Detailed Analysis of Section 164 of Companies Act 2013

Detailed Analysis of Section 164 of Companies Act 2013 – Disqualification for the appointment of a director in order to understand the section in a better way

As per Section 164(1) of companies act 2013

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

  • he is of unsound mind and stands so declared by the competent court;
  • he is an undischarged insolvent;

Here undischarged insolvent means, when he has been adjudged as insolvent (declared insolvent by a competent court), but has not been discharged.

Here filling the application by any vendor or creditor doesn’t term as an insolvent immediately until not declared by the court, and after the discharge of insolvent can be appointed as director of any company.

  • he has applied to be adjudicated as an insolvent and his application is pending;

Here he means that a person himself filled application for adjudicated as insolvent, in the case a person can’t become a director when he applied for adjudicated as insolvent from the date of filling application, even if not declared by the competent court.

  • he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof 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.

Provided that if 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;

Here court means Indian Courts or Court outside India

Here otherwise means any offence in respect of which a person is convicted by a court under the companies act 2013 or company act 1956 {as per rule 2(1)K of the Companies (Appointment and qualification of directors) rules 2014}

Disqualification comes to end on expiry of 5 years from the date of expiry of the sentence.

But where imprisonment of 7 years or more, he shall disqualify for the whole life.

  • an order disqualifying him for appointment as a director has been passed by a court or tribunal and the order is in force;

And when the order of a court for a certain period and such period expires, it is termed as ‘the order not in force’.

  • he has not paid calls in respect of any shares of the company held by him, whether alone or jointly with others and 6 months have elapsed from the last day fixed for the payment of call;

The Company here means the particulars company in which dues are pending not all companies. i.e. he is eligible for an appointment as director in other company.

When 6 months have not elapsed from the last day to pay calls then he is eligible for appointment as director.

In case of jointly held shares, even if he paid all his contribution as per the agreement with joint holder, but he is not eligible for appointment as director.

When he transfers his partly paid-up shares to other person, then he is eligible for an appointment as director of the company.

  • he has been convicted of the offence dealing with related party transactions u/s 188 at any time during the last preceding 5 years. (refer section 188)
  • he has not complied with subsection (3) of section 152 which require a director to have a Director Identification Number (DIN) (refer section 152); or
  • he has not complied with the provision of section 165(1) relating to the holding of specified numbers of directorships (refer section 165).

section 164(2) of companies act 2013

i.e. Disqualification by reason of a default made by a company

A person who is or has been director of a company shall be disqualified from being reappointed as a director of that company or appointed in any other company for a period of 5 years, from the date on which his company fails to

  • filled financial statements or annual returns for any continuous 3 Financial years; or
  • 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 failures continues for 1 year or more.

Important

  1. If after the disqualification attracted as per section 164(2) attracted, the default is made good by the company, the director shall continue to be disqualified till 5 years have not elapsed from the date of section 164(2) attracted.
F.Y. Financial Statements Annual return Default/ No default
2016-17 Yes No Default
2017-18 No yes Default
2018-19 Yes No Default
In that case, directors are disqualified

 

Proviso to section 164 (2) of companies act 2013

Provided that where a person is appointed as a director of a company which is in defaulted of clause (a) or clause (b) of section 164(2), he shall not incur disqualification for a period of 6 months from the date of his appointment.

Exemptions

Section 164(2) is not applicable to government companies if it has not default in filing financial statements under section 137 or Annual Return under section 92 of the companies act.

Section 164(3) of companies act 2013

A private company (not being a subsidiary of a public company) may by its articles provide for any disqualification for appointment as a director in addition as specified in section 164 (1) or 164(2) of companies act.

For example: No educational qualification or age is provided as per section 164(1) or section 164(2) of that act, but private companies may provide such additional disqualification criteria after amendment in its articles.

Proviso to section 164(3) of companies act 2013

Provided that disqualification referred to in clause (d), (e), (g) of subsection 1 of section 164 shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.

section 164 of companies act 2013

Priyansh Minocha

Priyansh Minocha is C.E.O and Director at Amonest India Private Limited and Founder at Casolutionsglobal

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