Disqualification of Directors as per Companies Act
Ineligibility Of Being Appointed As A Director
Section 164 of the Companies Act, 2013 prescribes certain conditions which make
a person ineligible for appointment as a Director in any company. As per
Sub-section (1) of this provision, a person cannot be appointed as a Director
- He is of unsound mind and stands so declared by a competent court;
- He is an undischarged insolvent;
- He has applied to be adjudicated as an insolvent and his application is
- An order disqualifying him for appointment as a director has been passed
by a court or Tribunal and the order is in force;
- He has not paid any calls in respect of any shares of the company held
by him, whether alone or jointly with others, and six months have elapsed
from the last day fixed for the payment of the call;
- He has been convicted of the offence dealing with related party
transactions at any time during the last preceding five years;
- He has not complied with provisions pertaining to allotment of Director
Identification Number; or
- Due to a criminal conviction (as explained separately in detail below).
Further, as per Companies (Amendment) Act, 2017, vide a proviso, it is provided
that the disqualifications relating to conviction or disqualification order of
the court shall continue to apply even if the appeal or petition has been filed
against the order of conviction or disqualification.
Disqualification Due To Criminal Conviction - Section 164(1)(D)
- If a person has been convicted of any criminal offence by a court,
whether it involves moral turpitude or otherwise, and has been sentenced
- at least six months, then until a period of five years has elapsed from
the date of expiry of the sentence he will not be eligible for appointment.
- for a period of seven years or more, then under these circumstances, he
will not be eligible to be appointed as a Director in any company, i.e.,
leads to permanent disqualification.
- Section 167 of the Companies Act, 2013, provides for situations under
which the office of a Director is liable to be vacated. The situations are
same as set out in Section 164(1) mentioned above. Further, this section
clarifies that the office of the Director shall be vacated even if he has
filed an appeal against the order of the court.
- Vide Companies (Amendment) Act, 2017, a proviso has been added to
Section 167 to provide that the office shall not be vacated by the Director
for 30 days from the date of conviction or order of disqualification:
- Where an appeal or petition is preferred within 30 days against the
conviction, resulting in sentence or order, until the expiry of seven days
from the date of such appeal or petition is disposed of; or
- Where any further appeal or petition is preferred against the order or
sentence within seven days, until such further appeal or petition is
- The term 'moral turpitude' has nowhere been defined in the Act or under
the Rules. Through a catena of judgments, the expression is understood to
mean anything done contrary to justice, honesty, modesty or good morals. It
can be defined as an act of biasness, vileness, or depravity in private and
social duties owing to fellow men in general, contrary to accepted and
customary rules. For instance, offences related to sexual harassment at
workplace and gross ethical violations would constitute moral turpitude.
- One of the most common instances pertaining to conviction of directors
is the dishonour of cheque which is a criminal offence as per Section 138 of the
Negotiable Instruments Act, 1881.
Ineligibility Of Being Re-Appointed As A Director
Sub-section (2) of Section 164 states that no person who is or has been a
Director of a Company which has done the following, 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 company fails to do so:
- Has not filed Financial Statements or Annual Returns for any continuous
period of three Financial Years; or
- Has failed to repay its Deposits accepted from public including interest
or redeem its Debentures on due date including interest, pay any Dividend
and such failure continues for a period of one year or more.
Further, as per the Companies (Amendment) Act, 2017, a person who is appointed
as a Director of a company which is already in default of the abovementioned two
conditions, shall not incur the disqualification for a period of six months from
the date of his appointment.
Other References With Respect To Disqualification Of Directors
- Under Section 143(3), the Auditor has to state whether any Director is
disqualified from being appointed as a director under Sub-section (2) of
- Under Section 152(4), every person proposed to be appointed as a
Director by the company in general meeting or otherwise, shall furnish a
declaration that he is not disqualified to become a Director under this Act.
Reporting Of Disqualification
Rule 14 of the Companies (Appointment and Qualification of Directors) Rules,
2014 provides obligation of the Director to intimate the disqualification to the
Company and thereafter, the Company has to inform the Registrar of Companies.
Serious Fraud Investigation
- Section 212(8) which became effective form August 24, 2017, read with
the Companies (Arrests in Connection with Investigation by Serious Fraud
Investigation Office) Rules, 2017 provides that if the Officers of SFIO
(Director, Additional Director or Assistant Director), has on the basis of
material possession reason to believe (and the reason for such belief is
recorded in writing) that any person is guilty of any of the following offences,
he may arrest such person and shall inform him of the grounds for such arrest:
- Incorporation of company;
- Criminal liability for mis-statements in prospectus;
- Punishment for fraudulently inducing persons to invest money;
- Punishment for personation for acquisition of securities;
- Certificate of shares;
- Transfer and transmission of securities;
- Reduction of share capital;
- Removal, resignation of auditor and giving of special notice;
- Power to call for information, inspect books and conduct inquiries;
- Investigation into company's affairs in other cases;
- Penalty for furnishing false statement, mutilation, destruction of
- Fraudulent application for removal of name;
- Liability for fraudulent conduct of business.
- Section 447 of the Companies Act, 2013, defines fraud as:
Fraud in relation to affairs of a company or any body corporate,
includes any act, omission, concealment of any fact or abuse of position
committed by any person or any other person with the connivance in any
manner, with intent to deceive, to gain undue advantage from, or to injure
the interests of, the company or its shareholders or its creditors or any
other person, whether or not there is any wrongful gain or wrongful loss;
In the definition above,
wrongful gain means the gain by unlawful means of property to which the
person gaining is not legally entitled; and
wrongful loss means the loss by unlawful means of property to which the person
losing is legally entitled.
Section 447 provides the penal consequence of fraud as under:
- Where the offence of fraud involves an amount of at least Rupees Ten Lakh or one per cent. of the turnover of the company, whichever is lower:
- Punishable with imprisonment for a term which shall not be less than six
months but which may extend to ten years; and
- Liable to fine which shall not be less than the amount involved in the
fraud, but which may extend to three times the amount involved in the fraud.
- Where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
- Where the fraud involves an amount less than Rupees Ten Lakh or one
per cent. of the turnover of the company, whichever is lower and does not
involve public interest:
- Punishable with imprisonment for a term which may extend to five years;
- With fine which may extend to Rupees Fifty Lakh; or
- With both
- It is pertinent to note that the Special Court shall not take cognizance
of any offence as mentioned above except upon a complaint in writing made
- The Director of Serious Fraud Investigation Office; or
- Any officer of the Central Government authorised, by a general or
special order, in writing in this behalf by that Government.
Complaint Of Fraud Against The Company
- The government, in order to encourage better compliance of the law, has
introduced the Form SCP (Serious Complaint Form) for reporting the serious
complaints relating to the companies. This is an e-form and can be filed on the
website of the Ministry of Corporate Affairs. There is no fee for filing Serious
Following category of persons can file this complaint:
- Deposit Holder
Nature of the Complaint:
- Cessation of director
- Management Dispute
- Financial Mismanagement
- Removal of Director
- Corporate Fraud
- Accounting Fraud
- Oppression of Minority Shareholders
Liability Of The Directors Where The Name Of The Company Has Been Struck Off From The Register Of Companies
Section 248 of the Companies Act, 2013 provides for situations where the name of
the company has been struck off from the Register of Companies and the company
continues to carry out its operations/ business, then the directors/management
and such other officers of the company will be held personally liable.
Lifting Of The Corporate Veil
- The Companies Act, 2013, points out the person liable for any
improper/illegal activity as officer who is in default under Section 2(60)
of the Act, and also includes people holding the positions of directors and
key-managerial personnel. A few instances when a Court may consider the
lifting of the corporate veil of a company include:
- Economic offences
- Fraudulent conduct
- Non-payment of statutory welfare payments
- On lifting of the corporate veil, the Court determines the directing
mind / real agency behind the corporate façade and accordingly the
liabilities/ penalties may ensue. The jurisprudence of piercing of corporate
veil is derived from the landmark judgements of the Supreme Court of India, in:
Life Insurance Corporation of India v. Escorts Ltd. & Ors, 1986
- A non-resident portfolio investment scheme which existed under the
Foreign Exchange Regulation Act, 1973. The scheme allowed non-resident
companies, which were owned by or in which the beneficial interest vested in
non-resident individuals of Indian nationality or origin was at least sixty
per cent., to invest in the shares of Indian companies. Investment was
allowed to the extent of one per cent. of the paid-up equity capital of such
Indian companies and could not exceed a ceiling of five per cent.
- Under the scheme, 13 companies, all owned by Caparo Group Limited,
invested in Escorts Limited which is an Indian company. Importantly, sixty per
cent. of the shares of Caparo Group Limited were held by a trust, whose
beneficiaries were Mr. Swraj Paul and members of his family, who were all
non-resident individuals of Indian origin.
- The investment by the 13 Caparo Group companies was challenged on the
ground that it was an attempt at circumventing the prescribed ceiling of
investment of 1% under the Scheme.
- The Hon'ble Supreme Court ruled that only for the purposes of
ascertaining the ownership in the investment, lifting of the veil would be
necessary to a limited extent, i.e. to ascertain the nationality or origin of
the shareholders. It was not necessary to ascertain the individual identity of
each of them. It could not deny these companies. The Apex Court ignored that the
identity of the shareholders may be common, thus recognising that each company
was an independent juristic entity, looking only at nationality for compliance
with the requirements of the scheme.
- Thus, it was held that corporate veil should be lifted where associated
companies are inextricably connected as to be in reality, part of one
State of Uttar Pradesh v. Renusagar Power Company, 1988
- Renusagar was a hundred per cent. subsidiary of Hindalco thus wholly
owned and controlled by Hindalco.
- The agreement between Renusagar and Hindalco indicated that there was a
normal Sale-Purchase Agreement between two independent juridical persons at
arm's length. The price of electricity was determined according to the cash
needs of Renusagar.
- The State of U.P. contended that Renusagar must be treated as alter ego
- Following the decision of LIC v. Escorts, the Hon'ble Supreme Court held
that Hindalco and Renusagar were inextricably linked together. Renusagar had, in
reality, no separated and independent existence. The person generating and
consuming energy were the same and the corporate veil should be lifted.
i. Liability of Directors under Prevention of Corruption Act, 1988
- The Prevention of Corruption Act, 1988 was amended in 2018 to bring it
in line with the United Nations Convention against Corruption 2005, which
was ratified by India in 2011. The amendment provided to prevent corruption
in Government departments and to prosecute and punish public servants
involved in corrupt practices.
It also introduced implication of offering bribes by a Corporate
- Where an offence has been committed by a commercial organisation and such an offence is proved in the
court to have been committed with the consent or connivance of any director of
the commercial organisation, such director shall also be held guilty of the
offence and shall be liable to be proceeded against.
- The director will be imprisoned for a term which shall not be less than
three years but which may extend to seven years and shall also be liable to
Iridium India Telecom Limited v. Motorola Incorporated & Ors
- The question of punishing a corporation came up in the Hon'ble Supreme
Court in a criminal case filed by Iridium against Motorola Inc. for cheating and
- The allegation by Iridium was that Motorala Inc., the primary contractor
for the Iridium project, floated a Private Placement Memorandum to obtain
funds/investments to finance the Iridium project. The project was represented
as being the world's first commercial system designed to provide global digital
hand held telephone data and it was intended to be a wireless communication
system through a constellation of sixty-sex satellites in low orbit to provide
digital service to mobile phones and other subscriber equipment locally.
Several financial institutions invested in the project based on the information
contained in the Private Placement Memorandum. However, it was alleged that the
representations were false and that the project turned out to be commercially
unviable resulting in significant loss to the investors.
- The Hon'ble Supreme Court held that a corporate body can be prosecuted
for cheating and conspiracy under the Indian Penal Code. The offences for which
companies can be criminally prosecuted are not limited only to the specific
provisions made in the Income Tax Act, the Essential Commodities Act, and the
Prevention of Food Adulteration Act. Several other statutes also make a company
liable for prosecution, conviction and sentence.
- The Apex Court noted that companies and corporate houses can no longer
claim immunity from criminal prosecution on the ground that they are
incapable of possessing the necessary means rea for the commission of criminal offences.
- Thus, the mens rea of the 'alter ego' of the company, i.e. the person or
group of people that guide the business of the company will be imputed to the
Mr. Sunil Mittal, CMD, Bharati Cellular Limited v. Central Bureau of
- In the year 2008, Unified Access Services Licenses ("UASL") were granted
by the Ministry of Telecommunications. After sometime, an information was
disclosed to the Central Bureau of Investigation (CBI) alleging various forms of
irregularities committed in connection with the grant of the said UASL which
resulted in huge losses to the public exchequer.
- The Prevention of Corruption Act, 1988 does not provide for the
vicarious liability of directors. This issue came up for consideration in
this case wherein the Hon'ble Supreme Court quashed the criminal charge against Sunil
Bharati Mittal, Chairman-cum-Managing Director of Bharti Cellular Limited, since
there was no vicarious liability of director provision in POCA.
- The issue at hand before the Hon'ble Supreme Court was when a director or
a person in charge of the affairs of the company can be prosecuted for an
offence committed by the company.
- The Apex Court relying upon the law laid down in Iridium v. Motorala Inc.
(as above) stated that the 'principle of attribution' is applied to impute
criminal intention to the company on account of the criminal intention of its 'alter ego' and cannot be applied in a reverse scenario to make the directors
liable for offences committed by the company.
ii. Personal/Vicarious Liability Under Tax Statutes
Lifting Of The Corporate Veil
- Section 179 of the Income Tax Act, 1961 imposes a vicarious liability on
a director and such liability can be imposed by the Assessing Officer
without adjudication by a court.
- Where any tax due from a private company cannot be recovered, then every
person who was a director at any time during the relevant previous year
shall be jointly and severally liable for the payment of such tax unless he
proves that the non-recovery cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in relation to the affairs of the
- The onus will be on the director to prove his innocence.
Under The Goods And Service Tax Regime
- If a private company does not pay its dues then the directors of the
company will become jointly and severally liable for the dues. In this case,
only the directors who were in office during the period when the tax was due
will be held liable.
- If a director can prove to the Commissioner that the non-payment was not
due to any negligence or breach of duty due to his part, then he will not be
iii. Personal Liability under Insolvency and Bankruptcy Code, 2016
- Personal Liability of The Director For Wrongful Trading: A
director of the company can be held liable to contribute to assets of the
corporate debtor if such director knew that the company has no prospect of
avoiding commencement of insolvency process and he did not exercise any due
diligence in minimising potential loss to creditors.
- Personal Liability of The Director for Fraudulent Trading: Any
person who is a party to any business of the debtor carried on with the
intent to defraud creditors or any other fraudulent purposes may be liable
to contribute to the assets of the company as determined by the National
Company Law Tribunal.
- Chapter VII of the Code prescribes certain acts which constitute an
offence and the officers in default/ directors are held liable.
These offences include the following:
- Concealment of property
- Transactions defrauding creditors
- Misconduct in course of corporate insolvency resolution process
- Falsification of books of corporate debtor
- Wilful and material omissions from statements relating to affairs of
- False representations to creditors
- Non-disclosure of dispute or repayment of debt by operational creditor
iv. Personal / Individual Liability under Competition Act, 2002
Written By: Madhavi Lakhotia
- Section 48(1) of the Competition Act, 2002 states that, if a company is
found to have contravened the provisions of the Act, then, every person who
is in charge of and responsible for the company's conduct shall be deemed to
be guilty of the contravention, and shall be liable to punishment according
to the provisions of the Act.
- Further, the proviso to Section 48(1) provides that nothing contained in
Section 48(1) shall apply, if the relevant individual can prove that the
company's contravention was without his/her knowledge or that he/she had
exercised due diligence to prevent the commission of such contravention.
Under the guidance of Ms.Attreyi Mukherjee
Senior Corporate Counsel and Ms.Deepika Bhagwagar
, Deputy Company