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.
This is only a
knowledge sharing initiative and author does not intend to solicit any business
or profession.
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