On Request

Happy Diwali to you, your family and friends! This edition we are going to highlight on Sections 164 & 167 for the disqualification of directors as requested by CS Guru Prasath K. There are many Directors who got disqualified due to their known mistakes and few were trapped innocently as they were not informed properly about the procedures to follow. Lets see indepth about the effects and avoidance of this disqualification.

Along with the article, our Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST follows.

Saranya Deivasigamani,
CEO

DISQUALIFICATION OF DIRECTORS

Pursuant to the action of the Ministry of Corporate Affairs of cancellation of registration of around 2.10 lakh (2,09,032) defaulting companies and subsequent direction of the Ministry of Finance to banks to restrict operations of bank accounts of such companies by the directors of such companies or their authorized representatives, the Ministry of Corporate Affairs has identified 1,06,578 Directors for disqualification under Section 164(2)(a) of the Companies Act, 2013 as on September 12, 2017. Directors disqualified under Section 164(2)(a) of the Companies Act, 2013 and who are associated with struck off companies (S.248) are advised by the Ministry not to make any application for Name Availability (INC-1), Incorporation of Companies (INC-7/SPICe-INC-32/URC-1/INC-12). Forms filed by such Directors shall be rejected summarily by the Central Registration Centre (CRC). Further, attention is drawn to the provisions of Section 7(5) and 7(6) which, inter-alia, provides that furnishing of any false or incorrect particulars of any information or suppression of any material information shall attract punishment for fraud under Section 447. Attention is also drawn to the provisions of Section 448 and 449 which provide for punishment for false statement and punishment for false evidence respectively. MCA is further analyzing the data of these companies available with the ROC to identify the Directors and the significant beneficial interests behind these companies. Profiles of Directors such as their background, antecedents and their role in the operations/functioning of these companies are also being compiled in collaboration with the enforcement agencies. The money laundering activities performed under the aegis of these companies are also under the scanner. The Professionals, Chartered Accountants/Company Secretaries/Cost Accountants associated with such defaulting Companies and involved in illegal activities have been identified in certain cases and the action by Professional Institutes such as ICAI, ICSI and ICAI is also being monitored.

As per Section 164 of the Companies Act, 2013, any person who is or has been a director in a company which has not filed financial statements or annual returns for any continuous period of three financial years shall not be eligible for re-appointment as a director in 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. Also, Section 248 of the Act provides that, the liability, if any, of every director, manager or other officer who was exercising any powers of management and of every member of the de-registered/dissolved company, shall continue and may be enforced as if the company had not been de-registered/dissolved. Further, Section 167 of the Act provides that on suffering the aforesaid disqualification, the Director shall vacate the office. It may be noted that prior to action against defaulting companies, there were about 13 Lakh companies in the Registry. However, after closing of around 2.10 Lakh Companies, there are about 11 Lakh companies having Active status in the Registry. According to Section 167 of the Companies Act, a director is disqualified automatically from all other posts of director once barred under Section 164.

Section 164 divided into three sub- sections

Sub section (1) states disqualification like: unsound mind, undercharged insolvent, convicted for an offences involving moral turpitude, not paid call money, offences relating to related party transaction, not obtained DIN etc.

Sub section (2) states that Company fails to file financial statements or annual return for a continuous period of three years; or failed to repay the deposit etc.

Sub section (3) states that private companies may by its Articles provide some additional ground for disqualification.

Interpretation of Section 164 (2) and Section 167

Literally speaking, Section 167 (1)(a) appears that when a person incurs any disqualification under section 164, he will have to vacate his office of director in all the companies in which he is a director. When there is any conflict between two provisions of a statute then it is a well-settled rule of construction that the provisions of a statute should be so read as to harmonise with one another and the provisions of one section cannot be used to defeat those of another unless it is impossible to effect reconciliation between them. The rule of construction is well settled that when there are, in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is what is known as the rule of harmonious construction. Every word and expression used by the legislature has to be given its proper and effective meaning as the legislature uses no expression without a purpose or meaning; a meaning must be given if possible, to every word of a statute, for a statute is never supposed to use words without a meaning, and no word should be considered as redundant.

Section 164(2) of the Act specifically provides the consequences of the disqualification, namely that a director of the defaulting company shall not 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. If one applies literal rule and consider that a director who incurred disqualification u/s 164 (2) vacates the office as per section 167 then phrase used in section 164 (2) as “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” will become redundant or meaningless.

Therefore, both the section should be read together and effect should be given to both. By harmonious construction it appears that provision in section 167(1)(a) would apply in the cases covered by section 164(1) and it would not apply in the cases covered by section 164(2).

Notice appears on MCA website:

As per the notice appears on MCA website:

“Any person disqualified under section 164(2) of the Companies Act, 2013 [the Act] is advised not to act as director during the period of the disqualification and not to file any document or application with MCA as the same shall be summarily rejected. However, this shall be without prejudice to the liability of the said person for violation of section 164(2) read with section 167 of the Act including the action under section 448 r/w 447 of the wherever warranted.”

MCA has mentioned both section 164(2) and 167 in the notice. Thus, it appears that MCA is in opinion that the provision in section 167(1)(a) would apply in the cases covered by section 164(1) and covered by section 164(2). MCA has already issued ROC wise list of directors at MCA website who are disqualified u/s 164(2) even though three years deadline under the new Act yet to be completed.

This whole exercise shall go a long way in creating an atmosphere of confidence and faith in the system paving the way for ease of doing business in India. The interest of stakeholders would be protected and the image of the country in the global business arena and fora would substantially improve.

Legal Term

Cadit quaestio

Indicates that a settlement to a dispute or issue has been reached, and the issue is now resolved.

MCA Updates

Companies (Acceptance of Deposit) Second Amendment Rules, 2017.
Commencement of proviso to section 2(87) (Subsidiary Company) of CA 2013 .

SEBI Updates

Non-compliance with the Minimum Public Shareholding (MPS) requirements.
Change in reporting norms for Category III Alternative Investment Funds (“AIFs”).
Schemes of Arrangement by Listed Entities and (ii) Relaxation under Rule 19 (7) of the SCRR, 1957 .

RBI Updates

Risk Management and Inter-Bank Dealings – Facilities for Hedging Trade Exposures invoiced in Indian Rupees.
Trade Repository for OTC Foreign Exchange and Interest Rate Derivatives .

Income Tax Updates

ITR/ Tax Audit Report Filing Due Date (AY 2017-18) Extended to 31 Oct. 2017.
The due date for filing of ITR/ Tax Audit Report filing (AY 2017-18) has been extended for corporate assessees to 31 Oct. 2017. Also, PAN Aadhaar linking to 31 Dec. 2017.

GST Updates

Order removing difficulties in composition scheme implementation.
CBEC amendment in notification related to Exemptions on supply of services under CGST Act.
Time limit to file Form GST ITC-01 for July, Aug, and Sep extended to 31.10.2017.
Time limit for filing of Form GSTR-6 for July, Aug, and Sep extended to 15.11.2017.
No GST on advance payment for small taxpayers with annual turnover less than ₹1.5 crores.