This blog will explore the meaning, definition, and effects of the disqualification of directors and highlight its importance in protecting the interests of shareholders, creditors, and other stakeholders in a company and maintaining integrity. Disqualification of directors is a crucial provision under Section 164 of the Companies Act, 2013, aimed at ensuring good governance and accountability in companies.
What is the Disqualification of Directors?
Disqualification of directors refers to legal restrictions imposed on individuals that prevent them from being appointed or continuing as company directors. The primary purpose of these rules is to ensure accountability, good governance, and compliance with legal and ethical standards in corporate governance.
Disqualification of directors in India is governed by section 164 of the Companies Act, 2013, and the relevant rules. Here is an overview.
What is the Disqualification of Directors Meaning?
Disqualification of directors refers to a legal circumstance or situation where a personality is declared ineligible to hold or continue as a director of a company. This status is imposed due to abnormal legal violations, lapses of duty or governance failures. It is a mechanism designed to ensure accountability, integrity, and transparency in corporate management.
What is the Disqualification of Directors Definition?
Disqualification of directors is a legal prohibition which renders a person ineligible to be appointed, reappointed or continue as a director in a company, on grounds of specific violation of law, failures of governance or misconduct of duty, as defined under the applicable legal framework in India such as the Companies Act, 2013.
This measure ensures accountability, transparency, and adherence to corporate governance standards.
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What are the Disqualification of Directors Effects?
Disqualification of directors entails consequences, which affect both the personality and the companies in which they hold directorships. Here is an overview.
1. For the Director:
- Disqualification for appointment or reappointment.
- Immediate termination of all directorships.
- Damage to reputation and professional credibility.
2. For the Company:
- Disruption of governance and the need to appoint replacements.
- Risk of penalty for non-compliance.
- Decreased stakeholder trust and increased regulatory scrutiny.
3. Broader Impact:
- Legal and financial consequences.
- Challenges in Fundraising and Operations.
What is the Disqualification of Directors Under Companies Act 2013?
Disqualification of a director under the Companies Act, 2013 is expressly governed by Section 164 and related provisions. It outlines the criteria and conditions under which a person is barred from being appointed or continuing as a company director.
1. General Grounds:
- Are of unsound mind, bankrupt, or convicted of offenses carrying a sentence of 6+ months (disqualified for 5 years).
- Failure to pay the share call money for 6 months.
2. Defaults of the Company:
- It served as a director in companies that failed to file financial statements or returns for three years.
- Failure to refund deposits, redeem debentures, or pay dividends for over a year.
What is the Disqualification of Directors Section 164?
Section 164 of the Companies Act, 2013 outlines the circumstances under which a person is disqualified from being appointed or continuing as a company director.
1. General Grounds:
- They must be of unsound mind, insolvent, or convicted of crimes punishable by 6+ months’ imprisonment.
- Failure to pay share call amount for 6+ months or being disqualified by the court.
2. Company Defaults:
- Are directors of companies that have failed to file financial statements/returns for 3 years or repay deposits, redeem debentures, or pay dividends for 1+ years.
What is the Disqualification of Directors in Company Law?
Disqualification of directors in company law refers to a legal prohibition imposed on individuals that makes them ineligible to be appointed or continue to be a company director due to non-compliance, ethical turpitude, or financial misconduct.
In India, it is governed by Section 164 of the Companies Act 2013, which specifies.
1. General Grounds:
- Being of unsound mind, bankruptcy, or convicted of offenses punishable with imprisonment for 6+ months.
- Non-payment of share call money for 6+ months.
- Disqualification order by a court or tribunal.
2. Company Defaults:
- Non-filing of financial statements or returns for three consecutive years.
- Non-refunding of deposits, redemption of debentures, or payment of dividends for more than 1 year.
How to Check the Disqualification of Directors on MCA?
To check the disqualification of directors on the Ministry of Corporate Affairs (MCA) website, follow these steps.
Step 1: Visit the MCA website at www.mca.gov.in.
Step 2: Click on Builders Services and Company/Check Company Details.
Step 3: Select View signer details.
Step 4: Enter the Director Identification Number (DIN).
Step 5: Click on Submit to view the details of the Director, including his/her disqualification status.
Conclusion
Disqualification of directors is a mandatory mechanism under the Companies Act, 2013, designed to ensure corporate governance, accountability and legal compliance within companies. Setting clear grounds for ineligibility, such as bankruptcy, criminal conviction, non-compliance with company law and failure to meet financial obligations it prevents individuals with poor administrative records from holding influential positions in companies.
FAQs
How does a director get disqualified?
A director can be disqualified in several ways. In many cases, the Insolvency Service plays a crucial role in investigating the conduct of directors of insolvent companies, which may result in disqualification. Alternatively, a court may impose sanctions, usually in cases involving fraud or unfair business practices.
What is the disqualification of directors 167?
If any person, knowing that his office as a director has become vacant because of any of the disqualifications mentioned in sub-section (1), continues to act as a director, he shall be punishable with imprisonment of either description for a term which may extend to one year or with fine which may extend to one year.
When a director may be disqualified?
A director can be disqualified if a company is removed from the register due to outstanding debts or if the director is associated with several companies removed due to non-compliance. Disqualification often occurs when a company fails to meet legal or financial obligations, restricting the director’s ability to hold office in other companies.
What is the section for disqualification of the director?
Disqualified directors cannot act as CEOs, who are ineligible to run a limited company.
What are the disqualifications of a managing director?
A person below 21 or above 70 cannot be appointed as a director unless special resolution approval is obtained for those above 70. Additionally, an approved or already declared insolvent cannot be a director.
What is the qualification of a director?
Note: There is no minimum educational qualification required to become a director of a company in India.
How do you know if a director is disqualified?
A person is disqualified if he is found guilty of an offense involving moral turpitude and is sentenced to imprisonment for at least six months or if a court/tribunal has passed an order disqualifying him from being appointed as a director.
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