Section 164 of the Companies Act, 2013 (CA 2013) provides for disqualifications for appointment of director. This section came into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27-03-2014.
Section 164 of the CA 2013 corresponds to section 274 of the Companies Act, 1956 i.e. Disqualifications of Directors. Additional disqualifications have been introduced under section 164 of the new Companies Act. Following are the disqualifications of directors for being eligible for appointment or re-appointment as a director in a company.
Disqualified Persons for Appointment of Director in a Company
According to the provisions of sub-section (1) of section 164 of the CA 2013, a person shall not be eligible for appointment as a director of a company in the following cases:
(a) Unsound Mind:
If he is of unsound mind and stands so declared by a competent court.
(b) Undischarged Insolvent:
If he is an undischarged insolvent.
(c) Pending Adjudication:
If he has applied to be adjudicated as an insolvent and his application is pending.
(d) Convicted by Court:
If 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 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence.
However, 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.
In accordance with Rule 2(s) of the Companies (Specification of Definitions Details) Rules, 2014, the term “or otherwise” means any offence in respect of which he has been convicted by a Court under this Act or the Companies Act, 1956.
(e) Disqualified by Court:
If an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force.
If he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and 6 months have elapsed from the last day fixed for the payment of the call.
(g) Related Party Transactions:
If he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.
(h) Not Complying Section 152(3):
If he has not complied with sub-section (3) of section 152.
However, the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) of section 164 of CA 2013 shall not take effect:
(i) Upto 30 Days: for 30 days from the date of conviction or order of disqualification;
(ii) In case of Appeal: where an appeal or petition is preferred within 30 days as aforesaid against the conviction resulting in sentence or order, until expiry of 7 days from the date on which such appeal or petition is disposed off; or
(iii) In case of Further Appeal: where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.
As per Rule 3(2)(a)(iii) of the Companies (Authorised to Registered) Rules, 2014, a company limited by shares after obtaining availability of name (Section 4) shall attach an affidavit from each of the persons proposed as the first directors, that he is not disqualified u/s 164(1) and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief.
According to Rule 17(5) of Nidhi Rules, 2014, the person to be appointed as a Director shall not have been disqualified from appointment as provided in section 164 of the CA 2013.
Directors Not Eligible for Appointment or Re-appointment as Director:
In accordance with the provisions of section 164(2) of the CA 2013, a person who is or has been director of a company and such company has:
(a) Not filed financial statements or annual returns for any continuous period of 3 financial years; or
(b) Failed to:
i) Repay the deposits accepted by it; or
ii) Pay interest on such deposits; or
iii) Redeem any debentures on the due date; or
iv) Pay interest due on such debenture; or
v) Pay any dividend declared; and
such failure to pay or redeem continues for one year or more.
Then such person shall not be eligible to be:
- Re-appointed as a director of that company; or
- Appointed in other company for a period of 5 years from the date on which the said company fails to do so.
As per Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014:
(1) Inform Company about Disqualification [DIR-8]:
Every director shall inform to the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed.
(2) Inform Registrar [DIR-9]:
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.
(3) Officers in Default:
When a company fails to file the Form DIR-9 within a period of 30 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.
(4) Document for Public Inspection:
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.
(5) Application for Removal [DIR-10]:
Any application for removal of disqualification of directors shall be made in Form DIR-10.
Additional Qualifications by Private Company:
According to section 164(3) of the Companies Act, 2013, a private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2) of section 164 of the CA 2013.
In compliance with the provisions of section 143(3)(g) of the Companies Act, 2013, 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.
Vacation of Office:
As per section 167(1)(a) of CA 2013, the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.
Small Shareholder’s Director:
In accordance with Sub-rule (6) of Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014, a person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of section 164.
In Rule 7(7)(a) of the Companies (Appointment and Qualification of Directors) Rules, 2014 it has been stated that a person appointed as small shareholders’ director shall vacate the office if the director incurs any of the disqualifications specified in section 164.