Disqualification of Director is an essential regulatory mechanism. It mainly operates under Section 164 of the Companies Act, 2013. A disqualification can be done due to insolvency, conviction, company non-compliance, etc. Then, a disqualified director suffers from a five-year ban from all boardrooms. They also suffer from the deactivation of their Director Identification Number (DIN). However, it is essential to understand these rules.  This will help to maintain professional integrity and support business operations. In this blog, you will get guidance on the disqualification of a director.

What is the Disqualification of Director?

Disqualification does not automatically mean removal. It means ineligibility to be appointed or re-appointed as a director. It is generally governed by Section 164 of the Companies Act, 2013. The Companies (Appointment and Qualification of Directors) Rules, 2014, also govern it. This means a person cannot be a director for a specific time. The time is usually five years. The restrictions happen due to personal misconduct or company non-compliance. The Ministry of Corporate Affairs (MCA) confirms that these rules are followed. They deactivated the Director Identification Number (DIN) of disqualified directors.

Grounds for Disqualification of Director under Section 164

Listed below are the grounds for disqualification of directors under Section 164:

1) Section 164(1) -Personal Disqualifications (Individual)

A person cannot be chosen for appointment or re-appointment as a director if they:

a) Unsound Mind

If a person declared as of unsound mind by a competent court.

b) Insolvency

An undischarged insolvent or application for insolvency is pending.

c) Conviction & Imprisonment

The person received a conviction for an offence. The offence included either moral turpitude or another type of offence. It is sentenced to 6 months or more. The disqualification period starts after the sentence ends. It lasts for five years from the date of expiry of the sentence.

d) Permanent Ineligibility

The person becomes permanently ineligible after serving a seven-year prison sentence.

e) Court Order

An individual becomes disqualified through an official ruling. The ruling is issued by a Court or Tribunal.

f) Non-Payment of Calls

The person has failed to pay their share calls for more than six months

g) Related Party Transactions

The individual gets a conviction for a crime. This falls under Section 188 during the last five years.

h) DIN Requirement

A person did not get a Director Identification Number (DIN). There was non-compliance according to DIN regulations.

i) Directorship Limit

The individual violates directorship regulations. They hold directorship positions in more than 20 companies or 10 public companies.

2) Section 164(2) - Company-Related Defaults (5-Year Disqualification)

If a company's director makes a mistake, they cannot return to their company for five years. They also cannot join any other company during that time. It includes:

a) Non-Filing

The company has not submitted its financial statements or its annual return for three continuous financial years.

b) Non-Repayment/Payment

When a company has not repay deposits, pay interest on deposits, redeem debentures, or pay dividends for 1 year or more.

Consequences of Disqualification of Director

Here are the consequences of the disqualification of director:

1) Direct Consequences for the Director

This includes:

a) Five-Year Prohibition

A disqualified director will not be re-appointed in the defaulting company. They also cannot be appointed as a director in any other company. It applies for a period of five years from the date of disqualification.

b) Automatic Vacation of Office

According to the Section 167(1)(a), a disqualified director must leave their job in all companies. The exception is the company that is not following the rules.

c) Deactivation of DIN

The Registrar of Companies (RoC) will deactivate the DIN of the disqualified director. So they cannot sign any documents or file e-forms.

d) Invalidation of Actions

Documents or financial statements signed by a disqualified director are not valid.

e) Liability for Continuation

When an individual acts as a director despite knowing they are disqualified, they can be punishable. The punishment means imprisonment up to one year. They also have to pay a fine of Rs. 1 lakh to Rs. 5 lakhs, or both.

2) Consequences for the Company

Here are the consequences for the company:

a) Board Invalidation

All board meetings and decisions can be invalid. This can happen in case a company has only two directors and one is disqualified.

b) Mandatory Appointment of New Directors

The company needs to quickly find a new director because the existing one is not qualified. This will help to meet their statutory requirements.

c) Struck-Off Status

In most cases, the ROC can remove the company, and to bring it back, someone must make a petition under Section 252.

Steps for removing the disqualification of directors

Here are the steps for removing the director disqualification:

Step 1: Identify the Remedy

It involves:

a) Writ Petition (High Court)

A writ petition is filed in case of disqualification without notice. The court also files it when disqualification is based on incorrect data.  This is filed under Article 226 of the Constitution.

b) Appeal (NCLT)

When the company was "struck off," which means removed from the ROC list under Section 248. An appeal is filed to the National Company Law Tribunal (NCLT) to bring the company back.

Step 2: File Pending Statutory Returns

This step allows the company to file all overdue financial statements (AOC-4). They must also file annual returns (MGT-7/MGT-7A) from the Registrar of Companies (ROC).

Step 3: Request Temporary DIN Activation

Company must file an application with the ROC or High Court to temporarily activate the DIN. DIN is the Director Identification Number. This allows the filing of the pending documents.

Step 4: File Writ Petition/Appeal and Obtain Order

This step requires filing the petition. The petition is for the removal of the director's name from the disqualified list. It can be filed in the High Court.

A company can also get an interim stay order to stop the disqualification. This means a temporary order to prevent the disqualification.

Step 5: Submit Order to ROC

Then, the organization need to file the certified copy of the Court or NCLT order with the ROC. This will update the status of the DIN from "Disqualified" to "Active".

Conclusion

Disqualification of Director is essential for corporate governance. It is managed under Section 164 of the Companies Act, 2013. This can happen due to personal misconduct or company defaults. A company director face a five-year ban. It can also impact their career and reputation. They must follow the rules to prevent losing their Director Identification Number (DIN). This will help them avoid facing issues. If you need any assistance about it, get connected with Online Legal India. 

FAQ

Q1. What is the Disqualification of Director?

As per the Section 164 of the companies Act, a disqualification of director happens if they are found unfit to manage a company. This means a director cannot be a director in any company for a certain time. A disqualification can happen due to unsound mind, insolvency, company-related defaults, etc.

Q2. What are the main reasons for disqualification of director?

The main reasons for disqualification of a director are:

a) Unsound Mind

b) Insolvency

c) Conviction & Imprisonment

d) Non-compliance

e) Financial Misconduct

f) Company related defaults, etc

Q3. Where to check the status of Director Disqualification?

You can check the status of Director Disqualification from the official MCA portal.

Q4. Can a disqualified director still be a shareholder?

Yes, a disqualified director can still be a shareholder in all companies.

Q5. Can a person be appointed as a director in a new company while disqualified?

As per the Companies Act, 2013, a person cannot be appointed as a director in a new company while disqualified. They also cannot continue as a director in any existing company. 

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.