Disqualification, Vacation of Office, Resignation and Removal

Three points that earn marks. Clause (d) covers any offence, whether involving moral turpitude or otherwise, and the five years runs from the expiry of the sentence, not from conviction. Its proviso is permanent: seven years or more and he is out of every company for good. And clause (f) is about unpaid calls plus six months, not about unpaid calls alone.

The proviso to section 164(3) is important and is often missed: the disqualifications in clauses (d), (e) and (g) continue to apply even if an appeal or petition has been filed against the order of conviction or disqualification. Filing an appeal does not suspend the disqualification.

The defaulting company disqualification: section 164(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 on them, or redeem any debentures on the due date, or pay interest due on them, 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 any other company for a period of five years from the date on which the said company fails to do so.

Take the elements apart.

Who is caught: a person who is or has been a director of the defaulting company. Past directors are within it.

Two triggers: three continuous financial years of non-filing, or one year or more of failure to repay deposits, interest, debentures or declared dividend.

The consequence: ineligible for re-appointment in that company and for appointment in any other company, for five years from the date of the default.

The proviso protects the rescuer. Where a person is appointed as a director of a company which is already in default under clause (a) or (b), he shall not incur the disqualification for a period of six months from the date of his appointment. Without it, nobody would ever join the board of a company in trouble to turn it round.

Section 164(3): a private company may add. A private company may by its articles provide for any disqualifications in addition to those in sub-sections (1) and (2). Note that it may add, never subtract.

The number of directorships: section 165

Section 165(1). No person shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time.

The proviso: the maximum number of public companies in which a person can be appointed shall not exceed ten.

Explanation I: for reckoning the limit of public companies, directorship in private companies that are either holding or subsidiary companies of a public company shall be included.

Explanation II: for reckoning the limit of twenty, directorship in a dormant company shall not be included.

So the figures are twenty in all, of which not more than ten may be public, alternate directorships count towards the twenty, private companies in a public group count towards the ten, and dormant companies count towards neither.

Section 165(2). The members may by special resolution specify any lesser number of companies in which a director of the company may act.

Section 165(3) gave existing over-holders one year to choose, resign the rest and intimate the choice to each company and to each Registrar.

And note the link: breach of section 165(1) is itself a disqualification under section 164(1)(i).

Vacation of office: section 167

The office of a director shall become vacant in case:

• (a) he incurs any of the disqualifications specified in section 164. Proviso: where he incurs a disqualification under section 164(2), the office shall become vacant in all the companies other than the company which is in default;
• (b) he absents himself from all the meetings of the Board held during a period of twelve months, with or without seeking leave of absence;
• (c) he acts in contravention of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
• (d) he fails to disclose his interest in any such contract or arrangement, in contravention of section 184;
• (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 to imprisonment for not less than six months;
• (g) he is removed in pursuance of the provisions of this Act; and
• (h) he, having been appointed a director by virtue of holding any office or other employment in the holding, subsidiary or associate company, ceases to hold that office or employment.

The proviso to clauses (e) and (f) gives breathing space for an appeal. The office is not vacated:

• (i) for thirty days from the date of conviction or order of disqualification;
• (ii) where an appeal or petition is preferred within those thirty days, until the expiry of seven days from the date on which it is disposed of; and
• (iii) where a further appeal or petition is preferred within those seven days, until that further appeal or petition is disposed of.

Now put the proviso to clause (a) beside section 164(2), because together they are the answer to the standard problem. A director of a company that has not filed for three years is disqualified under section 164(2). By the proviso to section 167(1)(a) he vacates his office in every other company, but keeps his seat in the defaulting company itself. The logic is deliberate: the people who created the default must stay and fix it, and cannot escape by being ejected.

Section 167(2): the punishment. If a person functions as a director knowing that his office has become vacant, he shall be punishable with a fine of not less than one lakh rupees and up to five lakh rupees.

Section 167(3): an empty Board. Where all the directors vacate their offices, the promoter, or in his absence the Central Government, shall appoint the required number of directors, who hold office till directors are appointed by the company in general meeting.

Section 167(4). A private company may by its articles provide any other ground for vacation, in addition to those specified.

Resignation: section 168

Section 168(1). A director may resign by giving a notice in writing to the company; the Board shall on receipt take note of it; the company shall intimate the Registrar in the prescribed manner, time and form; and the company shall also place the fact of the resignation in the report of directors laid in the immediately following general meeting.

The proviso: a director may also forward a copy of his resignation, along with detailed reasons, to the Registrar within thirty days of resignation, in the prescribed manner.

That proviso is the director's own protection. If he is resigning because he objects to something, he can put his reasons on the public file himself rather than rely on the company to report them.

Section 168(2): when it takes effect. The resignation shall take effect from the date on which the notice is received by the company, or the date, if any, specified by the director in the notice, whichever is later.

The proviso: the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

Section 168(3). Where all the directors resign or vacate office under section 167, the promoter, or in his absence the Central Government, shall appoint the required number, to hold office till the company appoints in general meeting.

Removal: section 169

Section 169(1). A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office, after giving him a reasonable opportunity of being heard.

The first proviso: an independent director re-appointed for a second term under section 149(10) shall be removed only by special resolution, and after a reasonable opportunity of being heard.

The second proviso: the sub-section does not apply where the company has availed itself of section 163 to appoint not less than two-thirds of its directors by proportional representation. Otherwise the majority could simply remove the minority's representatives and defeat the whole point of proportional representation.

Section 169(2). Special notice is required of any resolution to remove a director, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.

Section 169(3) and (4) give the director the right to be heard and to have his representation circulated, in terms closely following section 140(4) for auditors: the company sends him a copy, states the fact of the representation in the notice, sends copies to members, and, failing that, reads it out at the meeting, subject to the Tribunal's power to stop an abuse.

Section 169(5) to (7) deal with the vacancy: it may be filled at the same meeting if special notice of the proposed appointment was given, the appointee holds office for the unexpired term of the removed director, and the section is without prejudice to the removed director's right to compensation or damages payable under any contract of service.

That last point matters. Removal ends the office; it does not tear up a service contract. A managing director removed under section 169 may still sue for breach of his employment agreement.

A worked example

Mr Bhandari is a director of four companies: Latur Steel Limited, Beed Textiles Limited, Osmanabad Trading Private Limited and Solapur Exports Limited.

Latur Steel has not filed its financial statements or annual returns for three continuous financial years.

The disqualification. By section 164(2)(a) Mr Bhandari, being a director of that company, is ineligible to be re-appointed there or appointed in any other company for five years from the date of the default.

Which seats he loses. By section 167(1)(a) he vacates office because he has incurred a section 164 disqualification. But the proviso confines that: his office becomes vacant in Beed Textiles, Osmanabad Trading and Solapur Exports, and not in Latur Steel, the defaulting company. He stays where the problem is.

If he carries on regardless. If he functions as a director of Beed Textiles knowing his office is vacant, section 167(2) makes him liable to a fine of one lakh to five lakh rupees.

A rescuer. Ms Kale is invited to join the board of Latur Steel in order to clean it up. By the proviso to section 164(2) she does not incur the disqualification for six months from her appointment.

A conviction. Suppose Mr Bhandari is instead convicted of an offence and sentenced to eight months' imprisonment. Under section 164(1)(d) he is disqualified until five years from the expiry of the sentence, and under section 167(1)(f) his office becomes vacant. But by the proviso to section 167 the office is not vacated for thirty days; if he appeals within those thirty days, not until seven days after the appeal is disposed of; and if he files a further appeal within those seven days, not until that is disposed of.

Had the sentence been seven years or more, the proviso to section 164(1)(d) would have made him permanently ineligible in any company.

An appeal does not help with eligibility. By the proviso to section 164(3), the disqualifications in clauses (d), (e) and (g) continue to apply even while an appeal is pending.

Too many boards. Mr Bhandari also sits on twenty-two boards, of which twelve are public. He breaches section 165(1) on both counts: more than twenty in all and more than ten public. Two of the twenty-two are dormant companies, which do not count towards the twenty; and one is a private company that is a subsidiary of a public company, which does count towards the ten. Breach of section 165(1) is itself a disqualification under section 164(1)(i).

Absence. A different director, Mr Shaikh, attends no Board meeting at all between April 2027 and April 2028. By section 167(1)(b) his office becomes vacant, and it makes no difference that he sought and obtained leave of absence each time.

Resignation. Ms Kulkarni resigns by written notice received by the company on 10 June, stating that her resignation is to take effect on 30 June. It takes effect on 30 June, the later of the two dates. She may herself send a copy with detailed reasons to the Registrar within thirty days. She remains liable for offences that occurred during her tenure.

Removal. The members wish to remove Mr Patil before his term ends. They give special notice under section 115, the company sends him a copy, he makes a written representation which is circulated, he is given a reasonable opportunity of being heard, and the members pass an ordinary resolution: section 169(1) and (2).

Three things they cannot do. They cannot remove a director appointed by the Tribunal under section 242. If Mr Patil were an independent director in his second term, they would need a special resolution. And if the company had adopted proportional representation under section 163, section 169(1) would not apply at all.

And afterwards. If Mr Patil had a service contract, his removal is without prejudice to his right to compensation or damages under it.

Distinctions that carry marks

What this does NOT mean

It does not mean a section 164(2) disqualification empties every seat. The proviso to section 167(1)(a) keeps the director in the defaulting company.

It does not mean an appeal postpones disqualification. The proviso to section 164(3) keeps clauses (d), (e) and (g) alive during an appeal. What the proviso to section 167 postpones is the vacation of office, not the disqualification.

It does not mean leave of absence saves a director. Section 167(1)(b) applies with or without seeking leave of absence.

It does not mean removal ends a service contract. Section 169 is without prejudice to compensation or damages payable under any contract of service.

Quick revision

• 164(1), nine disqualifications: unsound mind so declared; undischarged insolvent; pending insolvency application; conviction with six months' imprisonment, five years from expiry of sentence, and seven years or more means permanent ineligibility in any company; a court or Tribunal disqualification order in force; unpaid calls plus six months; section 188 conviction in the last five years; no DIN; and breach of section 165(1).
• 164(2): a director of a company that has not filed for three continuous financial years, or has failed for one year or more to repay deposits, interest, debentures or declared dividend, is ineligible for five years. Proviso: six months' grace for one appointed to a company already in default. 164(3): a private company may add disqualifications; and clauses (d), (e) and (g) survive an appeal.
• 165: twenty companies including alternate directorships, not more than ten public; private companies in a public group count towards the ten; dormant companies count towards neither; members may fix a lesser number by special resolution.
• 167(1), eight grounds: any section 164 disqualification, but a section 164(2) one vacates every office EXCEPT the defaulting company's; absence from all Board meetings for twelve months, with or without leave; contravening section 184; failing to disclose interest under section 184; disqualification by court or Tribunal order; conviction with six months' imprisonment; removal under the Act; and ceasing to hold the office or employment by virtue of which he was appointed.
• Proviso to (e) and (f): office not vacated for thirty days, then until seven days after an appeal filed in that period is disposed of, then until a further appeal filed within those seven days is disposed of.
• 167(2): functioning knowingly after vacation, one lakh to five lakh rupees. 167(3): all offices vacant, the promoter, else the Central Government, appoints. 167(4): a private company may add grounds.
• 168: resign by written notice; the Board takes note, the company intimates the Registrar and reports it at the next general meeting; the director may himself send reasons to the Registrar within thirty days; effective on receipt or the date specified, whichever is later; and he remains liable for offences during his tenure.
• 169: removal by ordinary resolution on special notice after a reasonable opportunity of being heard; not a director appointed by the Tribunal under section 242; an independent director in a second term needs a special resolution; not applicable where section 163 proportional representation has been adopted; the vacancy may be filled at the same meeting for the unexpired term; and all without prejudice to compensation or damages under a service contract.

Test yourself

1. State the disqualification in section 164(2) and its effect. A person who is or has been a director of a company which has not filed financial statements or annual returns for three continuous financial years, or has failed for one year or more to repay deposits or interest, redeem debentures or pay interest on them, or pay a declared dividend, is ineligible to be re-appointed in that company or appointed in any other company for five years from the date of the default.

2. Which offices does such a director lose? By the proviso to section 167(1)(a), his office becomes vacant in all the companies other than the company which is in default. He keeps his seat in the defaulting company.

3. A director is convicted and sentenced to nine months. When does he vacate office? Not immediately. By the proviso to section 167, the office is not vacated for thirty days from the conviction; if an appeal is preferred within those thirty days, not until seven days after it is disposed of; and if a further appeal is preferred within those seven days, not until that is disposed of.

4. How many companies may a person be a director of? Not more than twenty at the same time, including any alternate directorship, of which not more than ten may be public companies. Private companies that are holding or subsidiary companies of a public company count towards the ten; dormant companies count towards neither: section 165.

5. When does a resignation take effect, and what liability survives? From the date the notice is received by the company, or the date specified by the director, whichever is later: section 168(2). The director remains liable even after resignation for offences which occurred during his tenure.

6. What is required to remove a director? An ordinary resolution, preceded by special notice under section 115, and after giving him a reasonable opportunity of being heard: section 169(1) and (2). A director appointed by the Tribunal under section 242 cannot be removed; an independent director in a second term needs a special resolution; and the power does not apply where the company has adopted proportional representation under section 163.