Disqualification of directors certainly is a hot topic among professionals practising corporate laws. Irrespectively of popular perception, the list compiled and released by Ministry of Corporate Affairs does not confer any disqualification to any director. These directors were already disqualified. In a serious violation, many of these directors might have failed to communicate about their disqualification to companies appointing or reappointing them after the actual date of disqualification. Such failure has penal consequences. This blog post will discuss serious consequences of the failure of compliance with law and procedures after incurring disqualification by a director.
Vacation and ineligibility for subsequent appointment
According to clause (a) subsection (2) of Section 164, “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 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. Further, according to clause (a) of subsection (1) of Section 167, the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.
These two provisions mandate a disqualified director to vacate his office of director immediately from the board of directors of all companies where he is a director. Further, the director shall not be eligible for appointment as director for next 5 years.
Date of disqualification
Section 164(2) disqualifies a director immediately on non – filing of financial statements and annual returns of three years. The disqualification date shall be the first date triggered as due date under Section 92(4) and Section 137(1) of the Companies Act, 2013 for its third-year annual return and financial statements respectively.
According to section 92(4), every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held. Further, according to Section 137(1), a copy of the financial statements shall be filed with the Registrar within thirty days of the date of the annual general meeting.
According to section (2) read with section 92(4) and Section 137(1), a director shall become disqualified on the due date for filing either financial statements or the annual return of the third year, where either financial statements or annual returns of earlier two years has already not filed.
In most case of recently striking off companies, this date of disqualification comes to 30th October 2016 (or 29th November 2016 after taking general circular 12/2016 and 31st December 2016 in State of Jammu and Kashmir after taking general circular 14/2016 into consideration).
Penal consequences of not vacating office
According to subsection (2) of Section 167, if a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
Accordingly, all disqualified directors holding a position as directors after the date of incurring disqualification are subject to serious penal consequence.
Another Reporting requirement
Rule 14(1) of the Companies (Appointment and qualification of directors) Rules, 2014 mandate that 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.
Accordingly, a director so disqualified should under Rule 14(1) of the Companies (Appointment and qualification of directors) Rules, 2014 shall inform to the company concerned about his disqualification under sub-section (2) of section 164 in Form DIR-8 before he is appointed or re-appointed.
Any disqualified director got appointed without informing the company concerned as per the rule 14(1) after the date of disqualification as above mentioned may attract Section 448.
Penal consequences of omission of information
According to Section 448, if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,—
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
A person found guilty under Section 447 shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud.
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Thank you for saying it out loud that the list put forth by MCA does not determine the disqualification, contrary to popular opinion. These directors were already disqualified. This realization needs to settle in the minds of various professionals and clients.
Further, in some cases I have seen that the company has not filed any single return since incorporation but somehow the directors’ names are not there in the list. While I insist that the directors are disqualified as per Act and that the provisions of the Act supersede the list, neither the clients nor the professionals involved are able to accept this fact.
Analysis of a director’s disqualification becomes all the more important when undertaking an assignment in respect of incorporation or appointment of new directors in an existing company.
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