Disqualification of Directors – Definition, Meaning & Effects

A company has no physical existence, it is merely a legal entity. It can only act through natural persons. The person acting on the company’s behalf is called a Director. They are professional people, hired by the company to direct its affairs. They can also be called – the officers of a company.

Any person can hold the position of Director. Company law in India does not prescribe any qualifications for Directors. Therefore, the Indian companies may, in its Articles, lay down qualifications for Directors.

Disqualifications of Directors

Under company law, a director can be disqualified for any of the following reasons:

• He is of an unsound mind and is declared so by the court.
• He is insolvent.
• He is in the process of declaring insolvency and his application is pending.
• He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been imprisoned for at least six months. However, if a person has been convicted of any offence and has served a period of seven years or more, he shall not be eligible to be appointed as a director in any company.
• If an order has been passed disqualifying him from being appointed as a director by a court or Tribunal.
• He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly with others, and a period of six months has elapsed from the last day fixed for the payment of the call.
• He has been convicted of offences dealing with related party transactions at any time during the last preceding five years.
• He has failed to acquire a Director Identification Number.

Effects of Disqualification

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently published the names of the disqualified Directors on the government website.

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT). He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person will still continue to be a director for the next seven days. Within this period, he can file his annual returns to stay the order of disqualification. However, there exists no procedure to reappoint a disqualified director. He can only be reappointed after a period of five years has elapsed from the date of disqualification.

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