Liabilities and Disqualifications for Appointment of Director

Ashish M. Shaji

24 Nov, 2020

Director is a very important person in context of a Company. He has been vested with certain crucial roles and responsibilities. Therefore the appointment of director must be made carefully. There are some liabilities and disqualifications associated with a Director’s appointment and we have discussed the same in this article.

Liabilities and Disqualifications for Appointment of Director: Can a Director be held liable on behalf of the Company?

The Liability of the Directors can be both joint and collective for any and every act prejudicial to the interests of the company. Though the Director and the Company are separate entities, under the following cases the Director may be held liable on behalf of the Company:

• For any misstatement in the Prospectus for acting fraudulently, the directors shall be liable to pay compensation to every person who subscribes to the shares on the faith of such prospectus.
• For the failure to repay application money on non-receipt of minimum subscription.
• Failure to repay application money on refusal to list shares on the stock exchange.
• For not mentioning the name of the company and acting in their own name.
• For acting beyond the powers of the company.
• For breach of trust where directors make the secret profit out of business.
• For negligence or not performing his duties honestly and carefully.
• For any liability of the Company at the time of winding up.
• Failure to file a return on the allotment with the registrar.
• Failure to give notice to the registrar for conversion of shares into stock.
• Failure to issue share certificate or debenture certificate.
• Default in holding the Annual General Meeting.
• Failure to provide the Annual Accounts and Balance Sheet.

Disqualifications for Appointment of Director (Section 164 of the Companies Act, 2013)

A person shall not be eligible for appointment as a director of a company or Change in Directors, if —

• He is of unsound mind and stands so declared by a competent court;
• he is an undischarged insolvent;
• he has been adjudicated as an insolvent, and that his application is pending;
• he has been convicted by a court of any offense and sentenced in respect thereof to imprisonment;
• A court or Tribunal have passed an order for disqualifying the appointment of the director;
• 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;
• he has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding five years;
• for any continuous period of three financial years he has not filed financial statements or annual returns;
• 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 failed to pay any dividend declared and such failure to pay or redeem continues for one year or more

Every director shall inform the company concerned about his disqualification in Form DIR-8 before he is appointed or re-appointed.

Now, it has been made the duty of the company to mandatory intimate ROC^[1] (in E-form DIR-9) about its failure, and if it fails to intimate within a period of thirty days, the Directors and officers of the company shall be the officers in default.

Also, it has been made the duty of the Auditors to state in its Auditors Report whether any director is disqualified for non-compliance as noted above.

Vacation of Office of Director (Section 167 of the Companies Act, 2013)

The office of a director shall become vacant in case—

• He incurs any of the disqualifications specified in section 164 of the act;
• he has not attended all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
• he contravenes the provisions relating to entering into contracts or arrangements in which he is interested directly or indirectly;
• he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested;
• By order of a court or the Tribunal, he becomes disqualified;
• he is convicted by a court of any offense, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment;

Penalty-

The office of director held by him has become vacant on account of any of the disqualifications specified above and then also the person functions as a director of the company, then 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 to maximum five lakh rupees, or with both.

Safeguards – Adopt a Precautionary Approach

To protect their interest and avoid undue liability, it is advisable that directors adopt a cautious approach. A few of the safeguards that can be considered and implemented are as follows:

• To attend meetings regularly;
• To be inquisitive and peruse agendas for unusual items and seek additional information in writing, if necessary;
• To ensure that disagreements/dissenting views are recorded in the minutes;
• To act honestly and with reasonable justifications;
• To report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
• To seek professional advice, establish audit committees, engage external agencies, if the situation demands;
• To engage outside organizations in addressing whistleblowing issues. The Company may consider appointing an external agency for whistleblowing reporting;
• To provide required disclosures of interests/conflicts, consider excusing oneself from participation in proceedings in cases of conflict;
• For ongoing and day to day compliances, have a competent compliance team and establish committees (for regular internal audits, etc.);
• To include indemnity provisions in the letter of appointment and seek Directors & Officers Liability insurance from the company to protect against malicious actions.

Conclusion

Hence it can be summarized that the Directors need to ensure that they take legal advice, in cases of doubt to avoid penalty and imprisonment. They should be cautious in their approach and this way they can avoid falling into legal trouble. In case you need more information regarding Appointment of Director, liabilities or disqualifications of a Director, then you may go through our blogs on the Enterslice website.

Read our article: Procedure for Issuance of Duplicate Share Certificate