India: The Recent Tale Of Disqualification Of Directors And Myriad Legal Issues

Last Updated: 13 November 2017
Article by Ankur Khandelwal

Most Read Contributor in India, December 2017

The Ministry of Corporate Affairs, last month, disqualified around 200,000 directors, under Section 164(2)(a) of the Companies Act, 2013 (2013 Act). Section 164(2)(a) of the 2013 Act provides for disqualification of directors if the company has not filed financial statements or annual returns for a continuous period of three financial years (non-compliance ground). These disqualifications were carried out with the likely intent of cracking the whip on black money and as part of the Government's crackdown on shell companies. Resultantly, Director Identification Number (DIN) of the disqualified directors have been suspended. Suspension of a director's DIN is perhaps, on the understanding that disqualification under Section 164(2)(a) results in automatic vacation of the office of the disqualified director, under Section 167. Pertinently, such automatic vacation upon disqualification was not envisaged under corresponding provisions of the Companies Act, 1956 (i.e. Sections 274 and 283 of the 1956 Act). In petitions filed by various disqualified directors, the Madras High Court, the Kerala High Court and the Delhi High Court, have stayed the operation of the disqualification of the directors before them.

The disqualification of directors and the consequent suspension of their DIN has raised multiple legal questions, including the following, which could very well mean that the disqualifications are contrary to law:

  1. Retrospective application of Section 164:
  1. Section 164 was notified on 1 April 2014 and therefore, could be made applicable only to future financial years (FY), i.e. the FY beginning 1 April 2014 and not to prior FYs.
  2. Under the 1956 Act, disqualification on the non-compliance ground was only for public companies. Even for public companies, automatic vacation of the disqualified director's office was not provided for under the 1956 Act. Therefore, the application of Section 164 of the 2013 Act is retrospective, even for public companies. Pertinently, the automatic vacation of the office of the director happens, not just for the defaulting company, but for all companies that the person is a director of.
  3. The Hon'ble Supreme Court in Pyare Lal Sharma v Managing Director and Ors (1989) clarified that, the principles of natural justice demand that no person be penalised for any conduct which was not penal on the day it was committed.
  4. However, apparently, the disqualifications are on the assumption that since the obligation to file financial statements triggered only after 1 April 2014, Section 164(2)(a) has not been applied retrospectively.
  1. Disqualification made effective from an earlier date (from 1 November 2015/ 1 November 2016):
  1. Disqualifications have been effected from 1 November 2016 and in some case, even from 1 November 2015. As a general principle of law, such disqualification, being penal in nature, cannot apply from an earlier date.
  2. Moreover, the automatic vacation of a director's office comes with the necessary implication that any decision taken by the person, as the director, of any third company also will also become a nullity. This may potentially unsettle concluded transactions and have a spiralling effect on the rights created by such transactions.
  1. No opportunity of being heard granted to the disqualified director
  1. Principles of natural justice demand that a hearing be accorded to any person whose rights are being curtailed by administrative action. The Hon'ble Supreme Court in Nawabkhan v State of Gujarat (1974) held " order is null and void if the statute clothing the administrative tribunal with power conditions it with the obligation to hear, expressly or by implication."
  2. Further, it is a possibility that the disqualified director may have taken due care in ensuring compliance but the non-filing was a result of a lapse on the part of some official of the company.
  1. Rights of third party companies affected for no default of theirs and without hearing
  1. If Section 167 is deemed to apply to Section 164(2)(a), disqualification of directors will result in the automatic vacation of the office of the directors from other companies – impacting the rights of such third-party companies without any non-compliance on their part. Further, this would be done without giving any notice or opportunity of hearing even to such third-party companies;
  2. Additionally, where the disqualification is effected from 1 November 2015/ 2016, the decisions/ actions taken by the disqualified directors, as members of the Board of such third parties, between 1 November 2015/2016 and the actual disqualification, will also be rendered inoperative, as a direct consequence of such vacation.
  1. No remedy to the disqualified directors
  1. Interestingly, the 2013 Act does not contain any provision permitting the disqualified director to challenge his disqualification. However, Rule 14(5) of the Companies (Appointment and Qualification) Rules, 2014 reads "Any application for removal of disqualification of directors shall be made in Form DIR-10". However, the Rules, being delegated legislation, cannot provide any remedy.
  2. Moreover, Rule 14(5) requires the Application to be made to the Registrar of Companies, and is therefore, contrary to the principles of natural justice – an appeal against disqualification cannot be made against the disqualifying authority.
  1. Vicarious liability provisions cannot be invoked without action against the principal offender
  1. Disqualification of the directors is invocation of vicarious liability for the non-compliance of the company. Ordinarily, vicarious liability is not invoked, unless the principal offender is also proceeded against. Therefore, where the company's name has not been struck off, disqualification of the director could well be wrongful invocation of the provision of vicarious liability;
  2. In the context of criminal liability, the Supreme Court, in Aneeta Hada v M/s. Godfather Travels & Tours Private Limited (2012), held that "...Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others..."

Further, disqualification may perhaps, not result in automatic vacation of the office of the director, given the language of Section 164(2)(a) – "No person who is or has been a director of a company which...has not filed financial statements ......shall be eligible to be re-appointed as a director of that company or appointed in other company ...". Therefore, Section 164(2)(a) does not, on its plain reading, suggest that disqualification is a bar on continuing as a director. Also, Section 167 may be read only as including disqualification under sub-section (1) within its ambit and not sub-section (2) of Section 164, since the latter deals only with vicarious liability of directors.

In this regard, the order of the Delhi High Court staying the disqualification also records that prima facie, it appears that the said provision does not provide for immediate disqualification of Directors. Whether the disqualifications will stand judicial scrutiny or not is for time to tell. While an interim order is, by no standard, a yardstick, it appears that prima facie, the courts are noticing the fault lines in the disqualification drive of the Ministry of Corporate Affairs.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
21 Dec 2017, Webinar, Mumbai, India
Contact Event Organizer: Khaitan & Co
The Insurance Group and the Private Equity Group at Khaitan & Co are pleased to invite you to an interactive webinar to discuss the implications of the Guidelines on private equity investment in the Indian insurance sector.
10 Feb 2018, Video/ Audio, Mumbai, India
Contact Event Organizer: Khaitan & Co Funds Team
This is to remind you that we will be hosting an audio-conference tomorrow, 10 January 2018, titled “SEBI’s Year End Bonanza to Investors and Fund Managers”, which is dedicated to fund managers and investors.
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions