Analysis of Section 164 and 167 of Companies Act, 13

In the month of September, 2017, the Ministry of Corporate Affairs, had released (03) Three separate lists containing the details of 3,09,614 Directors, associated with the Companies, which had not filed Annual Returns/Financial Statements with the respective ROCs/MCA Portal, for a continuous period of 03 (Three) years i.e., 2013 – 2014, 2014- 2015 & 2015 – 2016, thereby disqualifying them from acting as Directors pursuant to the provisions of Section 164 (2) r/w Section 167 (1) (a) of the Companies Act, 2013. 

As a result of the disqualification, the DINs of the respective Directors were de-activated, thereby the Directors cannot use their DIN/DSC for filing of any returns with the MCA Portal. 

With the above happening, the Companies in which such disqualified Directors, were associated, had also come to a stand still, as they cannot file any pending returns with the ROC/MCA Portal. 

In addition to the disqualification of the Director, the provisions of Section 167 (1) (a), that the office of such Director in all the Companies, is vacated is also put forth, resulting in a huge confusion, and also invoking the provisions of Section 167 (3) of the Companies Act, 2013, which empowers the Promoter or the Central Government to appoint Directors on the Board of the Company, in the event of vacation of the entire Board. 

In this article, an attempt is made to understand the provisions of Section 164, 167 of the Companies Act, 2013 and the corresponding Sections under Companies Act, 1956, to the extent relevant for the article, and also the following: 

?GeneralCircular No.16 of 2017, Dt:29.12.2017, announcing the Condonation of Delay Scheme 2018[“CODS”];

?Amendments to Section 167 (1) (a) of the Companies Act, 2013 vide the Companies (Amendment) Act, 2017, having a bearing impact on the interpretation of the present Section 167 (1) (a). 

Section 164 of the Companies Act, 2013: 

Section 164 of the Companies Act, 2013, prescribes two types of dis-qualifications as detailed in Sub- 

Section (1) and Sub-Section (2) as given below: 

• A person shall not be eligible for appointment as a director of a company, if: 

• he is of unsound mind and stands so declared by a competent court; 

• he is an undischarged insolvent;
• he has applied to be adjudicated as an insolvent and his application is pending; 

¹Though the Companies (Amendment), 2017, is notified, the effective date for the relevant amendments to Section 164 and 167 are yet to be notified, and only taken as a reference to understand the intent of the statute, by virtue of the amendment. 

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, 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: 

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company; 

• an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force; 

• he has not paid any calls in respect of any 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; 

• he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or 

• he has not complied with sub-section (3) of section 152. 

• No person who is or has been a director of a company which: 

• has not filed financial statements or annual returns for any continuous period of three financial years; or 

• has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon 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 other company for a period of five years from the date on which the said company fails to do so. 

From the above, it can be seen that Sub-Section (1) of Section 164 prescribes a sort of eligibility criteria for being appointed as a Director of a Company. 

Whereas, Sub-Section (2) of Section 164 lays down Two (02) situations when the disqualification arises: 

1. Non-filing of financial statements and annual return for any continuous period of 3 financial years; 

1. failure to repay interest on deposit/ debentures or repayment of deposit/debentures and such failure continues for a period of 1 year or more. 

If any of the two situations arises, all the directors of the company come under the purview of such disqualification, which will result in the consequence that such Director or Directors shall become in-eligible: 

?tobere-appointed as a Director in that company; or, 

?tobeappointed as a director in any other company; 

for a period of 5 years, from when the company fails to do so. 

It is clearly evident that Sub-Section (2) of Section 164 not only cites the situations in which the disqualification gets attracted but also prescribes the tenure of disqualification. 

Consequence for Non-Complianceof Sub-Section (2) of Section 164: 

Sub-Section (2) of Section 164, does not prescribe for any specific penalty, for the non-compliance, however, Section 172 prescribes for the punishment for non-compliance of the provisions of the Chapter. Accordingly, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 50,000/- (Rupees Fifty Thousand only) but which may extend to Rs.5,00,000/- (Rupees Five Lakhs only). 

Effective date of the provisions of Section 164 of the Companies Act, 2013: 

The provisions of Section 164 of the Companies Act, 2013, have been notified to be effective from 01.04.2014. 

Practically speaking, the disqualification provisions for Non-filing of financial statements and annual return for any continuous period of 3 financial years, shall have to come into effect from 01.04.2017, as the provisions of the enactment can be only prospective and not retrospective, and accordingly, if a person being a Director of a Company and fails to file the Financial Statement/Annual Returns for a continuous 3 financial years i.e., 2014 – 2015, 2014 – 2015 & 2016 – 2017, such Director shall be disqualified for a period of 5 years commencing from 01.11.2017. 

However, the wording “any continuous period of 3 financial years”, seems to be stand taken by the Ministry in bring out a list of disqualified Directors for 5 years, pertaining to a default of continuous non-filing for 3 years, prior to 01.04.2014, and fixing disqualifications from 01.11.2014 and onwards, is very much debatable and questionable, before law. 

Relevant provision under the Companies Act, 1956: 

Section 274 (1) (g) is the corresponding provision to Section 164 (2). 

The provisions of Section 274 (1) (g) was applicable only for Public Limited Companies and not applicable for Private Limited Companies. 

It would be not out of place to mention that the disqualification under Section 274 (1) (g) did not result in vacation of office under Section 283 of Companies Act, 1956. 

Section 167 of the Companies Act, 2013: 

With the provisions of Section 164 being above, let us understand the provisions of Section 167 of the 

Companies Act, 2013: 

167: 

• The office of a director shall become vacant in case: 

• he incurs any of the disqualifications specified in section 164; 

• he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board; 

• he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested; 

• he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184; 
• he becomes disqualified by an order of a court or the Tribunal;
• he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court" 

• he is removed in pursuance of the provisions of this Act; 

• he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company. 

• If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in sub- section (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. 

• Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting. 
• A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).

From the above, it can be seen that Sub-Section (1) of Section 167 provides for the circumstances under which the office of the Director shall become vacant and of which Clause (a) provides one case, which is, if the Director incurs any of the disqualifications specified in Section 164. 

Sub-section (2) of Section 167 provides for penalty on the Director knowing function as a Director in the Company, after his office has become vacant. 

Sub-section (3) of Section 167 provides the remedy in case the entire Board of the company vacates office under Section 167 

Sub-section (4) of Section 167 empowers a private company to provide for additional grounds for vacation of office. 

From a plain reading of Clause (a) of Sub-Section (1) of Section 167, it seems that the vacation of office has to happen instantaneously on attaining the disqualification under Section 164, and now the question which remains to be answered is, that vacation happened to which disqualification ???? i.e., whether on acquiring or getting the disqualification as listed in Section 164 (1) or Section 164 (2). 

There seems to be dichotomy or conflict between the provisions of Section 164 (2) and Section 167 (1), and if both the provisions are read together as below: 

Sub-Section (2) of Section 164, provides that if a Director was to incur disqualification, then he shall not be eligible to be re-appointed as a director of that company or be appointed in other company for a further period of 5 years from the date on which the company fails to do so; which means the disqualification for re-appointment in the company; and for appointment any other company for a period of 5 years is immediate, and there no provision for vacation of office is prescribed in the Section 164 

For the sake of argument, if it agreed that on attaining the disqualification under Sub-Section (2) of Section 164, the Director or Directors have to vacate in all the companies in which they are director, then all the Companies including the company which has defaulted in filing of the Annual Returns/Financial Statements will go without any Board, and in turn the Promoters or the Central Government will have appoint the directors on the Board pursuant to provisions of Sub-Section (3) of Section 167, which seems absurd, and not to be the intent of the Statute. In view the above practical issue, the Sub-Section (2) of Section 164 prescribes for disqualification from appointment in other companies which have defaulted under this section.

The confusion arose because of the loose drafting of the provision linking Section 164 with Section 167, which results in the interpretation that disqualification under Section 164 leads to automatic vacation of office of the respective Director. 

In my opinion, to understand the intent of the statute, a harmonious construction of the provisions of Section 164 and Section 167, is required, as there can be no interpretation such that one provision overrules or overrides the other.

From the amendment proposed in the Companies (Amendment) Act, 2017, to Section 167 of the Companies Act, it is evident that the disqualification referred to in Clause (a) of Sub-section (1) of Section 167, relates only to the disqualification under Section 164 (1) and not for the disqualifications under Sub-Section (2) of Section 164, and accordingly any Director who has incurred the disqualifications under Sub-Section (1) of Section 164 shall vacate the office immediately. 

The intent of the Sub-section (2) of Section 164 that the Director shall not be re-appointed in the Company or appointed in any other Company, is to ensure that the defaulting director shall continue in the Company and take steps to make good the failure of non filing of the returns. 

Further, with the recent Condonation of Delay Scheme 2018[“CODS”], introduced by the Ministry of Corporate Affairs, vide General Circular No.16 of 2017, Dt:29.12.2017, it is clearly evident that the Companies which have defaulted in filing their Annual Returns/Financial Statements, have been provided with the Chance of filing their pending returns, and for this purpose, the de-activated DINs of the dis-qualified Directors are temporarily activated, from which it is evident that there was no requirement of vacation of office of the said dis-qualified director. 

What would have been the case, if entire Board of such Company, was vacated, on the pretext of the combined reading of Sub-Section (2) of Section 164 and Clause (1) of Sub-section (1) of Section 167 ??? 

The Company may not or cannot utilise the CODS or it would have to appoint Directors pursuant to the provisions of Sub-Section (3) of Section 167. 

Amendment to Section 167 of the Companies Act, 2013, vide the Companies (Amendment) Act, 2017:

The Companies Amendment Act, 2017, which received the assent of the President on 03.01.2018, and some of the provisions of which were notified to be effect from 26.01.2018 and 09.02.2018, seems to have addressed the ambiguity in drafting of the Clause (a) of Sub-Section (1) of Section 167, and accordingly, the Section 54 of the Companies (Amendment) Act, 2017, provides to include a proviso to Clause (a) of Sub-Section (1) of Section 167 as below: 

“Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.” 

The Section 54 of the Companies (Amendment) Act, 2017, is yet to be notified. 

Conclusion: 

From the above analysis of the provisions, it is concluded that Sub-Section (2) of Section 164, provides that if a Director was to incur disqualification, then he shall not be eligible to be re-appointed as a director of that company or be appointed in other company for a further period of 5 years from the date on which the company fails to do so; and the provision of Clause (a) Sub-Section (1) of Section 167, in its present form is applicable only for the disqualifications attained under Sub-section (1) of 164. 

Unless there is a provision or requirement of re-appointment of Directors in the Company which has failed to file returns, the existing Directors of the defaulting Company can continue to be directors of the Company and also in other Companies, in which there are presently directors, but cannot be appointed as Director in any new Company.