Query - Sec 164 and Sec. 167 - Interpretation challenge

[Kiran T]

Dear All,

We have query on Sec 164 and 167:

Suppose a director is appointed on 4 companies by name A B C D as director. All 4 Companies are Pvt. Co. incorporated under Companies Act, 1956. Company 'A' is considered as defaulter co. for not filing annual statements and annual returns for 3 years continuously because of this a director has become defaulter director.

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Interpretation 1:

As per Sec 164(2)(a) director stated above gets disqualified and as per Sec 167(1) the said director shall vacate his office as director in Company B C D.

This understanding is as per plain reading of the section 164 and 167.

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Interpretation 2:

However inclusion of sentences under 164(2) No person…. “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”.

As per this sentence, the director would be disqualified – (Category 1)

·         In a defaulted company for reappointment.

·         In other company (we understand that it is new co.) for a period of five years for fresh appointment.

Going further the director would not be disqualified in the following companies – (Category 2)

·         In a defaulted co. if he is a continuing director.

·         Existing co.’s in which he is already director.

·         Reappointment of director or Managing director before the enactment of the Act.

·         Reappointment of director or Managing director before the date of default starts.

Considering the above interpretation, if we read Sec 167(1) only Category 1 companies are considered for vacation of office of director and not category 2 companies.

Let me know which interpretation is right.

Regards

Kiran.T

[Vivek Hegde]

Dear Kiran,

Food for thought...

As per my reading, Section 167 (1) a director shall vacate office only if he incurs any of the 'disqualifications' specified in section 164. 

As mentioned by you instances under Category 2 are not 'disqualifications' and accordingly he can continue to be a director.

Warm Regards

CS Vivek Hegde,B.com, ACS, CWA

Vivek Hegde & Co.
Company Secretaries
No. 2034, 26th Cross, K.R.Road
Banashankari II Stage, Behind 

Sevakshetra Hospital

Bangalore-560070
Mob : 09900898223

Off: 080 26710677

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[Phani Datta]

Dear Mr. Vivek,

Kindly give your views on the following question:

In the example given by Mr. Kiran, Company A is a defaulting company and in Company B,C and D, if he is a continuing director (i.e he is a director of other three companies from past few years),

According to Sec. 167(1) the office of director shall become vacant in case if he incurs any of the disqualifications specified in section 164, which includes disqualification due to failure of filing annual returns or financial statements for 3 consecutive years.

So does this mean that?  

1. There is necessity for him to vacate the office in all other 3 companies in which he is a director, if so within what time and what is the time limit for making good of the default?

                                                                                                  OR

2. Can he continue to be a director in rest of the 3 companies in which no question of appointment or reappointment arises?

[Vivek Hegde]

Dear Phani,

Since disqualification applies only to the defaulting company and new companies where the director is proposed to be appointed, he need not vacate office in 3 companies. 

Warm Regards

CS Vivek Hegde,B.com, ACS, CWA

Vivek Hegde & Co.
Company Secretaries
No. 2034, 26th Cross, K.R.Road
Banashankari II Stage, Behind 

Sevakshetra Hospital

Bangalore-560070
Mob : 09900898223

Off: 080 26710677

[BINDU MADHAVA]

I think non-filing of financials or annual return for 3 years and default in repayment of deposits, debentures or interest thereon also amounts to disqualification under section 164.

Please refer sub-section(3) of section 164

regards
Bindu Madhava K G

[Pracheta]

Dear Kiran,

Your second interpretation is correct. Disqualification will apply only in case of re-appointment in the defaulting company (i.e. A in your example) and appointment in case of other companies.

Best Regards,

CS.Pracheta.M

Practising Company Secretary

Ph: 98446 88622

[Kiran T]

I thank you all for conveying your opinion.

Regards

Kiran.T

[sid]

It will be immediate vacation from defaulting company and no reappointment in the same for 5 years and no appointment in other companies for 5 years but he can continue to be director in all other companies in which he is director as on date of default except defaulting company.

Thanks