Change in Business

Resignation/Removal or Disqualification of Directors

A company is a legal entity that acts through natural persons. The person who acts on the behalf of company is known as Director. In this article we shall look at Disqualification of Directors.

Disqualification of Directors

A Director may be disqualified on the happening of following events:

1. Unsound mind.
2. Undischarged insolvent
3. Pending Adjudication of insolvency convicted by a court in the case of an offense involving imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence.
4. Disqualified by a Court and the disqualification order is still in force.
5. Defaulted in payment of calls in shares.
6. Convicted of an offence relating to related party transactions.
7. In default not complying with other provisions of Companies Act 2013.
8. Where the Director has failed to get DIN. (Director Identification Number)

Additional Disqualification of Directors in case of a Public Company

In addition to the requirements mentioned above, the Companies Act^[1] further provides that a person shall not be eligible to be appointed as a Director of any other public company for a period of five (5) years from the date on which the public company, in which he or she is a Director,  is in default to file annual accounts and annual returns or is in default to repay its deposits or interest thereon or redeem its debentures on the due date or pay dividends declared.

Additional Disqualification of Directors in Case of a “Pure” Private Company

A private company which is not a subsidiary of a public company can provide for additional grounds for disqualification for the appointment of a person as a Director in addition to those specified in the Companies Act.

What is the consequence of Disqualification of directors?

Once disqualified, the person shall no more be eligible to be appointed as Director of that company or for that matter any other company. After the year 2017, MCA has strictly enforced these provisions of the Companies Act. It recently published the name of disqualified directors on the government website.

Retirement of Directors

The provision regarding the retirement of directors by rotation is applicable only for a public company. As per the provisions of the said section, 2/3rd of the total number of directors of a public company shall be liable to be retired by rotation. While calculating the 2/3rd of the total number of directors, the Independent Director shall not be counted in the total number.

Removal of Directors

Shareholders are bestowed with the powers to remove the Directors, as well all know that at the end of the day, directors are answerable to shareholders. Further, Shareholders can also remove a director before the expiry of his tenure, an exception is a case if the director is appointed by Tribunal under the prevention of oppression and mismanagement u/s 242 and if appointed under a principle of proportional representation u/s 163.

A Director can be removed by an ordinary resolution of the general meeting after a special notice has been given, before the expiry of his term of office.

Vacation of Office

The office of a Director of a public company, or of a private limited company which is a subsidiary of a public company, becomes vacant if he or her:

1. Becomes subject to any of the three (3) disqualifications mentioned above (with regard to disqualifications for a Managing or a Whole-time Director) during his or her term of office;
2. Fails to obtain within any time period as may be specified in the Articles (two months in case of a public company), or at any time thereafter ceases to hold, the necessary share qualification if any as prescribed by the Articles;
3. Absents himself or herself from three (3) consecutive meetings of the Board, or from all meetings of the Board for a continuous period of three (3) months, whichever is longer, if the leave of absence is not granted by the Board;
4. Whether by himself or herself, or by any person on his or her account or any firm in which he or she is a partner or company in which he or she is a Director, accepts a loan or guarantee or security for a loan from the company in contravention of the requirements governing loans etc to Directors;
5. Acts in contravention of the requirements regarding disclosure of interests;
6. Is removed from office under the Companies Act; or
7. Having been appointed as Director by virtue of his or her holding an office or other employment in the company (for instance, that of Managing Director), he or she fails to hold such office or other employment.

Also, in such public companies and private companies that are subsidiaries of public companies, if a Director or his or her relative holds an office of profit without the consent of the company, and with such Director’s knowledge, such Director shall be deemed to have vacated his or her office.

In addition to these reasons for the Director’s office becoming vacant, a “pure” private company may prescribe other such reasons in its Articles.

If a person continues to act as a Director, despite knowing that his or her office has become vacant, he shall be punishable with a fine up to five thousand rupees (Rs. 5,000/-) for every day that he or she continues to function and act as such.

Resignation of Directors

The Companies Act is silent with respect to the resignation of Directors. However, in a majority of cases, the Articles provide for Directors to resign. Even in cases where the Articles are silent, there is no absolute bar on Director’s resigning, which becomes effective upon submission of such resignation letter and the filing of the necessary form for such resignation with the Registrar of Companies (whether or not the Board formally accepts the same, unless the Articles provide otherwise). The filing of such resignation related form with Registrar of Companies is an obligation to be discharged by the company in question.

The only exception to the above rule is in the case of Managing, Whole-time and Executive Directors who are employees of the company, and where the terms of their respective service contracts will ordinarily refer to resignations, notice periods and/or compensation in lieu thereof.

Compensation for Loss of Office

Only a Managing Director, a Director holding the office of a Manager and Whole-time Directors can receive compensation for loss of office or consideration for retirement, subject to the conditions specified by the Companies Act.

Conclusion

It may be noted that there is also a provision of appeal for directors in case of disqualification. A director may appeal to the National Company Law Appellate Tribunal.

Read our article:The Procedure and Requirements of Appointment of Nominee Director