Norms for Disqualification of Directors May Undergo Change
Megha Saraf 07 December 2019
Ever since the release of the list of disqualified directors by the registrars all over the country and in the absence of any legal remedy in the Act against the same, aggrieved persons had opted for writ petitions. Such cases are still in being examined in some courts. The first phase of recommendations of the Company Law Committee (CLC/ Committee) set up by the ministry of corporate affairs (MCA) set up on 18 September 2019 has been released vide its report dated 14 November 2019. As per the terms of reference of the Committee, recommendations have been made to further rationalize the penal provisions in respect of 46 compoundable offences of the Companies Act, 2013 (Act). This is the second step taken up by the ministry to rationalise the penal provisions of the Act after the implementation of the Companies (Amendment) Act, 2019 which was based on the recommendations of the committee set up to review offences under the Companies Act, 2013. 
 
Keeping in mind the theme of ‘promoting ease of living in the country by providing ease of doing business’, the committee has also deliberated on certain other issues, recommendations on which are anticipated in the near future. One such area of discussion was the scope of Section 164(2) and Section 167(1)(a) and the probable revisions therein. 
 
Existing provisions under the CA 2013
 
Section 164 lays down a list of events/ situations which attracts disqualification of a person to hold or continue directorship in companies. Sub- section (1) thereof provides the grounds on account of the personal incapacity of the person, whereas, sub- section (2) talks about disqualification of a director on account of a corporate default. The significance of this provision gets enlarged once one sees the provisions of Section 167(1). Section 167(1) leads to immediate vacation of an office of director if the person incurs any of the disqualifications mentioned in Section 164. Therefore, for the purpose of Section 167(1), sub- section (1) and (2) of Section 164 appears in same footing irrespective of the fact that the former is a result of personal incapacity and the latter is of a case of default at corporate level. 
 
Though the aforesaid provisions have undergone some changes vide the Amendment Act, the onerous requirement of automatic vacation of office in non- defaulting companies still remains. Furthermore, the provisions do not provide any leeway/ exclusion to the non- executive directors despite their non- executive role in the organization making it more onerous to those directors. Even the period of six months given to a new director to make the default good seems to be possible only in respect of default related to non- filing of annual returns/ financial statements but not for default in repayment of deposits/ debentures etc. 
 
Considering the current provisions and also the recommendations made in the previous company law committee report in the year 2016, the committee deliberated on the changes in the provisions which can be put forth in the subsequent set of recommendations as below:
 
a. Vacation of office as provided in Section 167(1)(a) to be triggered only in respect of the grounds mentioned in Section 164(1), i.e. grounds in respect of personal incapacity;
 
b. The six months period provided to the new director under the proviso to Section 164(2) to be made applicable only in case of default related to clause (a) thereof i.e. failure to file annual returns/ financial statements for a continuous period of three years;
 
c. No disqualification to be triggered if the new director gets appointed after the expiry of one year of default as provided in clause (b) of Section 164(2).    
 
Considering the on-going examination of the cases, the committee has chosen to bring suggestions or recommendations on certain issue in its next phase after detailed examination of the matter. Nevertheless, the recommendations once made and adopted by the ministry on the same lines as discussed will be a welcome change and according to the committee, this will help in promoting ease of living by providing ease of doing business. 
 
(Megha Saraf is Manager in Corporate Law Division at Vinod Kothari and Company) 
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