The Companies (Amendment) Ordinance, 2018- Disqualification pursuant to exceeding number of Directorship

By Shaifali Sharma (corplaw@vinodkothari.com)

Introduction

In a move towards streamlining and strengthening the rules for directors, government has introduced and amended certain provisions in past which resulted into disqualification of lakhs of directors and deactivation of their DIN.

Recently, The Ministry of Law and Justice vide an Ordinance dated 2^nd November, 2018 has now introduced a new clause adding another criteria leading to disqualification of a director.

Section 164 of the Companies Act, 2013 (‘Act’) states various disqualifications for appointment of Director in a company where sub-section (1) specifies disqualification due to personal default while sub-section (2) specifies about disqualification arising due to corporate default. This write-up endeavors to discuss the said new provision under Section 164(1) read with Section 165 and related situations in the above context.

Restriction on number of directorship

With an idea to ensure that directors provide proper attention and do justice to the position of directorship in all the companies on which they are directors, a maximum limit on number of directorships has been prescribed by the government.

Section 165(1) of the Act provides the maximum number of directorship that a person can hold. The relevant extract of the provision under the aforesaid section is as follows:

“(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

Explanation I — For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

Explanation II.—For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included

(2) Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.

XXX”

Position under Companies Act, 1956

Section 275, 276, 277, 278 and 279 of the Companies Act, 1956 (‘1956 Act’) was the corresponding provision to Section 165 with the following major differences:

• The maximum limit on number of directorship under the 1956 Act was 15 (fifteen) only.
• Section 278 of the 1956 Act provided for “exclusion of certain directorships for the purposes of computing the limit on number of directorships.
• Members were not allowed to reduce the limit of number of directorship.

The Companies (Amendment) Ordinance, 2018 (“Ordinance”)

The Government has constituted a Committee under the chairmanship of Shri Injeti Srinivas, Secretary, Ministry of Corporate Affairs vide an order dated July 13, 2018 to review offences under the Act and had recommended that if the number of directorship held by an individual exceeds the limit provided under section 165, such an individual should be subject to disqualification under section 164(1) read with section 167(1). The Ministry of Law and Justice vide an Ordinance dated 2^nd November, 2018 named as Companies (Amendment) Ordinance, 2018 (“Ordinance”) has made the following amendments:

1. Section 164 – Disqualification of Directors

 In sub-section (1) a new sub-clause (i) has been inserted:

“(i) he has not complied with the provisions of sub-section (1) of section 165”

2. Section 165 – Changes in the provisions of penalty:

Sub-section (6) of section 165 shall be read as follows:

“(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be liable to a penalty of five thousand rupees for each day after the first during which such contravention continues” 

Directorship in more than specified limit

Hence, Pursuant to the above ordinance, impacts are stated below:

1. For non-compliance of section 165 of the Act director shall stand disqualified.
2. Office of such disqualified director shall immediately become vacate in all the companies in which he holds directorship.
3. A penalty of five thousand rupees for each day after the first day during which such contravention continues

Valid actions of disqualified directors

Section 176 of the Act that deals with the “Defects in Appointment of Directors not to Invalidate Actions Taken” states the following:

“No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company:

Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.”

In other words, actions of director are valid, even if it is subsequently noticed by the company that his appointment was invalid by the following reasons:

• Any defect
• Any disqualification
• Termination by virtue of any provision contained in this Act or in the articles of the company

Now, pursuant to section 164 read with section 167 of the Act, if a person was appointed as director exceeding the permissible limit of directorship as per section 165 of the Act, then in such a case he will be disqualified as a director at the instance of appointment and shall immediately vacate his office in all other companies. But the question arises, if the disqualification was effective at the instance of appointment, how can the actions taken by director be valid.

Going with the intent of section 176 of the Act, even after the disqualification, law intends to protect the interest of outsiders (including shareholders) by validating any kind of action taken by directors with bona fide intentions.

In furtherance to the above, it is pertinent to note that the actions taken by such disqualified director post appointments stays valid until the same is noticed by the company.

However, a question still exists in mind that if a director was disqualified at the instance of his appointment then would it be practically possible for him to take actions as director on behalf of the Company and the Board?