Disqualification of Directors: A New Mystery!!!

Disqualification of Directors: A New Mystery!!!

By CS Manish Gupta, manish@rmgcs.com

& CS Suresh Kumar Pandey, suresh@rmgcs.com

In the corporate realm, where several laws are in operation, implementation receives a blow when it comes to interpretation and understanding the spirit and purpose of any particular law that may have been designed and promulgated for meeting a particular purpose in the light of the anomalies prevalent in the sector at any given point of time.

Recently Ministry of Corporate Affairs has cancelled the registration of around 2.10 lakh defaulting companies and subsequent direction of the Ministry of Finance to banks to restrict operations of bank accounts of such companies by the directors of such companies or their authorized representatives, the Ministry of Corporate Affairs identified approx 1,06,578 Directors for disqualification under Section 164(2)(a) of the Companies Act, 2013. Further, the Ministry may come up with another list of such disqualified directors.

The Ministry of Corporate Affairs said that this exercise was necessary to create an atmosphere of confidence and faith in the system paving the way for ease of doing business in India. The Ministry is monitoring these cases on priority basis and taking up a concerted action with the help of other departments. Further, the money laundering activities performed under the aegis of shell companies are also under scanner.

MOS (CA) Shri Chaudhary said that “The present Government has vowed to fight Black Money and fighting the menace of Shell Companies is an imperative element of such fight.

Few weeks back, the market regulator Securities and Exchange Board of India (SEBI) had also directed stock exchanges to take action against 331 suspected shell companies that are listed on their platforms. As part of efforts to curb black money menace, Sebi has banned scripts of these companies and were not available for trading thereafter. Most of those companies had filed appeal with SAT against the said impugned order and SAT has set aside the order on the ground that Sebi has passed its impugned order without any investigation into the affairs of the companies. It seems that the same story is going to be repeated with the order of MCA, which deals with disqualification of directors, as various writ petitions are already been filed and admitted in the various High Courts of India.

Statutory Provisions under Companies Act, 2013

Section 164 of the Companies Act, 2013 deals with disqualification of directors. As per the provisions of section 164(2)(a), a director in a company that has not filed financial statements or annual returns for three financial years continuously would not be eligible for re-appointment in that company or for appointment in any other company for five years from the date on which the said company fails to do so.

Section 164(1) : Grounds due to which a person shall not be eligible for appointment as a director of a Company:

(a) If declared by a competent court as a person of unsound mind;
(b) If he is an undischarged insolvent;
(c) His application to be adjudged as an insolvent is pending;
(d) He has been sentenced to imprisonment: (1) for not less than six months – disqualification shall continue till five years after expiry of the sentence; or (2) for seven years or more – disqualification shall be permanent;
(e) If otherwise disqualified by a court or a Tribunal till the order is in force;
(f) He has failed to pay the call money on shares within a period of six months from the last date fixed for payment;
(g) If the person has been convicted for offence under section 188 dealing with ‘Related Party Transactions’;
(h) He does not have a Directors Identification Number (DIN).

Sub-section (2) of the section 164 makes a director ineligible for re-appointment in a company or for appointment in any other company if he is or has been a director of a company which:

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or
(b) has failed to repay the deposits 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.

The disqualification shall continue for a period of five years from the date on which the said company fails to do either of the acts.

Sub-section (3) of the section 164 provides that a private company may by its articles provide additional grounds for disqualification.

MCA has proposed amendments under Companies Bill 2016

The proviso to Section 164 says that the disqualification incurred by a person, due to his conviction for imprisonment or due to an order of a tribunal/court or due to conviction for violating provisions under section 188, shall remain suspended during the period in which appeal has been preferred and is pending before a higher forum. However, the proposed amendment by 2016 bill provides that the disqualification shall continue even if appeal or petition has been filed against order of conviction.

Further, a proviso to sub-section (2) is proposed to be added which will provide that a disqualification for non-filing of financial statements or failure to redeem debentures/payments of deposits shall not be incurred by a director for a period of six months from date of his appointment. This time period shall provide a breathing period to the directors for making good the default of a company.

Disqualification of Directors Under s. 164(2)

Section 164(2) disqualifies a director for reappointment in the same company or for appointment in any other company if either of the two specified defaults have been committed by the company in which he is a director. The first default is non-filing of financial statements or annual Returns for a continuous period of three financial years. The second default is failure to repay the deposits for period of 1 year.

Removal of Disqualification under section 164(2)

The provisions of section 164 (2) have to be read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. As per Rule 14, every director is duty bound to inform the company in form DIR-8 about his disqualification under sub-section 2 of section 164 before his appointment or reappointment. Similarly, a duty has been cast on the company, which fails to file the financial statements or fails to repay any deposits as specified under sub-section 2 of section 164, to furnish the names and addresses of all directors of that company in form DIR-9. If the company fails to file form DIR-9 then officers of the company shall be the officers-in-default.

The Rule 14 also provides for the removal of disqualification of directors suffered under sub-section 2 of section 164. It states that an application for removal of disqualification of directors can be made in Form DIR 10. The application for removal of disqualification can be filed with the Registrar of Companies. However, it is important to note that there is no statutory provision under the Companies Act, 2013 which empowers the Registrar of Companies to remove disqualification of directors. Thus, the legal sanctity of Rule 14 has to stand the test of time.

Further, the Section 164 of the Act only provides for the Disqualification of Directors for 5 years without any reference to the penalty / prosecution on the concerned directors. Going by the plain reading one can say, such director shall be  eligible to be appointed as director on the Board of any Indian Company, only after 5 year and has to apply for removal of disqualification in form DIR – 10 as stated in the applicable Rules.

We are also of the view that the disqualification as prescribed under Section 164 can neither be removed by compounding of offence for non filing of past financial & annual return nor by restoration of name of the Company under the provisions of the Section 252 of the Act by the order of the Hon’ble NCLT as these offence are covered under different provisions of the Act and has nothing to do with the disqualification of Directors.

Retrospective operation of provisions of Section 164(2)

It is a cardinal rule in law that every statute is prospective unless it is expressly or by necessary implication made to have retrospective operation.

The provisions of section 274 (1) (g) which were inserted by the amending act of 2000 in the Companies Act 1956 were retrospective in operation. This provision is akin to the section 164(2) of the Companies Act, 2013. Further, while interpreting the provisions of section 164(2) the National Company Law Tribunal in Vikram Ahuja v. Greenstone Investments (P.) Ltd. [2017] 136 CLA 131 (NCLT) held that the provisions of Section 164 are not retrospective in nature.

The Tribunal held that non–filing of financial statements before this enactment would not tantamount to disqualification to become director or to continue as director. New enactment has made non–filing of financial statements for three consecutive years as disqualification and amounts to an offence only to the act after 1st April, 2014. If this disqualification is construed as applicable to the past acts, it is obviously unfair to the people conducting the affairs of the company under the impression that non–filing of financial statements for three years is not a default and not an offence. Therefore, this provision has to be read as applicable to the situations where non–filing has started, at the most in the past and is continuing while this enactment has come to into existence and also to future non–filings but not to be considered as applicable to the past acts for it is an established proposition that an Act has to be considered retrospective only when it has been explicitly mentioned in the Act.

GENERAL CIRCULAR 41/2014 DATED 15.10.2014.

Before interpreting the provisions of Section 164(2) and its applicability as prospective or retrospective, it would be important to refer to the General Circular 41/2014 dated 15.10.2014 issued by Ministry of Corporate Affairs.

The said circular dated 15.10.2014 was issued by the MCA on the clarification been sought by the Stakeholders that whether the directors of the Companies who have filed their (past) balance sheets or annual returns after 01.04.2014 but before the Company Law Settlement Scheme 2014 (CLSS-2014) [15.08.2014] will get immunity from disqualification under Section 164(2)(a). As per the said circular, the MCA has clarified that the disqualification will be applicable for the prospective defaults of such companies directors who have filed their Balance Sheets and Annual returns on or after 01.04.2014 but before CLSS-2014 i.e. before 15.08.2014.

In other words, it can be said that the provisions of Section 164 (2) are not prospective in nature that is the three financial years will not be counted from 01.04.2014 (the day the section became effective) but even in case where the balance sheets or annual returns of previous years i.e. prior to 01.04.2014 have not been filed for consecutive period of three years and such default continues after 01.04.2014, the directors of such companies will be considered as disqualified. The prospective effect of disqualification will be applicable on such companies who have prior to 15.08.2014 have complied with filing of its past balance sheets or annual return as the case may be.

Going by the same methodology, MCA has notified 3 separate list (block of 3 years i.e 2011-2012 to 2013-2014, 2012-2013 to 2014-2015 & 2013-2014 to 2015-2016) of disqualified directors of such companies which have not filed their financials starting from the financial year 2011-2012. 

Clash between the Provisions of section 164 read with 167

Section 167 talks about vacation of office of a director. Sub-section (1) of section 167 states that the office of a director shall become vacant if he incurs any of the disqualifications specified in section 164. The basic difference between these two sections is that section 164 talks about the grounds for disqualification and section 167 provides for grounds of vacation of office. Thus, section 164 becomes applicable at the time of appointment or reappointment of a person as a director of any company whereas section 167 becomes applicable to person who is already a director.

Now, the question which arises is weather section 164(2) can be read with section 167 or not ? It is submitted that the provisions of sub-section (2) of section 164 are different provisions which contain consequences of the disqualification in the provision itself. Thus, section 167 will be applicable in cases covered by sub-section (1) of section 164 and it would not apply to grounds covered by sub-section (2) of section 164.

It is a well-established rule of interpretation that provisions of the statute should be read so as to harmonies with each other. If we apply these rules of statutory interpretation, it would appear that the consequence of vacation of office under section 167(1)(a) cannot apply in respect of the disqualification stated in subsection (2) of section 164, because subsection (2) itself specifically provides the consequence of the disqualification, namely that a director of the defaulting company shall not be eligible for re-appointment as a director of the defaulting company and for appointment of any other company for a period of five years from the date on which the said company fails to do so.

The provision in section 164(2) can be said to be a special provision as against section 167(1)(a) which is a general provision and hence the former should override the latter. Accordingly, while the provision in section 167(1)(a) would apply in the cases covered by section 164(1), it would not apply in the cases covered by section 164(2).

Thus, the apparent conflict between the two sections can be resolved by applying the rule of statutory interpretation that when there is a conflict between a special provision and a general provision, the special provision prevails over the general provision; the general provision applies only to such cases which are not covered by the specific provision; the rule applies to resolve conflict between different provisions in different statutes as well as in same statute.


  • Through Articles of Association

A Private Company can provide additional grounds for disqualifications in the Articles of Association. Such articles have an overriding effect over provisions of the Companies Act including s. 274 (now s. 164).

  • Default In Repaying Deposits

No person who is or has been  a director of the Company which has failed to repay deposits  accepted by it or interest thereon etc. for one year or more

  • By Operation of the Law

The disqualification for default in paying deposit and default in filing annual statements was inserted under section 274 (now 164) of the Companies Act, 1956 by way of amendment in 2000. In Nabendu Dutta’s case, while discussing the retrospective operation of this provision, the High Court of Calcutta held that language of the provision makes it implicit that the Legislature intends retrospective operation. Thus, it is evident from the language of clause (g) of sub-section (1) of section 274 (now 164(2)) that on the date of commencement of the Amending Act, any person who has been director in a defaulting company will be affected by the sub-section.

  • Scheme of Compromise and Arrangement on Default in Repaying Deposits

The scheme of compromise and arrangement sometimes defers the payment of deposits. In such cases, the default on repayment of deposits begins from the date of original default. It cannot be postponed or deferred on assumption that if the scheme would be sanctioned, the date of redemption would be different.

After effects of disqualification of Directors

A person who’s name is mentioned in the Order as disqualified director, has to go through the after effects, which might stay for next 5 years (effectively 4 years, as disqualification is effective retrospectively from 01-11-2016). DIN of the all such directors are blocked for 5 years and cannot be used to file any e-form including Annual Filing forms, even if the financials are being signed by such directors. The problem is worse for the active Companies which has complied with the provisions of the Act and having only 2 directors who are named in the list of disqualified directors. In all those cases power to appoint new director on the Board is either with the Central Government or with the Shareholders who can appoint any new person as director and approach respective ROC to add the name in the list of signatory from backend manually.



The Hon’ble High Court of Hyderabad, held that the Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, inter-alia provides for rectifying the defect by enabling the defaulting companies to file their returns, however, the said Rule does not provide what is required to be done by the respective authorities. The reliance was placed on the report of the Companies Law Committee, submitted to the Hon’ble Union Minister of Finance, Corporate Affairs, discloses that the irregularity in relation to the same, particularly, with regard to the disqualification that is earned by an individual not only with respect to the defaulting company, but also with respect to the other companies, is noticed and the prima facie opinion of the Committee is that a rectification is required to be made restricting the scope of disqualification to the defaulting Company.

In the light of the fact that a defaulting company is allowed to rectify the defect by filing the returns which have not been filed earlier and to restore the DIN Numbers of petitioners so as to enable them to submit annual returns for the years 2011-12 to 2015-16 and further financial statements for the years 2012-13 to 2015-16.


(DELHI HIGH COURT – Oct 10, 2017)

The Hon’ble Delhi High Court, has stated that prima facie, it appears that the provision under section 164(2) does not provide for immediate disqualification of Directors from all existing companies. The direction / order disqualifying the petitioners from acting as Directors of companies was stayed till the next date of hearing.


(HIGH COURT OF MADRAS – 21.09.2017)

The Hon’ble court of Madras has decided that order dated 08.09.2017 uploaded in the website of Ministry of Corporate Affairs, so far as the petitioner is concerned, quash the same as illegal, arbitrary and devoid of merit and consequently direct the respondent (ROC) to permit petitioner to get reappointed as Director of any Company or appointed as Director in any company without any hindrance thereby staying the operation of the order w.r.t. the petitioner.


The above discussion has left various questions unanswered, which are yet to be answered by one of the main pillar of the Constitution of India i.e. Indian Judiciary in near future unless there is another circular clarifying the position from the MCA.