DISQUALIFICATION OF DIRECTOR

DISQUALIFICATION OF DIRECTOR

Short Summary:

In this Flash editorial, the author begins by referring the provisions of Section 164(2) and 167 pursuant to “Disqualification of Director” and “Vacation of Office of Director”.  

This is article no. 272  of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

As MCA has struck off the approx 209,000 Companies from its record because of “Non Filing of its financial statement for 3 years or more” as per provisiosn of Section 164(2) and issued the list of approx 100,000 Director who has been disqualified under 164(2). Both the lists are available on the website of the MCA.

Major impact of disqualification of Director is:

If a Person is director in more than 1 Company example in 4 (A,B,C,D) Companies. One of such Companies (Company A) made default u/s 164(2). The name of Company may or may not be struck off from the Register of the ROC. But such director is become disqualified.

In such case if that disqualified director filing any form in other Company (i.e. B, C, D) then a error is occurring that “the person associated with the DIN is disqualified and not allowed to file the form”

Therefore, by this practical problem one can opine that intention of the Ministry is that once as director is disqualified u/s 164(2)(a) he have to vacant the office from all the Companies in  which he is acting as director as a vacation u/s 167(1).

One Quick Issue:

If a Company has not filed Annual Return or Financial statement for more than 3 years and the Status of Company Still Active. Whether Director of such company shall be disqualified to continue their appointment in another Companies or filing of forms of other Companies?

Solution:

First of all Status of Company is not a decisive factor to identify the disqualification or non disqualification of Director. Even if a Company is active, Directors of the Company may be disqualified.

Because as per provisions of Section 164(2) “A person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years shall not be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years”

Therefore, principle of qualification or disqualification of status of Director is non filing of financial statement. Hence, one can opine that Yes, Even the Company status of Company is still active in the records of ROC but Company not filed the financial statements and annual returns  from last 3 years then the status of director shall be “DISQUALIFIED”

After reading of above mentioned question and provisiosn of Section 164(2) many questions come into the mind of the person like:

i.            What are the compliances required to be done by a Company in case of its fails to file the FS or AR for 3 financial years.

ii.            Who shall be responsible for such non Compliances?

·         If there is Company Secretary in such Company, whether he will be responsible for such non-compliance.

·         If Auditor has not mentioned in its auditor report whether he shall be responsible for such non compliance.

·         What are the penalties on the Directors of the Company

iii.            How to appoint new Director in such Company for completion of the pending compliances.

iv.            Whether any way out of removal of disqualification of Director, if yes, which statutory authority has such power.

v.            If a Company has not filed the financial statement for an example from last 5 financial years. However, the Company has file many other forms, pass resolutions, conducted business etc. Whether work done by director shall be considered valid or void?

vi.             

What are the compliances required to be done by a Company in case of its fails to file the FS or AR for 3 financial years.

Legal Background:

As per Section 164(2) read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, in case of Company fails to file Financial Statement and Annual Return for continue period of 3 year then following are the Compliance requirements for the Company:

Rule 14(2) whenever a company fails to file the financial statements or annual returns, 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.

Rule 14(4) 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.

Outcome:

Hence, after reading the above mentioned Rule one can opine that it is duty of Company to file e-form DIR-9 with the ROC in case of Company fall u/s 164(2).  In DIR-9 company have to mention the name of the Directors who was directors of the Company during such period.

The purpose of this form is to inform the ROC by the Company about the Disqualified Directors so that ROC can debar them from appointment in another Companies or Incorporation of new Companies.

Therefore, all the Companies which have not filed such form DIR – 9 with ROC shall be liable for non compliance of Rule 14.

Who shall be responsible for such non Compliances under Rule 14 ?

Legal Background:

Rule 14(2) 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.

Officer in default: means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified

(iv) (v) (vi) (vii)…..

Question:

If there is Company Secretary in Such Company whether he will be responsible for such non-compliance.

As per provisions of Section 2(51) of Companies Act, 2013 “Company Secretary” is covered under definition of Key Managerial Personnel and KMP is included in the definition of Officer in Default.

Outcome:

Hence, one can opine that if the Company fails to file DIR-9 with ROC within 30 days of occurrence of Disqualification of Director then Company Secretary shall be officer in Default shall be liable for the penalty u/s 172.

Even the same penalty applicable on the Directors of the Company.

Penalty u/s 172: If a company contravenes any of the provisions of this Chapter and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

One more question comes to mind here:

In case a person (Mr. A) director in 4 Companies. Out of 4 Companies 1 Company having KMP (like: CEO/CFO/CS).

Out of 4 Companies 1 Company fails to file its financial statement or annual return for continue period of 3 years. In such situation Mr. A become disqualify u/s 164(2) and have to vacant office immediately u/s 167(1) (a).

But Mr. A continued as director in another 3 Companies. Another 3 Companies continue show him as director of the Company even he was disqualified u/s 164(2) and vacant u/s 164(1).

Whether there will be any penalty on the Directors, Company Secretary, KMP, Practicing Company Secretary who has certified the form of these Companies?  

If Auditor has not mentioned in its auditor report whether he shall be responsible for such non compliance.

Legal Background:

Pursuant to provisiosn of Section 143(3) 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.

In the above mentioned example if the Auditor of another 3 Companies has not mentioned in their Auditor Report that directors are disqualified to appoint as director u/s 164(2) and have to vacant office u/s 167(1). Whether auditor shall be punishable under Companies Act, 2013?

Outcome:

Even in the above mentioned example, if the auditor of above 3 companies has not mentioned in their Auditor Reports that the directors are not disqualified it is non compliance on the part of Auditors u/s 143(3) and they are liable for penalty under Companies Act, 2013.

Penalty:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

How to appoint new Director in such Company for completion of the pending compliances.

In some cases due to disqualification of all the Directors of the Company now it is not possible for such Companies to pass the Board Resolution or to file the form DIR- 12 with ROC for appointment of new Director. Therefore, a question arise in mind

·         How to appoint the new Director for compliances of the Company.

·         How to file the form for appointment of new Director.

Legal Background:

Pursuant to provisiosn of section 167(3): Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

Outcome:

As due to disqualifications of the entire directors, there is NIL Directors on the Board and the Company. The promoters of the Company can appoint any other person as Director of the Company that person shall hold the office till the next General Meeting of the Company. Hence one question is clear that Promoter can appoint the Director.

However, how to file the form / update in the record of the ROC name of the person appointed by promoters. At the same time as all the directors are disqualified so company can’t use their DSC.

In such Situation company can file the physical copy of application along with details of the person appointed by promoter to act as director of the Company. The ROC officials shall verify the application and if they are satisfied they will update the name of such person in their record as Director of the Company.

Hence, This remedy is in addition to any other remedies available to the members of such a company by applying to the Tribunal (currently CLB) for an order convening a general meeting of the company under section 98 of the Act.

Conclusion:

After reading of the provisiosn of Companies Act, 2013 it is clear that disqualified Director not able to continue as director in other Companies also, due to section 167(1) his office shall be vacant from all the Companies. In case of failure of information of such disqualification to ROC by the officer of the Company they are punishable for non compliance under the Act.

Ever after above discussion still there are many pending questions in the mind of the professional, directors, stake holders etc. some of them are like:

i.            Whether any way out of removal of disqualification of Director, if yes, which statutory authority has such power.

ii.            If a Company has not filed the financial statement for an example from last 5 financial years. However, the Company has file many other forms, pass resolutions, conducted business etc. Whether work done by director shall be considered valid or void?

Author shall try to discuss the above mentioned questions along with other questions along with other practical difficulties in the next editorial.

(Author – CS DiveshGoyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.

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