Section 167 (1) provided the list of incidences leading to automatic vacation by a director from all companies. This section which came into effect from 1st April 2014, has open the new Pandora’s box.
Clause (a) of the said section provides that if director incurs any of the disqualifications specified in entire section 164, he vacates the office.
Section 164 states that a person can not be eligible to be appointed or reappointed as Director of a Company if he is suffering from any disqualifications. Hence section 164 triggers only at the time of appointment or reappointment event. However reference of section 164 in vacation of office has made it complicated.
If you carefully look at the provisions of Section 164, you will find that there are two set of disqualifications. Disqualifications provided in sub section (1) are of personal nature. Persons can control those and can ensure that he is not entering into such disqualifications.
However disqualifications provided in sub section (2) has a potential danger. They are company specific. It would be difficult for a person to control it. Further if he is non executive director it is more difficult to understand the day to day functioning of the Company and to keep control over it. Sub section (2) provides for the filing and repayment non compliances made by the Company for certain period, makes such director ineligible for reappointment in the said company or for appointment in any other company.
If the Company has failed to file the financial statements or annual return for any continuous period of 3 financial years, such disqualification incurs. Hence in my view after 1.4.2014 if it is observed that any company has failed to file returns for 3 financial years i.e. 10-11, 11-12 & 12-13, then such disqualification has passively occurred to all the directors of the said company. The said disqualification will be active during their appointment in another company or reappointment in the said company.
Upto this everything is fine, but the catch is in section 167. Once we conclude that passive disqualification has occurred to a director under section 164 (2) (a), he has to vacate the office under section 167 (1) (a). The vacation is automatic and no cure is provided for it.
I am not sure whether we can take a stand that period stated in disqualifications under Section 164 (2) is to be counted after 1.4.2014.
Hence all companies who have failed to file their returns for year need to really understand whether their Board exists today. Whether death sentenced is already passed for directors?
Filing of returns after 1.4.2014 may not solve this problem. If vacation is there, then company is required to undergo a process prescribed for communication of vacation to registrar.
Given the intricacies and complexity of 2013 law, it seems that not much choice is left with the companies and there directors but to take a professional help in their day to day functioning to avoid such blows in future.
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Good one. I thought only I was thinking like that.