APPOINTMENT, DISQUALIFICATION, LIABILITY OF A DIRECTOR - Muds

LEGAL PERSPECTIVE FOR APPOINTMENT, DISQUALIFICATION, LIABILITY OF A COMPANY DIRECTOR

How to Appoint a Director?

A managing director can be appointed for a maximum period of five years. An MD of a pre-existing company can also be appointed as a director of another company as long as the board of directors of the earlier company authorize this new appointment.  In a public or private company, a total of two-thirds of directors are appointed by the shareholders and the rest one-third are appointed in cognition to the guidelines prescribed in the Article of Association (AOA). For private company, their Article of Association can suggest the steps to appoint any and all directors. The Companies Act also has a clause that permits a company to appoint two-thirds of the company directors to be appointed according to the regulation of proportional representation. The nominated director is elected through 3rd party authorities or the Government to stop mismanagement and misconduct. The duties of a director are to act responsibly and exercise reasonable care and skill while performing his service on behalf of the organization.

Steps to Appoint a Director from a Legal Perspective –

  • Set a meeting of the Board of Directors as per section 173 and SS-1.
  • Obtaining DIN and Digital Signature Certificate.
  • Convene General Meeting as per section 96, 100, and SS-2.
  • Filing of Returns with the ROC.
  • Obtain from MBP-1 from the Appointed Director.
  • Making Necessary entries in the Register of Directors.
  • File necessary Amendment Application to GST, Tax authorities, and other regulators.

Necessary configurations are required to appoint a director and those are –

  • The nominated individual shall have an Active DIN as per section 152(3).
  • As per section 164(1), a person shall not be eligible for appointment as a Director of a company if he is disqualified from being appointed as Director in any particular establishment.
  • A director who has not filed financial statements or annual returns for any continuous period of three financial years or has not repaid the deposits accepted by it or pay interest thereon or pay any dividend declared and such failure to pay or redeem proceeds with one year or more shall not be eligible to be re-appointed as a director of the company for five years from the date on which the company fails to do so as per section 164(2)(a).
  • A person who isn’t a retiring director according to regulations of section 152 is eligible for appointment as a director at any General Meeting after fulfilling the following constraints –
  1. He or some member who intends to propose him for directorship has less than 14 days left at the registered office of the company before the meeting, a notice in his handwriting signifying his candidature as a director
  2. As the case may be, the intention of such member proposing him as a potential candidate for that office, with the deposit of one lakh rupees or such higher amount which shall be refunded to such person or the member, if the person proposed gets elected as a director or gets more than twenty-five percent of the total valid voted cast either on a show of hands or on the poll in such resolution.

What is this Disqualification of the director? What are the circumstances faced by director after disqualification? Can it be removed?

Since 2017, the MCA has been strictly enforcing these provisions of the company act. Directors disqualification can take place for the following explanations under the company statute :

  • If the person is of an unsound mind.
  • If he/she is insolvent.
  • If the person is in the procedure of declaring insolvency and his application is pending.
  • If the person has been convicted by a court of any offense.
  • If an order has been passed disqualifying him/her from being appointed as a director by the court or Tribunal.
  • If the person had not paid any attention to calls concerning any shares of the company held by him/her.
  • If the person has failed to acquire a Director Identification Number(DIN).
  • If the person had been sentenced for an offense dealing with a related party transaction at any time during the last preceding five years.

Removal of Directors – The following violations lead to the process of the removal of directors.

THE COMPANY IN PERIODIC GENERAL MEETING – A Company can remove directors from the board before their term expires. It can pass a resolution in upon special notice. However, there are certain expectations –

  • This does non-applicable on a director appointed by Government.
  • This does not apply to companies who have adopted two-thirds of their directors by the principle of proportional representation.
  • Directors appointed by financial institutions under their respective acts.
  • Directors appointed by the Board designated for Industrial and Financial Reconstruction.

REMOVAL BY GOVERNMENT – The Central Government chooses to use its power on recommendation of Company Law Board/NCLT to remove a director for misconduct.

REMOVAL BY COMPANY LAW BOARD/NCLT – The company law board or the NCLT may remove a director, if found guilty of any inappropriate conduct. The terminated director is exiled from the position for the next five years.

 How to remove Director Disqualification

Circumstance I: The company is struck off and the Director wants his company revival to remove disqualification.

Circumstance II: The company is struck off but director just wants to remove disqualification without reviving the company.

Circumstances III: When company status is active but all the Directors are disqualified and want to remove the disqualification.

Strike off means temporary closure of Companies following the provisions of The Companies, 2013 are a substitute for winding up the company where the company can get the company revived for twenty years from the date of the strike-off of the company.

What are the grounds on which NCLT does the revival of Companies?

  • Immovable properties of the company.
  • Apart from ROC, if the company has met all additional compliance norms.
  • If there are evidencing the company to be an ongoing one of active transactions in the bank statements of the company’s account.

What is this DIN?

DIN is a unique Identification Number for directors allocated by the Government to any individual aiming to be a Director or an existing director of a corporation. Director Identification Number (DIN) was introduced in India by the Company Amendment Act, 2006.

What does this Section 164 Act mean?

  • Section 164 of the Companies Act 2013 states the provisions for the disqualification for the application of the director. In accordance with the Companies Act 2013, Section 164 is applicable in the direction of disqualification for an appointment of director. As per sub-section 164(2)(a), an individual who has been a director with a corporation that has not to field financial statements or annual returns for 3 consecutive financial years shall face disqualification.
  • Section 162 (2) states that no individual who is or has been a Director or a corporation which (a) has not filed financial statements or annual returns for any continuous period of 3 fiscal years shall be eligible towards being reappointed as a director of that corporation or appointed in other corporations for 5 years from the date on which the said corporation fails to do so.
  • Section 164(2)(a) deals with the directors disqualification. It states that when the company has not filed financial statements or annual returns, for any three consecutive years, it will return on the disqualification of its directors for five years.

Effects of Directors Disqualification – Once a person is disqualified, then he/she is not eligible for being all need as Director of that or any other company. This restriction is valid for five years.

Recently, the disqualified Directors’ names are been published on the government website. The Honorable Delhi High court in November 2019 clarified the position on the disqualification of directors in the case of Mukut Pathak and Ors. V. Union of India. This judgement has come in resonance with other similar judgments passed by Honorable high courts if Gujarat, Madras, and Karnataka, on Section 164(2)(a)  of the Companies Act, 2013.

Directors of many companies together approached the Honorable Delhi High Court for disqualification removal and wanted stay on MCA’s decision of debarred them from being appointed/reappointed as directors.

Liability of Directors under Companies Act 2013 and its Materiality –

Violation of the following norms of Section 166 (relating to codified duties) is punishable offence with a fine ranging from Rs.1 Lakh to Rs.5 lakhs. Further, penal provisions under 2013 Act have been made stringent and suggest increased penalties compared to the Companies Act, 1956. On average, the minimum fine imposed under certain Sections of the 2013 Act is Rs. 25,000/- which in certain cases extends to Rs.25 crores or even more. Below is the list of few offenses where the penalties are more than or equal to one crore.

  1. Violating provisions related to not-for-profit companies.
  2. Violation related  to subscription of securities on private placement.
  3. Issuing  duplicate share certificates to someone with an intent of fraud.
  4. Failure in repayment of deposits within specified time.
  5. Violation of provisions related to insider trading.

Apart from these penalties, certain offences could attract imprisonment too. The offences leading to imprisonment are non-cognizable (would need an arrest warrant). There are certain offences which are considered cognizable and won’t require an arrest warrant. These offences are connected to either fraud or the intent to defraud. Some of these offenses are as follows:

(a) Section 7(6) – Furnishing of any false or incorrect particulars regarding any information or suppressed any material information, in any of the documents filed with the Registrar of Companies about the registration of a company.

(b) Section 34 – Any untrue or misleading statement included in the prospectuses.

(c) Section 36 – Fraudulently inducing people to invest money.

(d) Section 56 – Default under Section 56 related to transmission of shares with an intended defraud;

(e) Section 66 – Offences related to reduction of share capital.

(f ) Section 53- Prohibiting issue of shares at discount

Fine on Company – Rs.1 lakh to Rs.5 lakhs.

Officer in default- Max. imprisonment of 6 months or a fine of 1 to 5 lakhs or both.

(g) Section 57 – Punishment for impersonation of shareholder

Min. 1 year to max. 3 years imprisonment or a fine of Rs.1 lakh to Rs.5 lakhs.

(h) Section 58(6) – Refusal of registration to transfer after the order of the tribunal

Mini. 1 to Max. 3 years imprisonment or a fine of Rs.1 lakh to Rs.5 lakhs.

(i) Section 59(5) – Non-rectification of the register of members as per the order of the tribunal

Fine on Company – Rs.1 lakh to Rs.5 lakhs

Officer in default Maximum imprisonment of 1 year or a fine of Rs. 1 lakh to Rs.3 lakhs or both.

(j) Section 68(11) – Power of Company to purchase its securities

A fine on Company of Rs.1 lakh to Rs.3 lakhs.

Officer in default- Maximum imprisonment of 3 years or a fine not less than Rs.1 lakh which may extend to Rs.3 lakhs or both.

(k) Section 71(11) – Debentures

Officer in default- Maximum imprisonment of 3 years or a fine not less than Rs.2 lakh which may extend to Rs.5 lakhs or both.

(l) Section 86 – Failure to Register Charge

A fine on Company not less than Rs.1 lakh which may extend to Rs.10 lakhs.

Officer in default- Maximum imprisonment of 6 months or a fine of Rs. 25,000 to Rs.1 lakh or both.

(m) Section 92(5) – Not filing annual returns.

A fine on Company not less than Rs. 50,000/- which may extend to Rs.5 lakhs.

Officer in default – Maximum imprisonment of six months or a fine not less than Rs. 50,000/- which may extend to Rs.5 lakhs or both.

(n) Section 118(12) – Tampering with the minutes and agenda of meeting of board of directors  or in the proceedings of general meeting.

Max. imprisonment for 2 years and a fine of Rs. 25,000/-  to Rs.1 lakh.

(o) Section 128(6) – Failure to keep Books of accounts.

Officer in default- Maximum imprisonment of 1 year or a fine of Rs. 50,000 to Rs.5 lakhs or both.

(p) Section 185(2) – Passing loan to directors in violation of section 185 of the act.

A fine on Company of Rs.5 lakhs to Rs.25 lakhs.

Officer in default Maximum imprisonment of 6 months or a fine not less than Rs.5 lakhs which may extend to Rs.25 lakhs or both.

(q) Section 186(13) – Investment and loan by Company.

A fine on Company of Rs. 25,000/- to Rs.5 lakhs.

Officer in default- Max. imprisonment of two years or a fine of Rs. 25,000/- to Rs.1 lakh or both.

(r) Section 187(4) – Keeping investment in own name.

A fine on Company of Rs. 25,000/- to Rs.25 lakhs.

Officer in default- Max. imprisonment of 6 months or a fine of Rs. 25,000/- to Rs.1 lakh or both.

Conclusion: So, we can say a director is an important organ of the company. As a company only exists in the eye of the law and does not have any physical existence, a director is a person who manages the affairs of the company.  All the directors collectively i.e., the Board of Directors is responsible for executing transactions in the interest of the company and its members. Powers are vested in a director to assist him in working for the benefit of the company. One of the vital requirements appointment as a director is getting a DIN, this is an identification number allotted to a person nominated as a director in a company. Companies act 2013 has introduced director disqualification so that only competent persons are eligible for appointment as director of the company. The directors are appointed in different ways like by the shareholder in general meeting, by the state or central government, memorandum or article, etc. A Director is entrusted with wide powers. Therefore, he is also liable for any act such as abuse of his power, breach of his duty, ultra-vires acts, money laundering, etc. Thus, it is evident that in order to maximize the profit and ensure good corporate governance we need an experienced and skillful director.

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