Director Disqualification Under Section 164

Director disqualification under section 164 of the Companies Act, 2013 comes in two shapes that are often treated as one. Sub-section (1) is about the person: nine grounds, each personal to the individual. Sub-section (2) is about a company the person was a director of: a five year bar that attaches because the company failed to file or failed to pay, whether or not the director was personally at fault. The consequences also differ, and section 167 is where they land.

The nine personal grounds in section 164(1)

A person shall not be eligible for appointment as a director of a company if:

• (a) he is of unsound mind and stands so declared by a competent court
• (b) he is an undischarged insolvent
• (c) he has applied to be adjudicated as an insolvent and his application is pending
• (d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence. The proviso adds a permanent bar: a person sentenced to imprisonment for seven years or more is not eligible to be appointed a director in any company
• (e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force
• (f) he has not paid any calls in respect of any shares of the company held by him, alone or jointly, and six months have elapsed from the last day fixed for payment
• (g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years
• (h) he has not complied with section 152(3), under which no person shall be appointed as a director unless he has been allotted the Director Identification Number under section 154, or any other number as may be prescribed under section 153
• (i) he has not complied with section 165(1), the limit on the number of directorships. Clause (i) was inserted by Act 22 of 2019, section 26, with effect from 2 November 2018

Section 164(3) allows a private company to provide by its articles for additional disqualifications beyond those in sub-sections (1) and (2).

The five year bar in section 164(2)

Sub-section (2) works differently. It is triggered by the company's conduct, and it follows the person outward to every other board.

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) has failed to repay the deposits accepted by it, or pay interest on them, or redeem any debentures on the due date or pay interest due on them, or pay any dividend declared, and such failure continues for one year or more

shall be eligible to be re-appointed as a director of that company, or appointed in another company, for a period of five years from the date on which the said company fails to do so.

The clock starts at the company's failure, not at the director's appointment and not at any order. A proviso inserted by Act 1 of 2018, section 52, with effect from 7 May 2018 gives a new arrival a grace period: where a person is appointed as a director of a company that is already in default under clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.

An appeal does not pause three of the grounds

The proviso to section 164(3), substituted by Act 1 of 2018, section 52, with effect from 7 May 2018, settles a question that used to be argued: the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.

So a pending appeal against a conviction under clause (d), a disqualification order under clause (e), or a section 188 conviction under clause (g) does not suspend the ineligibility for appointment. Section 167, as the next section shows, treats the same appeal differently for the purpose of vacating an existing office.

What section 167 does with a disqualification

Disqualification under section 164 answers whether a person can be appointed. Section 167 answers what happens to an office he already holds.

Under section 167(1)(a), the office of a director becomes vacant where he incurs any of the disqualifications specified in section 164. A proviso inserted by Act 1 of 2018, section 54, with effect from 7 May 2018 confines the reach of a section 164(2) disqualification: where he incurs a disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

That proviso is the practical heart of the regime. A director of a defaulting company keeps the seat at the defaulting company, and loses every other one. The rationale is visible in the drafting: emptying the board of the company that has to fix the default would make the default harder to cure.

Section 167(1) has seven further grounds for vacation that have nothing to do with section 164:

• (b) absence from all Board meetings held during a period of twelve months, with or without leave
• (c) acting in contravention of section 184 on interested contracts or arrangements
• (d) failure to disclose interest in a contract or arrangement, in contravention of section 184
• (e) becoming disqualified by an order of a court or the Tribunal
• (f) conviction by a court of any offence, whether involving moral turpitude or otherwise, and a sentence of imprisonment for not less than six months
• (g) removal in pursuance of the provisions of the Act
• (h) ceasing to hold the office or employment in the holding, subsidiary or associate company by virtue of which he was appointed a director

For clauses (e) and (f) only, a proviso substituted by Act 1 of 2018, section 54, with effect from 7 May 2018 postpones the vacancy on a three step timetable:

1. Thirty days from the date of conviction or order of disqualification
2. Where an appeal or petition is preferred within those thirty days, until the expiry of seven days from the date on which the appeal or petition is disposed of
3. Where a further appeal or petition is preferred within those seven days, until that further appeal or petition is disposed of

Read together with the section 164(3) proviso, the position is this: an appeal buys time on the seat you hold under clauses (e) and (f) of section 167, and buys nothing on eligibility for a new appointment under clauses (d), (e) and (g) of section 164(1).

Acting after the seat has gone

Section 167(2) makes it an offence to carry on. If a person functions as a director even when he knows that the office has become vacant on account of any of the disqualifications in sub-section (1), he shall be punishable with fine of not less than one lakh rupees extending to five lakh rupees. The words "with imprisonment for a term which may extend to one year or" were omitted by Act 29 of 2020, section 34, with effect from 21 December 2020, and the same amending section replaced "five lakh rupees, or with both" with "five lakh rupees".

Section 167(3) deals with an emptied board: where all the directors vacate their offices under any of the disqualifications in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors, who hold office until directors are appointed by the company in general meeting. Section 167(4) lets a private company add further grounds of vacation by its articles.

Where this sits in the disclosure picture

Disqualification is recorded on the Ministry of Corporate Affairs side rather than through an exchange filing, and the visible market trace is usually a change in board composition. For a listed company, board changes and the reasons for them run through the LODR disclosure machinery.

• What is a corporate governance report is where a listed company's board composition is reported quarter by quarter.
• What is a related party transaction covers section 188, conviction under which is the clause (g) ground.
• What is a form MGT-7 is the annual return whose non-filing for three continuous financial years triggers section 164(2)(a).
• Appointment of directors under section 152 covers the section 152(4) declaration that a proposed director is not disqualified under this section.
• What is material event disclosure is the route by which a resignation or vacation reaches the market.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.