India: Vacation Of Office Of Director -An Upshot From Disqualification Of Directors U/S 164 (2) Of The Companies Act, 2013

Last Updated: 22 June 2017
Article by Daizy Chawla, Kumar Deep and Arpita Karmakar

Most Read Contributor in India, July 2017

BACKGROUND

Section 164 of the Companies Act, 2013 (herewith referred to as the 'Act') states various disqualifications for appointment of Director in a company. Further, Section 167 of the Act states the instances for the occurrence of the vacation of the office of director. In the present Article the efforts has been done to make the reader understand the effect of clause (a) of subsection (2) of Section 164 read with clause (a) of the sub-section (1) of section 167 of the Act to the extent that it is not limited to the provisions of the Section itself i.e. disqualification under Section 164 (2) of the Act does not only makes a director ineligible to be reappointed as a director of that company or appointment in other companies, but also shall mean to effect the directorship in the existing companies when read with Section 167 (1)(a) of the Act.

Further, in this article it has been emphasized that the intention of the law makers to bring such strict provisions under the Act was to tighten the noose of the defaulters for non-filing of the financial reports annually is an act of keeping the stakeholders in grave obscurity.

The relevant extract of the provision under the aforesaid sections are as follows:

Section 164. "(2) No person who 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).....,

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."

Section 167. "(1) The office of a director shall become vacant in case—

(a) he incurs any of the disqualifications specified in section 164;"

RETROSPECTIVE OR PROSPECTIVE EFFECT OF SECTION 164(2) OF THE ACT

Substantive law refers to body of rules that creates, defines and regulates rights and liabilities. Procedural law establishes a mechanism for determining those rights and liabilities and machinery for enforcing them.

On study of various judgments, one could settle that 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. Procedural law is retrospective meaning thereby that it will apply even to acts or transactions under the repealed Act.

In this article, we shall elaborately discuss in the following points whether the applicability of Section 164 (2) shall be retrospective or prospective or whether even the question of the same arises keeping in mind the intention of the law.

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.

SECTION 274(1)(G) OF COMPANIES ACT, 1956.

It is to be noted that Section 164(2) correspond to Section 274(1)(g) of Companies Act, 1956, wherein a person was not capable of being appointed director of a Company if such person is already a director of a public company which has not filed the Annual Accounts or Annual Return for any continuous three financial years commencing on or after the first day of April 1999.

Here, as one can see the difference between Section 164(2) and Section 274(1)(g) is that in case of Section 274(1)(g) the default of non filing is w.r.t public company however in case of Section 164(2) there is no such distinguishment between Private Company or Public Company. Furthermore, under Section 274(1) (g), the applicability of the Section was defined i.e. the three financial years were taken into account from on or after 1st April 1999 however, in the present Section 164(2) there is no such date mentioned. Meaning thereby same is continuous in nature i.e. the defaults prior to introduction of the said Section 164(2) will be considered for the purpose of determining the disqualification.

CIRCULAR DATED 12.08.2014 OF MINISTRY OF CORPORATE AFFAIRS INTRODUCING COMPANY LAW SETTLEMENT SCHEME, 2014 (CLSS).

Furthermore, it would also be important to peruse the circular dated 12.08.2014 relating to CLSS. This circular by MCA provides the intention of introducing the scheme of the Company Law Settlement Scheme, 2014. The relevant extracts are as follows:

  1. "1. ...
2. The companies Act, 2013 lays down a stricter regime for the defaulting companies with higher additional fees....Additionally, the provisions of section 164(2) of the Act, inter alia, providing for disqualification of directors in case a company has not filed financial statements or annual returns for any continuous period of three financial years has been extended to all companies.

3. The Ministry has received representations from various stakeholders requesting grant of transitional period/one-time opportunity to enable them to file their pending annual documents to avoid attraction of higher fees/fine and other penal action, especially disqualification of their Directors prescribed under the new provisions of the Act.

6....... (xii):-In case of defaulting companies which avail of this scheme and file all belated documents, the provision of 164 (2)(a) of the Companies Act, 2013 shall apply only for the prospective defaults, if any, by such companies."

Further, the defaulting companies were defined under the Scheme as a company which has made a default in filing of annual statutory documents and such defaulting companies were permitted to file belated documents which were due for filing till 30th June, 2014.

Accordingly, on the basis of above the circular also it is clear that the intention of law was to curb the continuing default of the companies for non-filing of their statutory documents by bringing strict provisions under section 164 (2) of the Companies Act, 2013. Had the same not been the intention the purpose of the relief provided under the aforesaid scheme would fail.

VIKRAM AHUJA VS. GREENSTONE INVESTMENTS PVT LIMITED AND ORS., BEFORE NCLT, MUMBAI BENCH, DECIDED ON 22.11.2016:

In the said case law, one of the point for discussion and decision before the Hon'ble bench was "whether the disqualification set forth in Section 164(2)(a) r/w 167(1) (a) of the Act 2013 has retrospective effect or not";

  1. The Hon'ble Tribunal, after considering various case laws considered that: "this provision has to be read as applicable to the situations where nonfiling has started, at the most in the past and continuing while this enactment has come to into existence and also to future non-filing........"
  2. Also, in a decided case law it has been provided that, the statute providing posterior disqualification on past conduct does not become a retrospective one because a part of a requisition for its action is drawn from a time antecedent to its passing;
  3. Therefore, the provisions of Section 164 (2)(a) shall be applicable where the non-filing has started in the past and continuing while this enactment has come to existence and also to the future non-filing. Mere applicability of such provision on continuous default till date shall not give rise to the question of retrospective or prospective effect.

ACCOMPANIMENT OF SECTION 167(1)(A) AND SECTION 164(2) OF THE ACT

It is to be noted that Section 167(1)(a), mentions that "he incurs any disqualification specified in Section 164". The section collectively talks about the disqualification under Section 164 without further bifurcating as disqualification specified under Section 164(1) or Section 164(2). Had, it been the intention of legislature to refer to only Section 164(1) the same should have been clearly mentioned.

Further, Section 164 provides the type of disqualification due to which a person to be appointed or re-appointed as Director is restrained from being appointed or reappointed. On the other hand Section 167 provides for the circumstances wherein vacation of the existing director from the board of directors of any Company (without any discrimination as Private or public) will automatically happen. One such circumstance is any of the disqualifications contemplated under Section 164.

REPORT OF THE COMPANIES LAW COMMITTEE

Also, we have brought about the intention of the law makers w.r.t. Section 164 (2) read with Section 167 (1) (a) of the Act. The relevant extracts from the Report of the Companies Law Committee, issued in February 2016 (also available on the website of Ministry of Corporate Affairs), has been discussed below with respect to the stringent provision of disqualification and vacation of Director.

This Committee was formed on 4th June, 2015 by the Ministry of Corporate Affairs, to make recommendations to the Government on issues arising from the implementation of the Companies Act, 2013 as well as on the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on CSR, the Law Commission and other Agencies.

The relevant extract of the same is as follows [Page No. 57 para 11 (Part 1)]:

Disqualifications from appointment as, and vacation of office of director

11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc.

The Committee acknowledged that this Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. In this regard, the Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

11.14 The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the non-compliance, and in case of a continuing non-compliance, there should be a period of six months' time allowed for a new Director to make the company compliant.

The Committee above has also referred that in case of disqualification incurred by any Director under Section 164 (2) of the Act will automatically vacate the office of the director under Section 167(1)(a) of the Act in all the companies in which at that point of time such person is a director.

APPLICABILITY OF SECTION 164(2) TO PRIVATE COMPANIES OR PUBLIC COMPANIES

Disqualifications as provided under section 164(2) of the Act are applicable to all companies irrespective of their category and status. The private companies may add such other disqualification in its Articles in addition to the statutory disqualifications provided under the Act. Further, as far as the applicability of Section 164(2) to the private companies are concerned here it would be relevant to refer the circular dated 5th June 2015 wherein the Ministry of Corporate Affairs have clarified the sections which are exempted in case of Private Companies.

CONCLUSION

The above discussions relating to vacation of office of director due to disqualification incurred by a director under section 164(2)(a) of the Act may be concluded with the observation that such disqualification is one of the basis upon which the office of a director shall become vacant in all the companies in which he is holding position of director. However, it is pertinent to note that such vacation of office will be effective instantly when such disqualification has incurred by the director.

Although the said section 164(2) notified w.e.f. 01.04.2014, the disqualification shall be considered if there is default in filing of financial statements and annual return by a company in which a person is holding a position of directorship and thus such person as director shall be disqualified to be appointed as director in any other company and his position shall be vacated in all the companies in which he is a director in terms of Section 167 (1) (a) of the Act. The same may be understood by the following illustration:

Mr. A is a director in the following companies:

  1. XYZ Pvt. Ltd., which has last filed its financial statements and annual return up to financial year 2011- 12;
  2. PQR Ltd. which has last filed its financial statements and annual return up to financial year 2013-14;
  3. RST Pvt. Ltd. which has last filed its financial statements and annual return up to financial year 2015- 16;

The disqualification of Mr. X shall not be considered up to financial year 2014-15. Thereafter he will be disqualified pursuant to Section 164(2)(a) as XYZ Pvt. Ltd. has not filed its financial statements and annual return for the continuous period of three financial years till date. By virtue of this continuous offence, he is liable to vacate his directorship in all other companies viz. PQR Ltd. and RST Pvt. Ltd. in terms of Section 167 (1)(a) of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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