Section 164 of the Companies Act, 2013 contains disqualifications of a director. A person shall not be eligible for appointment as a director of a company if he suffers from any of the specified disqualifications. As such, the law does not specify any professional or educational qualifications of a director or requires him to hold requisite number of qualification shares except that as a general rule, any person desiring to become a director should be competent to contract and should have been allotted a Director Identfication Number (DIN).
Various disqualifications are mentioned as under:
(i) Section 164(1) states that a person shall not be appointed as a director 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 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence.
However, in case a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as 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 and 6 months have elapsed from the last day fixed for the payment of the call. It is immaterial whether such shares are held individually by him or jointly with others;
(g) he has been convicted of the offence of dealing with related party transactions under section 188 at any time during the last preceding 5years;
(h) he has not complied with section 152 (3) which requires a director to have a Director Identification Number (DIN).
(i) he has not complied with the provisions of Section 165 (1) relating to holding of specified number of directorships.
(ii) Sub-section (2) of Section 164 prescribes disqualifications which get attached to a person if he is or has been a director of a company which has committed default as under—
(a) his company has not filed financial statements or annual returns for any continuous period of 3 financial years; or
(b) his company has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1year or more.
In both the above cases of default, the director concerned shall not be eligible to be re-appointed as a director of such defaulting company or appointed in some other company for period of 5 years from the date on which the said company has committed default.
Where a person is appointed as a director in a defaulted company: However, in case a person is appointed as a director of a company which has committed default as per clause (a) or clause (b) above, he shall not incur the disqualification for a period of six months from the date of his appointment.
(iii) Additional qualifications by private company: According to Section 164 (3), a private company (not being a subsidiary of a public company) is permitted to provide for additional disqualifications through its articles for appointment of a person as a director besides those specified in sub-sections (1) and (2) of section 164. [refer points (i) and (ii) above]. Thus, it may specify certain qualifications like a graduate shall only be the director or the prospective director should hold certain number of qualification shares, etc.
(iv) Disqualification as prescribed by Section 217 (6)(ii): Section 217 related to a company which is under investigation. In case any director of such a company has been convicted of an offence under Section 217, the director shall be deemed to have vacated his office on and from the date on which he is so convicted. On such vacation of office, he shall be disqualified from holding an office in any company.
EXEMPTION:
As per Notification No. GSR 463 (E), dated 5th June 2015 as amended by Notification No. GSR 582 (E), dated 13th June 2015, Section 164(2) is not applicable to a Government Company provided it has not committed default in filing its Financial Statements under Section 137 or Annual Return under Section 92 with the registrar.
CASE LAW
1. In Manju Chamundeeswari v.Union of India,W.MP. NOS. 28025 & 28027 of 2021, it was laid that in terms of rule 11 of Companies (Appointment and Qualifications of Directors) Rules, 2014 neither cancellation nor deactivation of DIN is provided for upon disqualification under section 164(2) and such deactivation would be contrary to section 164(2), read with section 167(1) in as much as person concerned would continue to be a director of defaulting company.
2. The High Court of Kerala held in Zacharia Maramkandathil Mohan v.Union of India W.P (C) No. 21628 of 2020,June 16, 2021 the following principles :
(i) Section 164(2) disqualifying directors of companies for a period of 5 years on failure to submit annual returns/financial statements for 3 consecutive years is not ultra vires Article 14 or Article 19(1)(g) of Constitution .
(ii) Section 164(2) which had come into force from 1-1-2014 would have prospective and not retrospective effect and defaults contemplated under section 164(2)(a) with regard to non-filing of financial statements or annual returns for any continuous period of three financial years to be counted from financial year 2014-15 only.
(iii) Disqualification under section 164(2) is of temporary nature, thus, rule 11 of Companies (Appointment and Qualifications of Directors) Rules, 2014 does not empower any authority to cancel or deactivate DIN upon disqualification under section 164(2).
