DISQUALIFICATION OF DIRECTOR
A Company has no legal existence of its own and it is simply a legal body. It can operate
only through natural persons. The person acting on behalf of the Company is a Director.
Directors are professional experts, hired by the Company to direct its affairs.
Any person who is a major, sound mind and capable to make a contract can become a Director
of the Company.
A Director can be disqualified for various reasons.
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The Directors of Company are at risk if they fail to meet the legal responsibilities so it is essential for them to understand the possible reasons for disqualifications and the further consequences.
Section 164 (1) of the Companies Act 2013 provides the circumstances under which a Director can be disqualified :
He is of an unsound mind and is declared by the court
He is insolvent
Application of Insolvency is pending and the person is in the process of declaring insolvency.
He has been convicted by a court of any offence (whether or not involving moral turpitude)
and has been imprisoned for at least six months. However, if a person has been convicted of
any offence and has served a period of seven years or more, he shall not be eligible to be
appointed as a director in any company.
If an order has been passed disqualifying him of being appointed as a director by a court
or Tribunal.
He has not paid any calls with respect to any shares of the company held by him, whether
alone or jointly with others, and a period of six months has elapsed from the last day fixed for
the payment of the call.
He has been convicted of offences dealing with related party transactions at any time during
the last preceding five years.
He does not have Directors Identification Number
No 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; or
has failed to repay the deposits accepted by it or pay interest thereon or to redeem any
debentures on the due date or pay interest due thereon or pay any dividend declared and such
failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as
a director of that company or appointed in other company for a period of five years from the date
on which the said company fails to do so.
Once the Director is disqualified, a person is not eligible for being appointed as Director of that company or any other Company. This restriction is imposed for a period of five years.
Over the previous few years, the Ministry of Corporate Affairs has actively taken action against shell companies. They have disqualified over 3, 00,000 directors under section 164(2) of the Companies Act, 2013.Once the directors is disqualified, the directors cannot use the DIN and DSC, such directors need to resign from the Company.
In case of disqualification the Director can appeal to the National Company Law Appellate
Tribunal (NCLAT)
The director can temporarily ask for stay order
Situation I: When the status of the Company is Struck off and the Director intends to continue with the Company and desires to discontinue its disqualification:
In such a situation the will have to make an appeal to National Company Law Tribunal (NCLT) under the jurisdiction over the state in which registered office of the Company is situated. When the stay order of such disqualification is received by the Company, annual filing shall require to be done with Registrar of Companies for removal of disqualification. Also further it is essential to note that NCLT shall pass an order for revival only if it is in public interest.
Situation II: When the status of the Company is struck off and the Director doesn’t wish to continue with the Company but want to eliminate his disqualification.
In such a situation, the Director shall file a writ petition for removal of disqualification which shall be made to the High Court having jurisdiction in which the registered office of the Company is situated. Once stay order against such disqualification is received by the Company, physical annual filing shall require to be done with Registrar of Companies for removal of director disqualification. In this case, the Company shall do the physical annual filing and striking off forms rather than restoring the Company and shall be voluntarily struck off.
Situation III: When the status of the Company is active but all the Directors are disqualified and aim to remove disqualification.
In this situation, the status of the Company pursuant to which the Directors are disqualified is required to be obtained and accordingly opt of Situation I and Situation II herein above mentioned.
Sometimes, there can be a situation as well, where the Company pursuant to which the Directors are disqualified is not ready to do annual filing, then it is prudent to appoint to new Directors in the Company the status of which is active. Now the problem arises that a new Director cannot be appointed as there is no quorum for Board Meeting and accordingly, no Director can be authorized to file e-Form DIR-12. In this case, an application to appoint new Director has to be made to Registrar of Companies and Regional Director.
Disqualified directors are required to file writ petition under Article 226 of the Constitution of India before High Court.
The Company can file an appeal under section 252 of the Companies Act, 2013 before the National Company Law Tribunal for restoring the Company name.
When the High Court and NCLT give their decision on DIN reactivation and revival, the appellant has to file the require documents along with annual returns
After the completion of compliance, the Registrar of Companies will raise a ticket on MCA 21 portal through a change requirement form. Thereafter the Registrar of Companies has to upload a copy of the order on the official portal. When the verification is complete, the deactivated DIN will get reactivated.
Lastly, the disqualified director shall not be the director of any other struck off company.
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A director can be disqualified for a number of reasons including wrongful trading, fraudulent trading. Failing to fulfill his duties as a Director will result in investigation and disqualification.
Section 164(1) specifies the circumstances which are beyond the control of director i.e. it provides with the grounds where a director can stand disqualified from his current position of directorship and simultaneously becomes ineligible for appointment.
Once a person is disqualified as director he/she will not be eligible for being appointed as Director of that Company or any other Company for a period for 5 years from the date on which the Company failed to comply with the provisions of the Companies Act.
There is no need of Resignation of disqualified Director, because as per the Companies Act, 2013 once the Director is disqualified he automatically ceased to continue as Director.