Director Disqualification Under Section 164: What Indian Companies Miss

Director disqualification under Section 164 of the Companies Act, 2013 is one of the most under-appreciated compliance risks facing Indian companies today. Directors are frequently disqualified without realising it, and the consequences are serious, including the automatic vacation of office and criminal liability.

This article explains the grounds for disqualification, the common situations where it arises, and what directors and companies should be doing to manage the risk.

The Grounds for Disqualification

Section 164 sets out the grounds on which a person becomes disqualified from being appointed or continuing as a director. The main grounds include being an undischarged insolvent, having been convicted of an offence involving moral turpitude or otherwise sentenced to imprisonment for six months or more, having failed to pay any call on shares held in the company for six months, and having been convicted of certain offences under the Companies Act itself.

The ground that most commonly catches directors by surprise is Section 164(2), which disqualifies a person from being appointed as a director of any company for five years if the company in which they are a director has failed to file financial statements or annual returns for a continuous period of three years, or has failed to repay deposits or interest thereon, or has failed to redeem debentures or pay interest thereon, or has failed to pay declared dividends.

The MCA's Strike-Off Actions

In 2017 and 2018, the Ministry of Corporate Affairs conducted a large-scale exercise of striking off companies that had not filed financial statements or annual returns for consecutive years. As a result, a very large number of directors were disqualified under Section 164(2), many of whom had no idea that their company had defaulted in this way.

The consequences were significant. Directors found themselves disqualified from acting as directors of any company, including companies that were perfectly compliant. They were unable to be appointed to new boards. Their DIN (Director Identification Number) was deactivated.

What Directors Must Do

Every director should regularly verify the compliance status of each company on whose board they sit. This means checking that financial statements have been filed on time, that annual returns are current, and that any deposit or debenture obligations have been met. The MCA21 portal allows anyone to check the filing history of a company.

Directors who hold positions on the boards of group companies, associate companies, or subsidiaries should not assume that compliance in those entities is being handled correctly simply because the main company is in order.

Restoration and Condonation

Where a director has been disqualified due to the default of a company, it may be possible to apply for condonation of delay and restoration of the company's name on the register, followed by filing the outstanding documents. Once the company is restored and its defaults are remedied, the disqualification may cease to operate.

However, this process requires an application to the National Company Law Tribunal and is not straightforward. It is significantly better to ensure that filing obligations are met on time than to have to navigate restoration proceedings after the fact.

Criminal Consequences

A disqualified person who continues to act as a director commits an offence under Section 167(2) of the Companies Act and is liable to imprisonment for a term which may extend to one year, along with a fine. This is not a theoretical risk. The MCA and Registrar of Companies do pursue such cases, particularly where the default is significant.

Directors should treat compliance with Section 164 as a personal obligation, not something to be delegated entirely to the company secretary or compliance team. The disqualification is personal, and the consequences are personal.