Disqualification of a Director

The disqualification of a director is a critical mechanism to ensure that the management of a company remains in the hands of capable and honest individuals. Under the Companies Act, 2013, the grounds for disqualification are primarily governed by Section 164.

These disqualifications can be broadly categorized into two types: those based on personal incapacity or conduct, and those based on the company's failures.

1. Grounds for Disqualification (Section 164(1))

A person shall not be eligible for appointment as a director of a company if:

• Unsound Mind: A person is declared to be of unsound mind by a competent court.

• Insolvent: The person is an undischarged insolvent or has applied to be adjudicated as an insolvent and the application is pending.

• Criminal Conviction: 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 6 months.

  • Note: If the sentence is 7 years or more, the person is disqualified for life.

• Court/Tribunal Order: An order disqualifying them for appointment as a director has been passed by a court or the National Company Law Tribunal (NCLT).

• Unpaid Calls: The person has not paid any calls in respect of any shares of the company held by them (alone or jointly) and 6 months have elapsed from the last day fixed for payment.

• Related Party Transactions: The person has been convicted of the offense dealing with related party transactions under Section 188 at any time during the last preceding 5 years.

• No DIN: The person has not been allotted a Director Identification Number (DIN).

2. Disqualification for Corporate Default (Section 164(2))

This is a "group liability" provision. If a person is a director of a company that fails to meet certain statutory requirements, they are disqualified from being re-appointed in that company or appointed in any other company for 5 years.

The defaults include:

1. Failure to file Financials: The company has not filed financial statements or annual returns for any continuous period of 3 financial years.

2. Failure to Repay: The company has failed to repay the deposits accepted by it, pay interest thereon, redeem debentures on the due date, or pay any dividend declared, and such failure continues for 1 year or more.

3. Vacation of Office (Section 167)

If a director becomes disqualified under Section 164 after they have already been appointed, their office becomes vacant immediately.

• Attendance: If a director absents themselves from all the meetings of the Board of Directors held during a period of 12 months (with or without leave of absence), they must vacate their office.

• Contravention: If they act in contravention of the provisions of Section 184 (relating to entering into contracts or arrangements in which they are directly or indirectly interested).

4. Specific Provisions for Private Companies

While the grounds in Section 164 apply to all companies, a private company may, by its Articles of Association (AoA), provide for additional grounds for disqualification beyond those mentioned in the Act. A public company does not have this flexibility and must stick to the statutory list.

5. Remedies and Appeals

• Grace Period: For convictions or court orders, the disqualification does not take effect immediately. There is a 30-day window to file an appeal. If an appeal is filed, the disqualification is stayed until the appeal is disposed of.

• Penalty: If a person functions as a director even after knowing they are disqualified, they are punishable with imprisonment or a fine ranging from ₹1 lakh to ₹5 lakh.