(2).
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Introduction
The Act, 2013 has linked section 164 to
section 167 leading to
an impression that disqualification under section 164 leads to automatic
vacation. Section 164 of the Companies Act,
2013 (herewith referred to as the 'Act') states various disqualifications for
appointment/ reappointment of Director in a company. Further, Section 167 of
the Act states the instances for the occurrence of the vacation of the office
of director. Additionally, a statutory auditor is also mandated under Section
143 (3) (g) of Act, 2013 to report whether any director is disqualified from
being appointed as a director under Section 164 (2) in the Auditor’s report. This
article intends to discuss the applicability of one such provision as specified
under Section 164 (2) of the Act read with Section 167.
Position
under old Act
Please note
that that Section 164(2) correspond to Section 274(1)(g) of Companies Act,
1956, with the difference that Section 274 (1) (g) was not applicable to
private companies, however in case of Section 164(2) there is no such
distinguishment between Private Company or Public Company.
Further note
that Section 167 corresponds to Section 283 of Companies Act, 1956 pertaining
to vacation of office of a director. Section 167 (1) provides the premises when
office of a director shall become vacant and Section 167 (2) specifies the
consequence if a director continues to hold the office despite attracting any
of the premises under Section 167 (1).
In present
piece of writing, author has made efforts to make reader understand the effect
of clause (a) of sub section (2) of section 164 read with clause (a) of the
sub-section (1) of section 167 of the Act to the extent. Further it may be
noted that sub section (1) of section 164 has different footing than section
164 (1). Author would like to divert the reader towards a point that Section
167(1)(a), mentions that "he incurs any disqualification specified in
Section 164". The section collectively talks about the disqualification
under Section 164 without further bifurcating as disqualification specified
under Section 164(1) or Section 164(2).
Therefore,
let’s begin with interpretation and clear understanding of Section 164 (1) and
Section 164 (2) of the Act.
Sub
section (1) of Section 164:
Sub section
(1) of section 164 calls for the circumstances which are beyond the control of
director i.e it provides with the grounds where a director can stand
disqualified from his current position of directorship and simultaneously
becomes ineligible for appointment in other companies and may further call for immediate
vacation from the place of directorship as per clause (a) of sub section (1) of
section 167of the Act as he might become incompetent to act as director.
A person shall not be eligible for
appointment as a director of a company, if —
(a) he is
of unsound mind and stands so declared by a competent court;
(b) he is
an undischarged insolvent;
(c) he has
applied to be adjudicated as an insolvent and his application is pending;
(d) he 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 and a period of five years has not elapsed from the date of
expiry of the sentence:
Provided that 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;
(e) an
order disqualifying him for appointment as a director has been passed by a
court or Tribunal and the order is in force;
(f) he 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;
(g) he has been convicted of the
offence dealing with related party transactions under section 188 at any time
during the last preceding five years; or
(h) he has
not complied with sub-section (3) of section 152 (DIN NO)
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From
aforesaid provisions one can infer that if one were to be disqualified under
section 164(1) i.e. become an undischarged insolvent or is declared as being of
unsound mind by a Court. Most certainly such a person cannot continue as a
director. However sub
section (2) of section 164 of the act has different impression.
Sub
section (2) of section 164 read with clause (2) of sub section (1) section 167:
The
relevant extract of the provision under the aforesaid sections are as follows:
Section 164. "(2) No person who is or has been a director of
a company which—
(a) has
not filed financial statements or annual returns for any continuous period of
three financial years; or
(b).....,
Shall be
eligible to be re-appointed[1]
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."
Note: Clause (a) of sub-section (2) requires continuation
of the default for three years and clause (b) requires it for one year.
Section 167. "(1) The office of a director shall become
vacant in case—
(a) he
incurs any of the disqualifications specified in section 164;"
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As per the aforesaid provisions there are two situations when
the disqualification arises, if any of the two situations arises, all the
directors
of such
company get attracted with such disqualification. It is under such
circumstances that the board of the defaulting company will have to take steps
to make good the failure.
The failure to file financial statements or inability to
redeem debentures may be due to circumstances beyond the control of the company
and as a Consequence of the disqualification, as per Section 164 (2), is that
such director neither can be re-appointed in that company nor appointed as a
director in any other company. If such situation prevails company can be
regarded as “board less” and ultimate power lies with the shareholders of the
company.
The difference between section 164 and 167 is that, while
section 164 provides for disqualifications which must be considered in respect of a person who
is proposed to be appointed or re-appointed as a director of any company), section
167 provides for grounds for vacation of office of a person who is already a director of a company. In other words, section 164 is applicable at the time of
appointment of a person as a director of any company, section 167 is applicable
to a person who is already a director
Whether there would be immediate vacation
of office of director as per section 167 (1)(a) due to incurring
disqualification under section 1 64 (2)……?
The disqualification
under section 164(2) does not
envisage immediate vacation of office. As stated earlier if default
arises as per section 164 (2) of the act, all the directors of the company becomes
disqualified and company remains without board and company can possibly
not function without a board, therefore provisions of sections 164 (2) calls
for way out which do not call for immediate vacation of place of directorship
by disqualified director.
The
disqualified director shall not be eligible to be re-appointed as a director of
that company or be appointed in other company for a
further period of 5 years from the date on which the company fails to do so,
however the director is allowed to serve his present tenure in that company and
in other companies in which he is a director. So it makes it clear that
vacation of office is to be done at the end of tenure of directorship.
Please note
that as per the provisions of sub section (3) of section 167, where all directors’ stands
disqualified and need to vacate their place of directorship, new board of directors
will be appointed by the promoters of company ( usually promoters and directors are same in small or
private companies) so in their absence by central government.
One has to
interpret[2]
provisions of section 164 and section 167 together in respect to have clear
understanding. As it seems that section 164 (2) and section 167(1) (a) are
linked but from above interpretations it can be infer that section 167 pertains
to vacation in case of disqualifications under section 164(1) only. Accordingly,
the provision in section 167(1) (a) would not apply in the cases covered by
section 164(2).
Thus newly appointed director after the
occurrence of default as stated under section 164(2) will also be held
liable….?
Sub section
(2) of section 164 of the Act states that “No person who is or has been a
director of Company….” In this regard one to attract disqualification under
section 164(2)(b), it is important that the individual has to be on the board
of the company when the default actually happened. at least for a part of the
period of three years or one year, but not necessarily for the entire
three-year or one-year period.
Therefore
new director, during whose directorship the default did not occur, cannot be
held responsible for the same and suffer the misdeeds of his predecessors. If
that would have been situation then possibly no director will be willing to get
appointed in such a defaulting company. This, however, cannot be the intent of
law. Even if
companies end up defaulting, then adequate opportunity should be given to the
company and its directors to make good the default.
Sub section (2) of the section 164 of the
Act is exempted to Government Companies:
As per the
provisions of this section, opinion can be drawn directors of company that is Government Company
are exempted from the
provisions of section 164(2) of the Act who has defaulted in which has not filed
financial statements or annual returns for any continuous period of three
financial years; or 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 and simultaneously are also exempted from the provisions
of section 167(1)(a) i.e
they are not required to vacate their office of directorship and can be reappointed
or appointed as director in other companies
Director who is shareholder
Note that if
the director is disqualified and removed/ stands vacated from office as a
director, this will not usually affect the director's position (if he/she has
one) as a shareholder in the company. This is often a relevant consideration in
private companies, where often a director is also a shareholder.
So opinion
can be drawn where such situations prevails in companies where promoters,
directors and shareholders are same person specially in case of ‘private
limited companies’, provisions of Article of Association can be entrenched
making it more stringent providing that a shareholder who ceases to be a
director is deemed to have given the company a transfer notice in respect of
his or her shares, so that the shares can, in effect, be compulsorily acquired.
In nutshell,
powers to appoint new Board of directors in company rely with shareholders of
Company.
Removal of Disqualifications
The
Companies (Appointment and Qualification of Directors) Rules, 2014 contain a
provision empowering the Registrar of Companies to remove the disqualification.
Rule 14(5)
states that, “Any application for removal of disqualification of directors
shall be made in Form DIR-10.” However it does not provide any procedure to be
followed.
Penalty provisions
Sr. No
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Particulars
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Penalty
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1
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If
director fails to file Form DIR 9 (intimation by company to ROC for
disqualification) within 30 days.
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Officers
of the Company specified in clause (60)[3]
of section 2 of the Act shall be default and company and every officer who is
in default shall be punishable with fine of Rs. 50000 to 5 Lacs
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2.
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Any person
who contravenes the provisions of sec 164.
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There are
no specific penal provisions stated for the occurrence of default, but same
as be stated under section 172 of the Act, company and every officer who is
in default of chapter IX shall be punishable with fine of Rs. 50000 to 5 Lacs
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3.
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If a
person functions as director even when he knows that the office of director
held by him has become vacant on account of any disqualification grounds
under section 164
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He shall
be punishable with the imprisonment for a term upto 1 year or with fine of
Rs. 1 lac to Rs. 5 Lacs or with both
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Are this offence Compoundable….?
As per
provision of Section 441 (1) of the Act, 2013-Any offence punishable under this
Act, whether committed by a company or any officer thereof, with fine only,
may, either before or after the institution of any prosecution, be compounded
to the extent, if default is made good. Power of Compounding of offence is with
NCLT/ Regional Director/ Person authorized by Central Government. Amounts
exceeding Rs 5,00,000 will be adjudicated upon by the NCLT and the amounts
lesser than Rs 5,00,000 by the RD or the Central Government authorized person.
As per the
current scenario, where two lakhs companies have been struck off, where more
than one lac directors have been declared disqualified under section under
section 164 (2) seems non-compoundable and under section 167 Offence seems to
be compoundable for officers only. Further note that any offence under section
447[4] and 448[5] of the Act are non-compoundable.
Who will represent the company in further proceedings,
if any before tribunal, if all directors are ineligible for re-appointment
under sub section (2) of section 164 of the Act…?
Dear reader
would request to refer Case law: Arvind Mohan Johari v/s M/s Mohan Carlton
Hotel Pvt Limited interim order dated 21/11/2016 as the case is pertaining to “Mismanagement
and Oppressions” affairs of company where all directors are disqualified under
section 164(2). Final order is yet to be passed. (Link provided).
http://nclt.gov.in/interim_orders/allahabad/10.11.2016/Carlton%20Hotels%20Pvt.%20Ltd.%20&%20Ors..pdf
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DISCLAIMER: The entire contents of this document have
been developed on the basis of relevant information and are purely the views of
the authors. Though the authors have made utmost efforts to provide authentic
information however, the authors expressly disclaim all or any liability to any
person who has read this document, or otherwise, in respect of anything, and of
consequences of anything done, or omitted to be done by any such person in
reliance upon the contents of this document. READER SHOULD SEEK
APPROPRIATE COUNSEL FOR YOUR OWN SITUATION. AUTHOR SHALL NOT BE HELD LIABLE FOR
ANY OF THE CONSEQUENCES DIRECTLY OR INDIRECTLY.
(Author-CS
Anjali Gorsia, Company Secretary from Nagpur (Maharashtra) and can
be contacted at csanjali.gorsia@gmail.com)
[1] The use of the specific words “re-appointed”
and “appointed” in the concluding portion of subsection (2) is significant.
These words must be interpreted according to their natural meaning in the
context of the provisions of the Companies Act concerning directors. Section
152 of the Act indicates that the word “re-appointment” is used to refer to a
director who is liable to retirement by rotation under section 152 and who is
appointed again at an annual general meeting at which his current term office
as a director comes to an end.
[2] When
there are in an enactment two provisions which cannot be reconciled with each
other, they should be so interpreted that; if possible, effect should be given
to both. This is what is known as the rule of harmonious construction.( Venkataramana
Devaru v. State of Mysore AIR 1958 SC 255)
[3]
Officers in default is defined
[4]
Punishment for fraud
[5]
Punishment for false statement
