Provision under the Companies Act, 1956 for Disqualifications of Directors:
No Vacation of Office of Directors due to his/her Disqualification(s):
Section 274 (1) provides for the following conditions under which a Director becomes Disqualified:-
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force ;
(b) he is an undischarged insolvent ;
(c) he has applied to be adjudicated as an insolvent and his application is pending ;
(d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence ;
(e) he has not paid any call in respect of 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;
(f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section ; or
(g) such person is already a director of a public company which, -
(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999 ; or
(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more :
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B).”
Section 283 of the Companies Act 1956 specifies the conditions under which the Office of a Director gets vacated, but those conditions does not prescribe that a Director disqualified under Section 274 would be liable for vacation of his/her Office.
Extra Provision for a Private Company: A private company which is not a subsidiary of a public company may, by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in sub-section (1) of Section 274.
Central Government’s Right to Remove Disqualification: The Central Government may, by notification in the Official Gazette, remove - (a) the disqualification incurred by any person in virtue of clause (d) of sub-section (1) of Section 274, either generally or in relation to any company or companies specified in the notification; or (b) the disqualification incurred by any person in virtue of clause (e) of sub-section (1) of Section 274.
TheCompanies (Disqualification of Directors under section 274(1)(g) of theCompanies Act, 1956) Rules, 2003 (applies to all public limited companies only)
Disqualifications under clause (g) of sub-section (1) of section 274 of the Companies Act, 1956:-
(a) Whenever a company fails to file the annual accounts and annual returns, as described in sub-clause (A) of clause (g) of sub-section (1) of section 274, persons who are directors on the last due date for filing the annual accounts and the annual returns for any continuous three financial years commencing on and after the first day of April, 1999, shall be disqualified.
(b) If a company has failed to repay any deposit, irrespective of the enactment, rules or regulations under which the deposits have been accepted by the companies, or interest thereon, or redeem its debentures, or pay any dividend declared on the respective due dates, and if such failure continues for one year, as described in sub-clause (B) of clause (g) of sub-section (1) of section 274, then the directors of that company shall stand disqualified immediately on expiry of that one year from the respective due dates:
Provided that all the directors who have been directors in the relevant year, from the due date to the expiry of one year after the due date, will be disqualified:
Provided further that disqualification on account of the reasons cited under this Rule shall also apply to the reappointment as a director.
Explanation.- For the purpose of this rule, it is clarified that non-payment of dividend referred to in sub-clause (B) of clause (g) of sub-section (1) of section 274 due to the reason of dividend not being claimed or kept in separate bank account as required under section 205A of Companies Act, 1956 or paid into Investors Education & Protection Fund as required under section 205C of that Act shall not be deemed to be a failure to make payment of dividend.
Duty of Statutory Auditor to report on disqualification.-
(a) It shall be the duty of statutory auditor of the appointing company as well as disqualifying company, as required under section 227(3)(f) to report to the members of the company whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274 and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, any director of the company is disqualified for appointment as a director or not.
(b) It shall be the duty of the statutory auditors of the "disqualifying company" as required in section 227(3)(f) to report to the members of the company whether any director in the company has been disqualified during the year from being re-appointed as director, or being appointed as director in another company under clause (g), of sub-section (1) of section 274.
Duty of company to intimate disqualification: Whenever a company fails to file the annual accounts and returns, or fails to repay any deposit, interest, dividend, or fails to redeem its debentures, as described in clauses (A) and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file a return in duplicate in Form 'DD-B', prescribed under these rules for this purpose, to the Registrar of Companies, furnishing therein the names and addresses of all the Directors of the company during the relevant financial years:
Provided that names of such directors who have been exempted from application of Section 274(1)(g) by the Central Government, from time to time, shall be excluded.
Provided further that no unusual abbreviations or short forms shall be used in filling up the Form 'DD-B', which shall give such details as may be necessary to distinguish and identify each director without any ambiguity.
Failure to intimate disqualification shall render director as officer in default: When a company fails to file the Form 'DD-B' as above within 30 days of the failure that would attract disqualification under Section 274(1)(g), officers of the company listed in section 5 of the Companies Act, 1956 shall be officers in default.
Duty of the Registrar of Companies: (a) Upon receipt of the Form 'DD-B' in duplicate under Rule 5, the Registrar of Companies shall immediately register the document and place one copy of it in the document file for public inspection. (b) The Registrar of Companies shall forward the other copy to the Central Government.
Names of the disqualified directors on the web-site etc. (a) The Central Government shall place on the web-site of the Department of Company Affairs the names and addresses and such other details including names and details of the companies concerned, as may be necessary, in respect of all the disqualified directors. (b) The Central Government may also publicize the names of disqualified directors in such manner as it may consider appropriate. (c) The Central Government shall take such steps as may be required to update its web-site to ensure that name of the person, in whose respect disqualification period has expired after 5 years, is deleted from the web-site.
Duty of every director: Every director in a public company registered under the Companies Act, 1956 shall file Form 'DD-A', prescribed under these Rules, before he is appointed or re-appointed.
If any question arises as to whether these rules are or are not applicable to a particular company, such question shall be decided by the Central Government.
Punishment for contravention of the rules: If a company or any other person contravenes any provision of these rules for which no punishment is provided in the Companies Act, 1956, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first, during which the contravention continues.