The Companies Act, 2013 establishes clear guidelines regarding who can serve as a company director in India. This legislation outlines specific disqualifications that prevent individuals from being appointed or continuing as directors. Understanding these provisions is essential for corporate compliance and good governance.
Section 164: Disqualifications for Appointment of Director
The Companies Act, 2013 primarily addresses director disqualifications under Section 164, which specifies several grounds that render a person ineligible to be appointed as a director.
Mandatory Disqualifications Under Section 164(1)
A person shall not be eligible for appointment as a director of a company if:
- Unsound Mind: The individual is of unsound mind and stands so declared by a competent court
- Undischarged Insolvent: The person is an undischarged insolvent
- Applied for Adjudication of Insolvency: The individual has applied to be adjudicated as an insolvent and the application is pending
- Criminal Convictions: The person has been convicted by a court of any offense, whether involving moral turpitude or otherwise, and sentenced 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. If a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as a director in any company.
- Court Orders: An order disqualifying the individual as a director has been passed by a court or Tribunal and the order is in force
- Default in payment of calls: The person has not paid any calls in respect of any shares of the company held by them, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call
- Related Party Transaction Violations: The individual has been convicted of the offence of dealing with related party transactions under Section 188 at any time during the preceding five years
- Director Identification Number (DIN) Violations: The person has not complied with requirements for obtaining a Director Identification Number under Section 152(3).
Additional Disqualifications Under Section 164(2)
No person who is or has been a director of a company which:
- Filing Defaults: Has not filed financial statements or annual returns for any continuous period of 3 financial years; or
- Deposit Repayment Defaults: Has failed to repay the deposits or interest thereon on due date or redeem its debentures on due date or pay dividends and such failure continues for 1 year or more
shall be eligible to be re-appointed as a director of that company or appointed as a director of any other company for a period of 5 years from the date on which the said company fails to do so.
Section 165: Restriction on Number of Directorships
In addition to explicit disqualifications, Section 165 imposes numerical limitations:
- No person shall hold office as a director in more than 20 companies at the same time
- The maximum number of public companies in which a person can serve as director shall not exceed 10.
Consequences of Appointment Despite Disqualification
Section 167 of the Companies Act, 2013 addresses the consequences when a director is found disqualified:
- Automatic Vacation: The office of a director shall become vacant if they are disqualified under Section 164
- Continuing Obligations: Despite disqualification and vacation of office, the director remains liable for offenses committed during their tenure
- Notice Requirements: Directors must inform the company immediately upon becoming disqualified.
Removal and Resignation of Directors
When disqualification arises:
- Section 169: Provides for removal of directors by shareholders through ordinary resolution
- Section 168: Directors may resign by giving notice in writing, but disqualified directors must promptly vacate office.
Compliance Best Practices for Companies
To ensure compliance with director qualification requirements:
- Regular Verification: Companies should periodically verify directors’ eligibility status
- Documentation: Maintain declarations from directors confirming absence of disqualifications i.e., Form DIR-8.
- Timely Filings: Ensure all statutory filings are completed within prescribed timeframes to avoid triggering Section 164(2) disqualifications.
Frequently Asked Questions (FAQs)
Q1: Can a director disqualified under Section 164(2) serve in any company?
A: No. A director disqualified under Section 164(2) cannot be appointed or reappointed as a director in any company.
Q2: What happens to existing directorships when a person gets disqualified?
A: When a person becomes disqualified under Section 164, as per Section 167, the office of director shall become vacant in all companies where they are serving as a director, except for the defaulting company that triggered the disqualification under Section 164(2).
Q3: Can a disqualified director continue to hold shares in the company?
A: Yes. Disqualification as a director does not affect a person’s shareholding in the company.
Q4: How can companies verify if a prospective director is disqualified?
A: Companies can:
- Check the MCA portal for the list of disqualified directors
- Obtain a declaration from the prospective director confirming they are not disqualified
Q5: Do foreign nationals face the same disqualification criteria as Indian citizens?
A: Yes. The disqualification criteria under Section 164 apply equally to all individuals, regardless of nationality.
Q6: Can a person disqualified as a director be appointed as a manager or key managerial personnel?
A: The disqualification under Section 164 specifically applies to the position of director. However, it’s advisable for companies to avoid appointing disqualified directors to key managerial positions to maintain good corporate governance.
Conclusion
The Companies Act, 2013 establishes rigorous standards for director eligibility to ensure corporate accountability and protect stakeholder interests. Both companies and individuals must remain vigilant regarding these disqualification provisions to maintain corporate compliance and avoid legal complications.
For specific situations regarding director disqualifications, consulting with a qualified legal professional specializing in company law is always advisable.
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