DISQUALIFICATION OF DIRECTORS

Section 164 of the Companies Act 2013, as discussed earlier here; deal with Disqualification for appointment of directors. Sub – section (1) of Section 164 list disqualifications of directors for appointment as a director of a company. The Appointment shall include reappointment but not continuation to be in office. Disqualification in this sub – section is general in nature and shall apply for an appointment and reappointment of such director in a company.

Sub – section (2) of Section 164 adds two disqualifications which are applicable to reappointment of director in same company and appointment in any other company for a period of five years from the date on which the said company defaulted and disqualification arises.

Disqualifications under these two sub–sections are applicable in all companies irrespective of their category and status. However, private companies may add other disqualification in the list of these statutory disqualifications.

The Companies (Appointment and Qualification of Directors) Rules, 2014 discusses only disqualifications under sub – section (2) of Section 164 of the Act but silent on sub – section (2) and (3) of Section 164.

According to Rule 14 of the Rules, every director shall inform to the company concerned about his disqualification under sub – section (2) of sub – section 164, if any, in form DIR – 8 before he is appointed or reappointed. [Sub – rule (1) of Rule 14]

Whenever a company fails to file the financial statements or annual returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of section 164, the company shall immediately file Form DIR – 9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years. [Sub – rule (2) of Rule 14]

When a company fails to file the Form DIR – 9 within a period of thirty days of the failure that would attract the disqualification under sub-section (2) of section 164, officers of the company specified in clause (60) of section 2 of the Act shall be the officers in default. [Sub – rule (3) of Rule 14]

Upon receipt of the Form DIR – 9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection. [Sub – rule (4) of Rule 14]

Any application for removal of disqualification of directors shall be made in Form DIR – 10. [Sub – rule (5) of Rule 14]

DISCUSSION – 1:

Form DIR – 8 is not an annual ritual but pre – requisite for any appointment or re – appointment only. In case of a company where there is no appointment or reappointment, this form DIR – 8 is not required at all. Further, in case of long term appointment like independent directors or in case of directors not liable to be retired by rotation, there is no requirement for this form DIR – 8 under the Law.

Form plain reading, the Act and rules made there under does not provide any mechanism related to disqualifications which may be incurred under sub – section (1) or sub – section (3) of Section 164. What to do? Further, in case, where there is no requirement of appointment or reappointment, how a company shall ensure that any of its directors has not incurred any disqualification under Section 164(2).

Discussion – 2:

According to Section 143(3)(g), the auditor’s report shall also state — whether any director is disqualified from being appointed as a director under sub-section (2) of section 164.

How the auditor shall discharge such duty unless he gets some declaration form the company and all of its directors?

Discussion – 3:

Section 167(1)(a) state, the office of a director shall become vacant in case — he incurs any of the disqualifications specified in section 164.

This vacation of office come into effect at the moment when such disqualification incurred by the director not from the moment when the company come to know about such disqualification. However, how a company comes to know about such disqualification is remain an open question.

There may not be an annual ritual suitable for such information in any case. Any of these disqualifications may be incurred by a director any time between two annual rituals. Answer may be either in Articles of a company or more suitable in Secretarial Standards.

My suggestion; companies may have provision in its articles to ensure that a director shall inform the board about any such disqualification incurred by him within a certain period of time from the date when he come to know about his such disqualification. Such provision may be incorporated in its “nomination and remuneration policy” if not in it Articles. However, I would like to see some solution incorporated in Secretarial Standards issued by the Institute of Company Secretaries of India.

I do not see any such possibility under the Companies Rules because Section 164 has no scope for Rules and Forms under these rules. Such power, however, may come from Section 469 of the Companies Act 2013. Rule 14 of these Rules itself come under authority of Section 469 not under authority of Section 164