Penalties For Director Disqualification?
Companies Act, 2013- More Austere Measures
Companies Act, 2013, replaced the earlier Companies Act, 1956, and came into force from April 1, 2014. The transition from one to the other was quite turbulent as the Companies Act, 2013, has widened its scope, included many more features in its ambit, defined many new clauses, introduced more stringent punishment and penalties for defaulters.
Many Sections of the Act sees a massive shift in the intensity of retribution on the ‘Officers’ of a company- managers, directors & such others for their inability to perform their duties. There are many obligations that have been bestowed upon the officers and non-compliance of various rules & provisions under the Act draws severe punishment.
When Does A Director’s Disqualification Occur?
Companies Act, 2013, under Section 164 enumerates the reasons for disqualification of a company director. On one hand, Section 164(1) deals with disqualification that arises out of personal reasons, but on the other, Section 164(2) is completely in contrast where a director shall be disqualified for the failures of the company.
Section 164(1) mandates that a director shall attract disqualification if he is of unsound mind, or insolvent, or has been convicted for more than 7 years, has been convicted under section 188, or a Court or Tribunal has disqualified him, etc.
Section 164(2) states that a director shall be disqualified if the company has not filed financial statements, or annual returns for a continuous period of three financial years; or has failed to repay the deposits accepted by it, or has failed to redeem any debentures.
The disqualification of a director for non-compliance occurs automatically as soon as the company is struck off. The director shall have to vacate office in other companies too. Such a director cannot be eligible for reappointment for the next 5 years as mentioned in Section 167(1).
Disqualification As A Side-Effect Of Strike Off Of Company
Section 164(2) combined with Section 167 of the Act, makes the director prey to none of his own faults. A default committed by a company becomes a noose for the director to be hanged for five long years.
This clause of the Act is full of contradictions and ambiguities and needs serious relook by the authorities. There are circumstances beyond the control of the directors and therefore, it is too harsh a penalty.
Remedy For Removal of Disqualification of Director
Since the disqualification of a director under 164(2) occurs as a penalty imposed for non-compliance by the company, hence, there is no direct mention of any solution to it.
The Act gives a solution to restore the struck-off company by applying to NCLT and if it succeeds then a director can get his DIN activated by the ROC.
An indirect solution for the removal of director disqualification has created immense hardships for many directors who faced mass disqualification in 2017. If a company for any reason decided not to revive itself, then the disqualified director has no option but to wait for five years.
Many of such disqualified directors took to the last resort and filed a writ petition in concerned High Courts. In many instances, the courts have given stay orders, quashed the list & paved way for reactivation of DIN.
The Sections in the Act that discuss the penalties and punishments for various defaults should act as a deterrent and the company and its officers should follow the rules and regulations at all times. Each person thus engaged should understand his responsibility in the smooth running of a company and any negligence on his part will fetch a penalty.
“Removal of directors’ disqualification can be achieved by taking appropriate counsel and proceeding accordingly.”
-Shweta Gupta, Founder, and CEO, MUDS