Articles

Disqualifications of Directors Under The Companies Act 2013

This Article is written by Prachi Yadav, a student at Amity University, Noida

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INTRODUCTION

The word company is derived from the Latin word com and panis which means an association of persons to take their meals together. A company is a body of persons called as the members who invest their shares and allocate their resources in the management of the company under the companies act 2013.the company being a separate legal entity or an artificial person having a corporate body and common seal   undertakes the business matters and corporeal functions. the financial transactions are carried by an association of members who are formed in a way of partnership contributing towards common stock and capital in the company. the business venture and business enterprise headed by the association and prior to be governed under the company’s act. but there is a need to represent the artificial person as the existential fact of a corporal entity in order to constitute the legal and regulatory affairs and to uphold the accountability of capital flow in the company. the board of a company appoints the director under section 2(34) of this act. Where the individual person qualifies to be elected by the board of company i.e., by the permanent directors of the company under section 2(10). the directors are the persons who are the collective body and is responsible for the contracts between third party for buying and selling of shares /securities and capital stock of the company. the directors are persons who act as trustees of company responsible for the financial expenses, venture capital and equity for long term growth and orderly economic development of the company. For the sovereign existence of the company “people may come and may go but the company remains forever” the perpetual succession owned by the boards of directors. inception for formation of the company is its directors who take the control over the affairs in buying and selling of stock exchange in the market and take financial decisions for the welfare and good governance in the company. The directors act as a trustee by taking decisions in the transactional contracts and agreements which take place in the other company through the board meeting the clauses are inserted in the contract for its execution thereof. In the conduct of contractual affairs if any clause is violated by the director or if the director is found to be indulged in corrupt activities for pecuniary interest to supersede the contractual obligations. then the director may immediately get disqualified in a board of meeting as action taken against him .no chance of defense will be given to the director in the violation of the clauses in the contract. 

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COMPOSITION OF DIRECTORS

The directors are natural persons and individuals they independently exercise their powers and responsibilities, the number of positions vacant in the appointment of directors. the Supreme court in the case Oriental metal pressing works (P)Ltd. vs. Bhaskar Kashinath Thakery observed that the directors are prohibited for the assignment of office and are respectively regarded as the office of trust due to the failure to carry out the responsibility in consolidation of funds and prior unable to tackle and to fix the difficulty in allocation and consolidation of funds, is the main reason for appointment of director as an office of trust. the board of directors in appointment is provided under section 149 speaks of number of directors to be appointed three directors in case of a public company and two directors in case of a private company and one in case of a one-person company. In section 149 (1)(b) conveys the maximum number of directors to be appointed is fifteen. then rule 3 of the Act says that at least one-woman director should be appointed.

INDEPENDENT DIRECTORS

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An independent director is appointed by the Board under section 149(6) who is of an opinion for them to own integrity, relevant expertise and experience in the management of the company has the choice to accomplish a relation with a company which is different from a managing director or a nominee director. An independent director is a director not in substitute to any associate member or a promoter, his powers are subordinate to other directors of the board, and receives a monthly remuneration of the work done by him for holding a sum of securities and attending the board meetings. The independent director has an important place in effective control in the business affairs of the company along with its relevant experience he is a chief advisor of the company for securities and investments to be made in a financial year of the company. As a non -executive director he guides the management of the company in the ethical conduct of business and helps in maintaining a business transparency by keeping the records and receipts. the company consisting of 1/3 of the independent director helps the company to achieve the monopoly in the open market and treat the demand and supply inflation rate from economies of scale and development in technology. the independent director is proposed to be appointed consecutively for a cycle of five financial years, he is employed for five years to bring the stability in the company on a condition that he cannot work with more than three companies in the time. the appointment of directors comprises a dyarchy in the system of appointment and qualification of appointment in board of directors which consist mostly of independent directors and appointment of executive directors such as whole- time directors or managing directors. Due to this dyarchy system companies waste the resources on troubleshooting the problems in framing of law reforms in the governance, corporeal functionaries often get disturbed. In the board meeting the directors sometimes become rebels in utilization of corporate finances and does poor decision making due to difference in opinion arising from pecuniary interest in a related matter among themselves.  the participants in the meeting are unknown about their pecuniary interest and existing of a circumstance on taking a improper long time in the arrangement of further meetings and doing a formality on arriving in a conclusion or to hide the discrepancies in their pecuniary interest they may unfairly settle the matter in a unconscionable manner. when the compliance report is furnished then those directors shall be disqualified from being a director of the company if found guilty in exercising the pecuniary interest. Either acting extraneous to their powers in a unconscionable code which challenges the validity of the principles of governance on contrary abuses the executive powers shall be struck down by the doctrine of ultra vires says of incidents of corporate torts to incur a civil liability on the company committed by the concerned authority. The disqualification of directors is the nexus to the liabilities of the director and failure to comply with his duty. In the case Jahangir R.Modi vs Shamji Ladha (1866) where the directors were held personally liable for their acts , in this case it was observed that the directors diverted the funds of the company to purpose foreign company to the company’s memorandum and acted outside the scope of their powers and made the directors personally liable for replacement of funds .The Bombay high court held that shareholders in equal  circumstance can compel the directors to restore the funds of the company as a medium of action taken against the directors.

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CLASSIFICATION OF DIRECTORS

A director may be classified on the basis of their appointment of position and nature of duties in the company. A director may be an executive director for example – independent directors and they may be non-executive for example a managing director.

  • MANAGING DIRECTOR– means a director who owes the charge in the internal affairs of the company and is vested with major powers to wield the internal management of the company. their work is to supervise over the customization of securities in the company held by the shareholders.
  • PERMANENT DIRECTOR – the appointment of directors specially in public companies they may appoint a strength of 1/3 directors as permanent members of the board of the company, they do not retire by rotation. The permanent directors are the chairman’s and supreme body of the company in the governance and welfare of company.
  • NOMINEE DIRECTOR – There is a nomination process in the selection of board of directors in the company. the director may be nominated from a financial institution matching the criteria for the knowledge of finance or may be nominated by the central government subject to the articles and provisions.
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CODE OF CONDUCT 

 There was an urgent need for framing of laws, compliance and provisions for the checks and balances in the corporate governance system. the influence of board of directors on the internal management of the company and superseding their functions, affected adversely to the oppressive and mismanagement of the company. the system of check and balances was laid down for the working of the directors with honesty for the commitment of the interests and success of the company. But there is no establishment of a legal vigilance committee due to this the companies face challenges of corporate politics and organized illegal activities not found in records of balance of payments which becomes easier for the authoritative body to arbitrary use of their powers for illegitimate interests and not abiding the laws the companies act 2013.

  • APPICABILITY OF CLAUSE 49– when a company is listed in the SEBI it issues the guidelines for the corporate governance and listing agreements applicable to listed companies. the SEBI has framed the regulatory mechanism of directors for the purpose of true and correct information on value of securities, assets and in respect of stock exchange and shareholders agreements. the code of conduct applied are in conjunction to the directors.

Coleman vs Myers (1977) in this case an appeal was filed in the court of appeal in New Zealand. where the appeal was sought against Douglas Myers and his father the chairman of the family company. the appellants are the minority shareholders, they offered to sell a small private company unwilling to sell on mode of control on Acquisition transaction to Douglas Myers. The respondent on the time when the company was acquired, they obtained the assets and sold as dividends. without the inquiry of minority shareholder. It was alleged that Douglas had took control over the assets of the company by violating the contractual relationship between the seller and buyer. on misrepresenting the value of assets and had exploited the insider information on gathering the true value of assets and then falsely intended once the company was undertaken by him. The cause of action arose between the managing director and minority shareholder whereas subsequently   the target company was absorbed by the buyer and an unhostile take over. the buyer sold the assets of the company on pre-acquisition period resulted in waiver of assets. It is the duty of managing director to act in utmost faith for the interests of the company and disclosing the information which adversely have an effect on the whole scheme of acquisition. It was held by justice Cooke that the managing director was personally liable on duty of confidentiality in matter related to sale of assets on contrary fraudulent activity. the decree was passed that the director was further discharged from his duty and the director in in section 166 includes restriction on activities and disclosure of information.

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FRAUDULENT CONDUCT OF BUSINESS  

 Earlier the company’s creditors had    huge    losses due to fraudulent conduct of business such as asset misappropriation, financial statement fraud on the other side committed by the party knowingly carries such criminal activities intending to fraud others. The govt of India took administerial measures on passing of the bill 2009 proposes of punishment from minimum 1 years up to 3 years party found guilty on fraud. In Winkworth vs Edward Baron Development. co.ltd. [1987] in this case it was observed by Lord Templeman that the director owes a duty towards the creditor of the company. The duty to protect the interest of the creditors to maintain the stability in capital and transparency in business affairs of the company and take preventive measures as a tool against the improper use of capital or to disappearance in the property of the company unconscionable to the creditors. The statements passed in judgements were so long as the best interests of the company is operated on a normal course the company grows. But if the company faces loss of capital and is at financial risk in such circumstances the director ought to do the duty in saving the debentures and corresponding to secure the interests of the holders and members of the company .If it is found  from the side of director that there is irregularity in  modus operandi in  business trading  due to which the company falls sick .He shall be liable for fraudulent activity and is to be adjudged as  insolvent and  is disqualified for the appointment of director. To ensure that the functions of the director doesn’t expose any danger to the company’s financial health.

SERIOUS FRAUD INVESTIGATION OFFENCES UNDER COMPANIES ACT 2013

The SFIO is a sundry organization established on behalf of Naresh Chandra committee in 2003 it was enforced for the purpose of securing the interests of the investors in business affairs with company directors for keeping a watch dog on the legal  formalities of business contracts and investigation of insider facts on annual financial statement of the company .The Naresh Chandra committee recommended this as a multifarious agency for unfolding serious corporate frauds  in the economic legislations .Under section 212 of the Companies Act 2013 the central govt may refer any matter to investigation SFIO for rule of necessity on the basis of –

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  1. u/s 208 on the receipt or report issued by the registrar or inspector for investigation on the corporate affairs of the company 
  2. The company matters are required to be investigated when the special resolution is passed and a decision is made.
  3. A letter of Request from any Department of Central Govt 
  4. On the public interest 

The investigation officer shall take evidences by information documents, material information possessed by the head of the company i.e., the owner, director. If the director or assistant director is found in the embezzlements of corporate frauds relating to assets and securities of the company then in such case, they will be held liable for offences in economic crimes and   will be cognizable for a non bailable offence under section 447. further on the completion of investigation. the investigation officer shall submit an interim report to the agency within a specified time period. The SFIO acts is an agency which is backed by legal statutes thereby act as an incumbent engine which warrants against economic crimes related to weak corporate governance. SFIO warrants the person or company who are inflicted to corporate frauds and scandals. 

In recent scenario the central govt empowers for the fraud investigation offices (SFIO)operates as agencies related to companies. the auditor of the company shall receive a report on the special resolution passed by the company and submit the report to the agency on offences against companies committed by officers of the company, managerial personnel and the board of directors. the SFIO shall investigate and prosecute against the company If any one commits fraud, then the auditor may report to the central govt within 30 days. the duty of the auditor is to maintain records and transparency. the auditor has a role in MOA for its internal analysis.

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CIRCUMSTANCES IN WHICH A DIRECTOR IS RESPONSIBLE FOR LIFTING UP OF CORPORATE VEIL

The lifting up of corporate veil is a legal concept in section 9 which enjoys a separate legal identity from its shareholders and directors the company has a distinct lawful personality from its members. this principle opens the envelope of the managing of business undertaking by its members for the company. the court lifts the cloak over the company when there is improper code of conduct in the internal affairs found to be true and substantial evidence against the company and its members. This legitimate idea was denoted from the House of lords in Solomon vs Solomon case in a situation where the Solomon was the head of the organization and the loan boss of the organization.  the doctrine of limited liability arose for the shareholders are not held liable when in a limited liability company, the number of subscribers ought to be at least seven. where the director was responsible to be held liable in this case though he tried to recover the debts in his best of efforts in conversion of LLP the principle of separate legal entity got established.

  • Section 5 of company’s act identifies that any individual found involved in wrong doing practices is liable for a corporeal mischief and disturbing to functions of the company is an offence, and punishment is imposed to the individual on the consent of the executive director as per investigated by (corporate social responsibility) CSR being a nucleus to the legislative constituent organ of the company. In such situation the directors are responsible for examination of accounting statements, audit reports etc.
  • Section 45 of company’s act talks about the contractual risks and obligations under which a public and private company is exposed to heavy risks.  For their weak business due to reduction in numbers of persons working in the company. the company here is severally at risk for carrying their business operations due to which the director is in clear reality of the upcoming crisis and may take help from govt in funds raising for to curb monetary unstable happening and for financial development of the company.
  • Section 147 of companies act states that where a person has not maintained accuracy in their work for signing of bills of trade, promissory notes, hundis has erroneously made signing to what isn’t referred to other company is known as “liable for default of an individual “such mistake is called as misdescription of company referrals. Thereby the director shall rectify the errors and then examine the accounts and correct it with signing of bills on sound description.
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The overall Auditer or Secretary once in a monetary year gives an Annual Report to the Director of the organization expressing its yearly exhibition and monetary data about the organization exercises this report means on every business stratergic components, for example, :

  • Cash flow statement 
  • Profit and loss statement 
  • Financial statement 
  • Annual report 
  • Balance sheet 
  • Policy frame-work

STATUTORY ACTS GOVERNING THE LEGISLATIVE DUTY OF THE DIRECTORS 

Disqualification of Directors – when a director demonstrates his act of a particular genuine nature for the credibility of the person from being time -barred for a particular period the director to inspect the work of the organization. in the public interest a preclusion request can be made preventing the said person from so acting as a director.

This mechanism was evolved in the UK in the company director disqualification act 1986 in this act there is a procedure to file an application along with the order by the court for disqualification of directors. Hence the director is disqualified from: –

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  1. Acting as the promoter of the company in the formation of the company 
  2. Being the liquidator or administrator of the company 
  3. Being a receiver or the manager of the company property
  • Company Directors Disqualification Act 1986 – where there is default in complying with the norms of the company in filing of documents with the registrar of companies in during the preceding five years. In case of liquidation a two-year time limit is given considering the evidence for the director 
  • Insolvency Act 1986 – when an insolvent company liquidates then before the liquidation the director is informant to the reasonable prospect that liquidation should be refused if in case the director makes a personal contribution for his assets in the company is as a part of his noxious plans considered as a malice intent to defraud creditors is a wrongful doing in this act.  thereby the court sentences punishment or penalty to the wrong-doer.
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  • Health and Safety of work Act 1974 – if any health and safety offence is committed with the consent of a known member of the company. if any member or employer-employee found disregard in their piece of work, they will be held liable for negligence in course of work. The court takes civil actions on part of negligence caused to the organization.
  • Corporate manslaughter and Homicide Act 2007– the ex post facto law is exercised by the senior management they couldn’t meet their targets and the work involves high risk and the company results in gross-failure of the company and responsible for breach of owing duty to care in their target. the outcome of the failure leads to the consequence of death of an employer, employee, public loss of life is a severe crime. That person is culpable is liable for the risk taken for promise to do   the part of specific performance of work and therefore breaches the promise the court will criminally sanction death punishment or life term imprisonment to that culpable person according to this Act.

EFFECT OF DISQUALIFICATION OF A DIRECTOR 

The director is banned from its executive activity on order of effect by the court, the person is wholly disqualified from acting as a director of the company, promoter, receiver of the property, management of the LLP company, from acting as an insolvency professional. In the ramification of a breach of a disqualification Order a fine or imprisonment may be imposed u/s 13.

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SHADOW DIRECTORS 

A shadow director is defined in disqualification of directors’ act 1986 “a person in accordance with whose directions or instructions the director of the company is accustomed to act (although a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity).” In the case of Industry vs Deverell and another the law point that occurred are as following: –

  • All the board of directors to be accustomed acc to this act as directed by the shadow person acting as a director. the purpose is to monitor and control the Board in a legislative standard of law.
  • The directors must “do something in conformity with” such instructions. may simply be translated by the shadow director to the board of directors.
  • The directors must act on the alleged shadow director’s directions as a regular course of conduct of the directors over a period of time.

 LATEST CHANGES

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  • In the company law Act 2013 as per section 164(2) a director may get disqualified in future, he shall be ineligible for re-appointment after five years because he has not filed the financial statement application to the ministry of corporate affairs MCA.
  • The director may get an opportunity to file an application under the scheme condonation of delay COD 2018. The date starts from the very beginning of non-filing till two years. The predecessor of this scheme of settlement came on 2014 after the enactment of companies act 2013.
  • The director for removal of the disqualification may file a writ petition to the high court under article 226 for the judicial relief. proved that directors are just disqualified on the basis of their non-financial returns. article 226 provides remedy to the director in favor of their disqualification. 

CONCLUSION

The disqualification of director has been defined under section 164 of companies act 2013, the disqualification term and action were evolved from the UK Court of law and then this legal idea travelled to India for the purpose of financial returns and in the recent arena the concept and legislation of shadow director is invoked for monitoring and controlling the board of directors and providing them legislative instructions for the welfare and betterment of corporate governance culture. There are substitute acts in disqualification mentioning the term of imprisonment on the wrong doing of criminal activity called as work on default. The method of this article was to provide intricate grounds for removal of the director or disqualification of director and in the latest changes remedifying the director by condonation of delay. The MCA gives an order on the judgement of the circumstance on winding up of a company or lifting up of corporate veil.

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