This article pertaining to the recent developments in area of directors
disqualifications and subsequent vacancy arises therein. At the very outset, it
is important to note that India is having concept of mixed economy whereby which
the executive strikes an optimum balance of socialistic and capitalistic
features as domination of either of them would negate the contribution of other.
In addition to said fact, it is also an undisputed fact that the corporate
sector is boon to the national income of the country and at the same time is a
reason of millions of job creation in the economy. Hence, by that logic, the
corporate sector is an classic illustration of having presence of both
capitalistic and socialistic features of Indian economy at the same time.
Corporate democracy is an essential & substantial element for the corporate
sector as in absence of it, the corporate sector would become play hand of
majority and consequently the very idea of mixed economy would fail and
capitalist would take over socialistic characters.
Hence, to control this entire lacuna and to strike optimum balance of both, the
companies act has from very beginning brought an idea of removing the
Individuals from very post of representation when such so called directors by
virtue of their omission or commission while exercising their official duties
allow themselves to be in a position and to make themselves enrich with undue
gain or cause loss either actual or constructive to the stakeholders.
With evolution of company law jurisprudence, the major challenges and threats
always arises in form of frauds, force and ill-gotten gains. It is also
important to note that crime is accompanied to every society irrespective of its
size, history, culture and economic conditions.
There may be a case where some acts are recognized as crime in one country but
not in another country or some acts are universally recognized as crime in all
of civilized nations such as crime against homicide.
However, there is new class of crime which is evolving in modern era and that
very class of crime is known as white collar crime or socio economic offences.
The corporate frauds come within purview of this class only and hence in order
to prevent the overall economy and social, the corporate sector need to be
refined with amendments and alterations to do the overall justice to the very
idea of India and its structure of economy.
Thus, in this context our line of observation would be focus to recent
amendments in area of directors disqualifications and some recent pertinent
observations by judicial organs.
Section 164 & Section 167 Of Companies Act, 2013
Section 164: Disqualifications for Appointment of Director
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
(d) 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 six months and a period of five 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 seven 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, whether alone or jointly with others, and six months have elapsed from the
last day fixed for the payment of the call;
(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; or
(h) he has not complied with sub-section (3) of section 152.
(i) he has not complied with the provisions of sub-section (1) of section 165
(2) 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 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 one year or
more, shall be eligible to be re-appointed as a director of that company or
appointed in other company for a period of five years from the date on which the
said company fails to do so.
Provided that where a person is appointed as a director of a company which is in
default of clause (a) or clause (b), he shall not incur the disqualification for
a period of six months from the date of his appointment.
(3) A private company may by its articles provide for any disqualifications for
appointment as a director in addition to those specified in sub-sections (1) and
Provided that 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.
Section 167:Vacation of Office of Director
167. (1) The office of a director shall become vacant in case—
(a) he incurs any of the disqualifications specified in section 164;
Provided that where he incurs 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.
(b) he absents himself from all the meetings of the Board of Directors held
during a period of twelve months with or without seeking leave of absence of the
(c) he acts in contravention of the provisions of section 184 relating to
entering into contracts or arrangements in which he is directly or indirectly
(d) he fails to disclose his interest in any contract or arrangement in which he
is directly or indirectly interested, in contravention of the provisions of
(e) he becomes disqualified by an order of a court or the Tribunal;
(f) he is convicted by a court of any offence, whether involving moral turpitude
or otherwise and sentenced in respect thereof to imprisonment for not less than
Provided that the office shall not be vacated by the director in case of orders
referred to in clauses (e) and (f)-
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid
against the conviction resulting in sentence or order, until expiry of seven
days from the date on which such appeal or petition is disposed of; or
(iii) where any further appeal or petition is preferred against order or
sentence within seven days, until such further appeal or petition is disposed
(g) he is removed in pursuance of the provisions of this Act;
(h) he, having been appointed a director by virtue of his holding any office or
other employment in the holding, subsidiary or associate company, ceases to hold
such office or other employment in that company.
(2) If a person, functions as a director even when he knows that the office of
director held by him has become vacant on account of any of the
disqualifications specified in subsection (1), he shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees, or
(3) Where all the directors of a company vacate their offices under any of the
disqualifications specified in sub-section (1), the promoter or, in his absence,
the Central Government shall appoint the required number of directors who shall
hold office till the directors are appointed by the company in the general
(4) A private company may, by its articles, provide any other ground for the
vacation of the office of a director in addition to those specified in
Analysis of Section 164 And Section 167:
Section 164 provides for disqualification to the directors.
Section 164(1) provides for disqualification owe due to personal reasons
Whereas Section 164(2) provides for disqualification owe due to non-compliance
on part of company.
Section 167(1)(a) provides for vacant of office by director on attracting
section 164 disqualifications.
Question has been raised whether Section 167(1)(a) applies only to Section
164(1) or Section 164(2) as well ?
One argument is that if it apply to Section 164(2) as well then it would mean
that on attraction of Section 164(2), all the directors have to vacant the
office. Not only that, any person who became the director in such company would
get attracted section 167(1)(a) as he would automatically be disqualified and
have to vacated.
Two suggestion were suggested by 2016 report:
- Section 167(1)(a) to be apply only to Section 164(1) and not Section
- Section 167(1)(a) to apply to both Section 164(1) and Section 164(2) but
to clear the chaos , such director would vacant the office in all companies
except the defaulting company. This is for reason being to make such
defaults good in defaulting company.
Proviso to Section 167(1)(a) has been added to implement second option of
suggestion that Section 167(1)(a) apply to both Section 164(1) and Section
164(2) but create an exception by proviso with respect to situation of Section
Also, Proviso added to Section 164(2) is a good governance provision which gives
a new comer director in defaulting company a cooling period of 6 months to clear
the defaults by filling the returns, deposits, etc. The automatic vacation to
such new comer would not arise for 6 months.
Thus, Board of defaulting company would comprise : existing directors who have
to vacant in other companies and new comers who would remain immune for 6 months
from application of section 167(1)(a) by virtue of proviso added to Section
G. Vasudevan (A Company secretary) v. Union of India & Anr
. (High Court of
judicature at Madras, W.P 32763 of 2019)
Issue: Constitution validity of Proviso added to section 167(1)(a) via 2017
amendment act challenged?
- Proviso to Section 167(1)(a) of the Companies Act, leads to unequal
treatment being met out to Directors of a company defaulting company based
on whether they are Directors in other companies or not.
- The petitioner claims that since this proviso states that such Directors
of a defaulting company would only have to vacate Directorship in other
companies while retaining the same in the defaulting company, this leads to
unfair treatment to those Directors who hold such posts in multiple
- The petitioner further claims that this differential classification is
not based on an intelligible differentia and that there is no justification
provided for mandating the vacation of Directorship in other companies, thus
leading to this provision being arbitrary and violative of Article 14 of the Constitution
- It is also contended that the impugned provision irrationally has a
detrimental effect on other, non-defaulting companies and punishes
individual Directors for the defaults of a company even when fault cannot be
directly attributed to them.
- The petitioner also claims that the impugned proviso also violates the
principles of natural justice.
- Though the corresponding provisions in the Companies Act 1956 and the
Companies Act 2013 deal with similar subject matter, there are important
distinctions between the same. As per Section 167(1)(a) of the 2013 Act, the
office of the Director is to become vacant if a Director incurs any
disqualification as provided for under Section 164.
However, no such all-encompassing provision existed in the 1956 Act with
each of the grounds for vacation being listed individually. It is important
to note that liability under Section 274(1)(g) was not a ground for a
Director to vacate his post in any company.
- Before the impugned proviso was inserted in the Companies Act 2013,
Directors of a company who had defaulted under Section 164(2) would have to
vacate their post as Director of the defaulting company only. This was
leading to a situation where any person who became a Director of a company
which had defaulted under Section 164(2) automatically attracted Section
Thus, no person could be appointed as a Director in those companies which
had defaulted under Section 164(2). This was noted in the judgment dated
14.11.2019, passed by the Hon'ble Delhi High Court in Mukut Pathak & Ors Vs. Union of India,
WP.No.9088 of 2018 which while placing reliance on the decision dated 09.07.2019
of the Hon'ble Bombay High Court in Kaynet Finance Ltd. Vs. Verona Capital Ltd.,
Appeal Lodging No.318 of 2019 I Arbitration Petition No.716 of 2019.
- It was in order to rectify such situations the proviso to Section
167(1)(a) was inserted by the 2017 Amendment Act. It is worthwhile to
mention that the Company Law Committee had also made its recommendations to
The relevant portion of the 2016 Company Law Committee report reads as
11.13 Section 167(1)(a) dealing with vacation of office by a director
triggers an automatic vacation of office of the director if he incurs any of
the disqualifications stipulated under Section 164. Section 164(1) provides
for disqualifications which are incurred by a director in his personal capacity such
as being an undischarged bankrupt, of unsound mind, convicted of an offence
etc., and Section 164(2) lists out disqualifications related to the company such
as non-compliance of annual filing requirements, etc. The Committee acknowledged
that this Section created a paradoxical situation, as the office of all the
directors in a Board would become vacant where they are disqualified under
Section 164(2), and a new person could not be appointed as a director as they
would also attract such a disqualification. In this regard, the Committee
recommended that the vacancy of an office should be triggered only where a
disqualification is incurred in a personal capacity and therefore, the scope of
Section 167(1)(a) should be limited to only disqualifications under Section
164(1). 11.14 The Committee also recommended that a disqualification under
Section 164(2) be only applicable to a person who was a director at the time of
the noncompliance, and in case of a continuing non-compliance, there should be a
period of six months’ time allowed for a new Director to make the company
compliant. 11.15 The Committee felt that the proviso to Section 164 (appearing
under sub-section (3) of the section) creates an inconsistent situation when
read with the proviso to Section 167(1)(f), as these provide for a person to be
appointed as a Director if he has been convicted/disqualified by a Court but has
an appeal preferred in a Court whereas for a sitting Director, it does not allow
such consideration and he has to vacate office on conviction, even if an appeal
had been preferred against such conviction and sentence. The Committee,
therefore, recommended that such inconsistency be corrected and in case of
requirement for vacation of office of a Director, it should not take effect
until the appeals are disposed off, while in case of disqualification, it is not
required to provide for period of pendency of appeal."
- A perusal of the above extract makes it clear that Section 274(1)(g) of
the Companies Act 1956 was made to protect investors rights and to ensure
that Directors of companies act vigilantly in preventing any misfeasance or
discrepancy which may affect investors and the public. It is thus held that
the underlying object of Section 274(1)(g) is facilitating good corporate
governance and it cannot be declared unconstitutional without considering
the purpose that the provision serves.
- In our opinion, the legislative intent behind the inclusion of the
proviso to Section 167(1)(a) is also to ensure good governance and inculcate
a sense of security in investors through transparent disclosures and control
over erring Directors. The Hon'ble Supreme Court inN.Narayanan Vs. Adjudicating Officer,
Security and Exchange Board of India, (2013) 12 SCC 152, in paragraphs 35 and 36
state as under:-
35.Gower and Davies in Principles of Modern Company Law, 9th Edn. (2012) at p.
751, reiterated their views on the scope and rationale of annual reporting
required under the Companies Acts, as follows: “On the basis that ‘forewarned is
forearmed’ the fundamental principle underlying the Companies Act has been that
of disclosure. If the public and the members were enabled to find out all
relevant information about the company, this, thought the founding fathers of
our company law, would be a sure shield. The shield may not have proved quite so
strong as they had expected and in more recent times, it has been supported by
36.The Companies Act casts an obligation on the company registered under the
Companies Act to keep the books of accounts to achieve transparency. Previously,
it was thought that the production of the annual accounts and their preparation
is that of the accounting professional engaged by the company where two groups
who were vitally interested were the shareholders and the creditors. But the
scenario has drastically changed, especially with regard to the company whose
securities are traded in public market. Disclosure of information about the
company is, therefore, crucial for the accurate pricing of the company's
securities and for market integrity.
Records maintained by the company should
show and explain the company's transactions, it should disclose with reasonable
accuracy the financial position, at any time, and to enable the Directors to
ensure that the balance sheet and profit and loss accounts will comply with the
statutory expectations that accounts give a true and fair view. The Companies
(Amendment) Act, 2000 has added clause (iii) to Section 209-A(1) of the
Companies Act, 1956 under which SEBI has also been given the power of inspection
of listed companies or
companies intending to get listed through such officers, as may be authorized by
- An analysis of the above mentioned extract reveals that filing of
returns and disclosures regarding the finances of the company are vital to
ensure greater transparency and accountability to the public which is the
need of the hour in today's corporate set up. These measures are extremely
necessary in the interest of fair trade and ensuring justice. Additionally,
a great deal of responsibility is borne by the Directors of a company to
ensure that the company acts in accordance with laws and upholds the
principles of transparency and probity.
It would be apt to rely on the
judgment of the Hon'ble Supreme Court
in Official Liquidator,Supreme Bank Ltd., Vs. P.A.Tendolkar,(1973) 1 SCC 602,
that holds that the Directors of a company must be responsible for actions and
affairs of the company which are visible to the public even superficially. A
Director must not derelict his duties as a Director and must exercise all due
diligence necessarily to ensure that the company abides by laws and regulations.
The relevant paragraphs are extracted hereunder:-
"45.It is certainly a question of fact, to be determined upon the evidence in
each case, whether a Director, alleged to be liable for misfeasance, had acted
reasonably as well as honestly and with due diligence, so that he could not be
held liable for conniving at fraud and misappropriation which takes place. A
Director may be shown to be so placed and to have been so closely and so long
associated personally with the management of the Company that he will be deemed
to be not merely cognizant of but liable for fraud in the conduct of the
business of a Company even though no specific act of dishonesty is proved
against him personally.
He cannot shut his eyes to what must be obvious to
everyone who examines the affairs of the Company even superficially. If he does
so he could be held liable for dereliction of duties undertaken by him and
compelled to make good the losses incurred by the Company due to his neglect
even if he is not shown to be guilty of participating in the commission of
fraud. It is enough if his negligence is of such a character as to enable frauds
to be committed and losses thereby incurred by the Company."
- It has also been noted by the Hon'ble Supreme Court inDale & Carrington
Invt. Pvt. Ltd. v. P.K. Prathapan,(2005) 1 SCC 212 that the directors of a
company owe an obligation to the shareholders of the company to make all
disclosures and to act in the best interest of the company, exercising due
diligence and good faith. The Hon'ble Supreme Court also stated that
irrespective of whether directors are described as trustees, agents or
representatives, they have a duty to act for the benefit of the company and must
not derelict their duty towards the shareholders and investors in the company.
- A Director, irrespective of the nature of Directorship, by virtue of the
fact that he holds the position of Directorship cannot claim immunity for
the defaults of the company in the filing of returns or the business of the
company, and therefore cannot be made to vacate his post in other companies.
This Court can take judicial notice of the fact that people invest their
hard earned money in companies in which there are persons of repute holding
the position of a Director.
The Director therefore cannot absolve himself of the misdeeds of the
company after holding a position in the company. Section 166 of the Companies
Act 2013, which enumerates the duties of a Director mandates that the Director
of a company shall act in good faith in order to promote the objects of the
company for the benefit of the other members as a whole and in the best interest
of the company, its employees, shareholders, the community and the protection of
The object of inserting the proviso is to ensure that a person
who is a Director in a Company that does not file its returns for a period of
three years or does not return the money back to its investors or creditors does
not continue as Director in other companies. This proviso will also act as a
deterrent from incorporating shell companies to park illegally obtained money.
There is thus a rational nexus between the amendment and the object for which
the amendment was brought about in the Companies Act 2013. The contention of the
petitioner that the proviso to Section 167(1)(a) is irrational, manifestlyarbitrary and unreasonable, and thus must be declared as ultra viresArticle
14 of the Constitution of India cannot be accepted.
The proviso to Section 167(1)(a) must be interpreted in ordinary terms and would
apply to the entirety of Section 164 including sub-section 2. The Court has
further held that this proviso can be justified on two grounds.
- Firstly, it has been reiterated that the exclusion of Directors from
vacating their posts in the defaulting company while doing so in all other
companies where they hold Directorship has been done in order to prevent the
anomalous situation wherein the post of Director in a company remains vacant
in perpetuity owing to automatic application of Section 167(1)(a) to all
newly appointed Directors.
- Secondly, the underlying object behind the proviso to Section 167(1)(a) is seen
to be the same as that of Section 164(2) both of which exist in the interest of
transparency and probity in governance. Owing to these justifications, the Court
thus holds that the proviso to Section 167(1)(a) is neither manifestly arbitrary
nor does it offend any of the fundamental rights guaranteed under Part III of
the Constitution of India.
The views and opinions expressed in this article are those of the authors and do
not necessarily reflect the official policy or position of any agency of the
Indian government. Examples of analysis performed within this article are only
examples. They should not be utilized in real-world analytic products as they
are based only on very limited and dated open source information. Assumptions
made within the analysis are not reflective of the position of any Indian
The author is a Practicing company secretary and has completed its CS management
trainee with a reputed corporate law firm. Further, he is a Second Year Law
student at faculty of law, University of Delhi. He is enrolled as Para Legal
volunteer with Delhi State Legal Service authority and is an active Participant
in Moot Court.