DISQUALIFICATION OF DIRECTOR - Will it amount to vacation of office under Section 167?

Ministry of Corporate Affairs (MCA) recently via press release announce that it has identifies more than one lakh directors of shell companies for disqualification. The process started with Government taking action against Black Money first they cancelled license of nearly 2 lakhs Companies, later they announced freezing of Bank Accounts of all the Shell Companies whose registrations are cancelled.

To put in numbers, the step MCA, in consultation with Finance Ministry and Government of India has taken is as under:

1. MCA cancelled the registration of above 2 lakh Shell Companies.

1. Subsequently, Ministry of Finance via Press Release announced that the bank accounts of all such companies are frozen and Banks and announced that Directors and Officer of the Company will not able to operate Bank Account of such companies unless  such companies are legally restored by NCLT. 

1. Now, MCA has identified over 1 lakh Directors for disqualification under section 164(2)(a) of Companies Act, 2013 as on 12th September, 2017. Click here to check the list of disqualified Directors

Recently, MCA put following warning for disqualified Directors on its Website:

While Section 164 (corresponding to section 274 of the 1956 Act) deals with “Disqualifications for appointment of director” and section 167 (corresponding to section 283 of the 1956 Act) is dealing with “Vacation of office of director”.

As per Clause (a) of section 167(1), the office of a director shall become vacant in case, if he incurs any of the disqualifications specified in section 164. On plain reading, the effect of this provision is that, when section 164, the director has to vacate the office and he ceases to hold the office of director as a result of this provision under section 167 automatically on the happening of any of any the events specified in section 164(1) and (2). Basically, this is an absurd provision and we cannot bring section 164 into section 167 since they have different roles to play. There was no similar provision in section 283 of the 1956 Act. It has been introduced by the Companies Act 2013 but its object is unknown.

Even the Company Law Committee, formed by MCA in 2016, in its report said that :

"Disqualifications from appointment as, and vacation of office of director 11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic vacation of office of the director if he incurs any of the disqualifications stipulated under Section 164. Section 164(1) provides for disqualifications which are incurred by a director in his personal capacity such as being an undischarged bankrupt, of unsound mind, convicted of an offence etc., and Section 164(2) lists out disqualifications related to the company such as non-compliance of annual filing requirements, etc. 

The Committee acknowledged that this Section created a paradoxical situation, as the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. In this regard, the Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1)".

However, no further action is taken by Government or MCA which could suggest that MCA has accepted the recommendations of Company Law Committee on Section 164 read with Section 167 particularly.

What is the stand of MCA on disqualification?

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.

Also, list of Directors issued by MCA is named as 'List of Directors Disqualified under Section 164 (2) (A)' of the Companies Act, 2013 which makes it clear that if the all the Directors whose name are appearing in such list are Disqualified under Section 164 of the Companies Act, 2013. 
From the above, it is clear that MCA is interpreting, non filing of Accounts as disqualification under Section 164 and Section 167 (1) (a) which clearly states that a Director is liable to vacate his office if he incurs disqualification under Section 164 of the Act.

Penalty for non Compliance of Section 167 (1):

While, there are still interpretation issue on applicability of 167 on other Companies, the penalty prescribed under Section 167 is extravagant.

As per Section 167 (2) "If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Penalty for violation of Section 167 (1)
Fine	Rs. 1 lakh to Rs. 5 lakh
Imprisonment	Upto 1 Year
Or Both

Conclusion : Shall director vacate office from other companies?

If Clause (a) of section 167 (1) is to be interpreted in the same way as the Clauses (b) to (h), where disqualification does not amount to vacation of office from other Companies, a disqualification under section 164(2) in a particular company cannot result into vacation of directorship in any other company in which such a person is a director.

However, the way ROC and MCA are taking action against disqualified directors and looking at the list of disqualified directors, MCA simply says that 'Directors are disqualified under Section 164 (2) (a)'. Sans logic of other clauses of Section 167 (1), on plain reading, Section 167 (1)(a), says that a Director is liable to vacate his office if he incurs disqualification under Section 164 and considering list issued by MCA, a list of Directors who are disqualified under Section 164, the interpretation, MCA taking is exactly opposite to the common understanding as explained in para above. 

Hence, going by the recent action of MCA, a Director disqualified under Section 164 will be liable to vacate his office from all other Companies where he is a Director.

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