Category Archives: Notes

One Director must stay in India: Brief discussion

Section 149 subsection 3 of the Companies Act 2013 state as follows:

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year”

Let us first analyse the provision-

  1. The provision is applicable to all the companies, irrespective of size, scale and nature of business. 
  2. A raw look of the provision requires one of the director to meet the residency requirement. 
  3. Atleast one director, i.e one or more than one director has stayed in India for the stipulated period
  4. The period of stay in the previous calendar year should be 182 days or more, however the stay may not be a continuous stay of 182 days.
  5. General Circular 25/2014 further clarifies ‘residency requirement’ would be reckoned from the date of commencement of section 149 of the Act i.e. 1st April, 2014. The first previous calendar year for compliance with these provisions would therefore be Calendar year 2014. The period to be taken into account for compliance with these provisions will be the remaining period of calendar year 2014 (i.e. 1st April to 31st December-9 months). Therefore, on a proportionate basis, the number of days for which the director(s) would need to be resident in India during Calendar year 2014, shall exceed 136 days
  6. Further special window of 6 months for companies incorporated between 1st April 2014 to 30th September 2014.

There are lot of private companies in India which are owned by foreign companies, generally such companies have nominee directors on the Board of the Indian company, who are directors or employees of the parent company and reside abroad. Also there are a number of companies privately owned and controlled by NRIs. For the sake of convenience, let us call the foreign parent company or NRI as owners. The pivot of control in such companies remain with owners of the company who are generally residing outside India. The companies appoint a manager or operational incharge in India for management and administrative convenience, though rarely, there are chances of appointment of person residing in India as Director.

Now, the provisions of the Act makes it mandatory for every Indian company to have one director residing in India for min 182 days. Hence such companies have to either :

  • appoint a person residing in India as Director

  • send an employee/close relative to India to act as Director of the Company

  • ensure that one of the existing Directors stay in India for the stipulated period

The latter two options will also have to be reviewed from tax perspective.

The potential tax implications on an employee / director for the income earned while working in India could be an important factor while deciding the options.  For instance, under section 6(1) of Income Tax Act, 1961, an individual could be considered as a resident in India if he is in India in the previous year for a period of at least 182 days and this could lead to tax costs in India. Thus apart from relocation, visa, cost of living and other allied issues the owners will also have to consider the tax implications, before deciding on any of the options.

The first option has its own limitations too, as the owners will have the fear of misuse of power in hands of Indian director. Indeed the Indian director being a part of Board of Directors would have control over both the operations and management of the company, and could possibly take advantage of the same. Thus the owners may spend sleepless nights as they are giving the controlling power of the company to another person, thus increasing manifold the chances of litigations and court cases, which take years to be resolved.

The rationale of new provision is not very clear. However analysts have referred it as a move to create accountability i.e. if the company violates any provisions of law, the Director who is residing in India can be more easily tracked n adjudged. However it is significant to note that if one director is residing in India, the decision making powers including the power for his appointment will remain with the owners of the company residing abroad. The director will only act as per instructions of the owners, and still be accountable for all the lapses and violations, becoming a scapegoat or fall guy in hands of owners and statutory authorities.

The new provision is subject to wide criticism, because in the current scenario of economic despair it is discouraging international business. Investors who are reluctant to dilute their stake or powers will be apprehensive to set up business in India. However it may take some time before there is any change in the statute, so lets live with it till then. We suggest that the companies willing to appoint their foreign or Indian employees as Director should pass necessary resolutions to delegate limited and specific powers to the director residing in India, execute indemnity bond and employment agreement specifying the role, powers, duties, liabilities etc.

Companies Act 2013: MCA introduces new eforms

On its way to the journey of implementation of Companies Act 2013, MCA introduces the following new eforms

Serial no New form Purpose of the form
1 INC-1 Application for reservation of name
2 INC-2 OPC- Application for Incorporation
3 INC-3 OPC- nominee consent forms
4 INC-4 OPC-change in members/nominees
5 INC-5 OPC-Intimation of cessation
6 INC-6 OPC- application for conversion
7 INC-7 Incorporation for conversions(other than companies)
8 INC-18 Application to regional director for conversion of sec.8 company into any other type of company
9 INC-20 Intimation to registrar for revocation, surrender of license issued under sec 8
10 INC-21 Application for commencement of business
11 INC-22 Notice of situation or change of situation of registered office
12 INC-23 Application to regional director for approval to shift the registered office from one state to another state or from jurisdiction of one registrar to another in the same state
13 INC-24 Application for change of name
14 INC-27 Conversion from private to public and vice versa
15 INC-28 Notice of order of the court or tribunal or any other competent authority
16 PAS-3 Return of allotment
17 SH-7 Notice to registrar for alteration of share capital
18 SH-8 Letter of offer
19 SH-11 Return in respect of buyback of securities
20 CHG-1 Application for registration of modification or creation of charge ( other than debentures)
21 CHG-4 Particulars of satisfaction of charge
22 CHG-6 Notice of appointment or cessation of receiver or manager
23 CHG-9 Application for registration of creation or modification of charge in case of debenture
24 MGT-14 Filling of resolutions and agreements to registrar under sec 117
25 DIR-3 Application for allotment of director identification number
26 DIR-5 Intimation of change in particulars of directors to be given to central government
27 DIR-7 Notice of resignation of director to the registrar
28 DIR-8 Particulars of appointment of directors and the key managerial person and the changes among them
29 MR-1 Return of appointment of managing director, whole time director or manager
30 MR-2 Form of application to the central government for approval of appointment or reappointment and remuneration or increase in remuneration or waiver for excess or over payment to managing director or whole time director or manager and commission and remuneration to directors
31 URC-1 Application by a company for registration of under sec 366
32 FC-1 Information to be filed by foreign company
33 FC-2 Return of alteration in the documents filed for registration by a foreign company
34 FC-3 List of all principle place of business in India established by foreign company
35 FC-4 Annual return
36 ADJ Memorandum of appeal
37 MISC-1 Application to Roc for obtaining the status of Dormant company
38 MISC-3 Return of Dormant company
39 MISC-4 Application for seeking status of active company.

You may also visit demo forms at http://www.mca.gov.in/MinistryV2/Company_Forms_NCA.html

Companies Act 2013-A brief outlook on major changes affecting private companies

Glance on provisions affecting private companies
Section Details Brief Provision
Section 2(41) Definitions Financial Year of any Company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.
Section 2(68) Definitions Maximum number of members in a Private Company increased from 50 to 200.
Section 2(85) Definitions Concept of small companies with various relaxations in terms of reporting requirement, board meetings and procedure for mergers/ amalgamations have been introduced.  Small Companies have been defined to mean a Company, other than a public Company (a) having paid-up share capital not exceed fifty lakh rupees or such amount, not exceeding rupees five crores, as may be prescribed; (b) Having turnover not exceeding rupees two crores or such amount, not exceeding rupees twenty crores, as may be prescribed, as per its last profit and loss account. 
Section29 Public offer of securities to be in dematerialised form. Any company, other than a public company may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.
Section 43 Issue of differential equity shares  Issue of equity shares with differential rights would have to be in accordance with such rules as may be prescribed. This has been made applicable to even private companies now.
Section 62 Preferential issue of shares  Pricing of a Preferential Issue of shares by a company to be determined by a registered valuer. Conditions may be prescribed in rules for preferential issue by companies.
Section 62 Further issue of Capital  – Provisions relating to further issue of capital applicable to all companies. Accordingly, any shares have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution dealt in next point).
Section 101 Notice of meetings Notices for Board and General Meetings sent by electronic mode are recognised in the statute.
Section 120 Maintenance and inspection of documents in electronic form Any document required to kept by a company or allowed to be inspected or copies given can be maintained in electronic mode
Section 123 Decleration of Dividend Declaration of interim dividend can be out of surplus profits or out of current years profits. However, in case the Company has incurred loss up to preceding quarter during the year, the interim dividend cannot be declared out at a rate higher than the average dividend declared by the Company during immediately preceding 3 financial years.
Section 129 Consolidation of financial statements  Consolidation of financial statements mandatory in case a Company has one or more subsidiaries
Section 129 Financial Statements Cash flow statement and statement showing changes in equity if any of the company also forms part of the financial statements. In case the Company has a subsidiary company, the consolidated financial statements of all subsidiaries and the company shall be prepared and laid before the AGM
Section 131 Voluntary revision of financial statements or Board’s report. Voluntary revision of financial statements or Board’s report.
Section 135 Concept of Corporate Social Responsibility CSR introduced  ;Board shall ensure to spend 2% of average profits of last 3 years on CSR. Applicable to Companies having net-worth of Rs. 500 cr or more or Turnover of Rs. 1,000 cr or more or net profit of Rs. 5 cr or more. Company also required to constitute CSR committee.
Section 139 Appointment of auditors The Auditor will be appointed for a period of 5 years, with a requirement to ratify such appointment at each annual general meeting
Section 149(1) Company to have Board of Directors. A maximum limit of 15 directors is imposed for the Board unless approved by a special resolution in AGM.
Section 149(3) Company to have Board of Directors. Every company shall have at least 1 director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
Section 174 Quorum for meetings of Board Participation of directors through video conferencing or by other audio visual means is recognized for the purpose of quorum.
Section 185 Loan to directors  No Company shall directly or indirectly make any loan including book debt or give any guarantee or provide any security to its directors or to any persons in whom the director is interested. However, this provision shall not be applicable to managing director / whole time director subject to conditions, etc.
Sec 186 Inter-Corporate loans / investment  Rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. Further, exemption to Private companies from restrictions /conditions contained under section 372A of the exiting Companies Act, 1956 is now done away with. Hence, private companies shall be required to be bound by the above restrictions (i.e., private companies may not be able to grant interest free loans).
Section 232 Merger of listed Company with unlisted Company  Under existing provisions of the Act merger of listed company with listed company entails listing of the unlisted company. However under the new provisions the unlisted company has the option to continue as an unlisted company subject to payment of cash to existing shareholders of listed transferor company in accordance with determined valuation.
Section 233 Merger and amalgamation of certain companies Concept of fast track merger without the requirement of a Court Process introduced to facilitate merger between 2 or more Small Companies or between holding Company and its wholly owned subsidiary.
Section 234 Merger of Indian Company with Foreign Company  –  Indian Company can be merged with Foreign Company or vice versa with prior approval of RBI
Chapter XI Directors  (a)  One of the directors of the company shall be a person who has stayed in  India  for 182 days or more; (b) Maximum no. of directors in a company increased from 12 to 15 which can be increased further by special resolution; (c) Maximum no. of directorship increased from 15 to 20 (with maximum 10 public companies)
Chapter XXVII National Company Law Tribunal and National Company Law Appellate Tribunal – Constitution of a National Company Law Tribunal and National Company Law Appellate Tribunal consisiting of combination of technical and judicial members
** Limitations of the above
This is only a summarized version of provisions

Highlights of Company Bill 2012- passed in Lok Sabha

After a long wait –  

Companies Bill, 2008 became Companies Bill, 2009 and then Companies Bill, 2011. Based on Parliamentary Standing Committee’s recommendations, it was again amended and finally now we have Companies Bill, 2012 – Passed in Lok Sabha on 18th Dec 2012 at 10:46 PM

The Companies Bill, 2012 has been passed by the Lok Sabha on 18 December 2012 and introduced in Rajya Sabha. After receiving Rajya Sabha’s and President of India’s assent it will get enacted and will replace the existing statute for regulation of companies in the country, viz. the Companies Act, 1956.

The final version of the Companies Bill 2012 that was passed by Lok Sabha is yet to be public. However, based on the existing Companies Bill which was placed before the Lok Sabha and yesterday’s PIB Press release, following are the Salient features of the Bill and the press release:

  1. Maximum number of members in a Private company – Maximum number of members in a Private Company increased from 50 to 200. Further, the concept of One Person Company has also been introduced.
  2. Small Companies – Concept of small companies with various relaxations in terms of reporting requirement, board meetings and procedure for mergers/ amalgamations have been introduced. Small Companies have been defined to mean a Company, other than a public Company – (a) having paid-up share capital not exceed fifty lakh rupees or such amount, not exceeding rupees five crores, as may be prescribed; (b) Having turnover not exceeding rupees two crores or such amount, not exceeding rupees twenty crores, as may be prescribed, as per its last profit and loss account. 
  3. Annual Return – Substantial additional information is required to be given in the Annual Return of a company. Further, in case of a listed company, even if the Annual Return is signed by the Company Secretary in employment of the Company, it is further required to be signed by the Company Secretary in Whole time 
  4. Auditor (Clause 139) – Auditor appointed shall continue to hold office up till the conclusion of 6th meeting. Also, in case of listed companies and certain other class of companies as may be prescribed, compulsory rotation of individual auditors in every five years and of audit firm every 10 years has been provided.Limited Liability Partnership is allowed to be appointed as auditor.
  5. Financial Year – Financial Year of any Company can end only on March 31 and only exception is for companies, which are holding / subsidiary of a foreign entity requiring consolidation outside India, can have a different financial year with the approval of Tribunal.
  6. National Company Law Tribunal and National Company Law Appellate Tribunal – The bill provides for constitution of a National Company Law Tribunal and National Company Law Appellate Tribunal consisting of combination of technical and judicial members
  7. Dividends (Clause 123) – Mandatory transfer of profits to reserves for dividend declaration out of profits seems to have been done away with. Further, declaration of interim dividend can be out of surplus profits or out of current year’s profits. However, in case the Company has incurred loss up to preceding quarter during the year, the interim dividend cannot be declared out at a rate higher than the average dividend declared by the Company during immediately preceding 3 financial years.
  8. Inter-Corporate loans / investment (Clause 186) – Rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. Further, exemption to Private companies from restrictions /conditions contained under section 372A of the exiting Companies Act, 1956 is now done away with. Hence, private companies shall be required to be bound by the above restrictions (i.e., private companies may not be able to grant interest free loans).
  9. Buyback (Clause 68) – Time gap between 2 buy-backs of an unlisted company shall be minimum of 1 year whether approved by board of directors or shareholders.
  10. Concept of Fast Track Merger introduced (Clause 233) – Concept of fast track merger without the requirement of a Court Process introduced to facilitate merger between 2 or more “Small Companies” or between holding Company and its wholly owned subsidiary.
  11. Merger of Indian Company with Foreign Company (Clause 234) – Indian company can be merged with foreign Company or vice-versa with prior approval of RBI.
  12. Merger of listed Company with unlisted Company (Clause 232) – Under existing provisions of the Act, merger of listed company with unlisted company entails listing of the unlisted company. However, under the Bill, the unlisted company has an option to continue as unlisted company subject to payment of cash to existing shareholders of listed transferor company in accordance with determined valuation.
  13. Further issue of Capital (Clause 62) – Provisions relating to further issue of capital applicable to all companies. Accordingly, any shares have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution dealt in next point).
  14. Issue of differential equity shares (Clause 43) – Issue of equity shares with differential rights would have to be in accordance with such rules as may be prescribed. This has been made applicable to even private companies now.
  15. Preferential issue of shares (Clause 62) – Pricing of a Preferential Issue of shares by a company to be determined by a registered valuer. Conditions may be prescribed in rules for preferential issue by companies.
  16. Concept of Corporate Social Responsibility (‘CSR’) introduced (Clause 135) – Board shall ensure to spend 2% of average profits of last 3 years on CSR. Applicable to Companies having net-worth of Rs. 500 cr or more or Turnover of Rs. 1,000 cr or more or net profit of Rs. 5 cr or more. Company also required to constitute CSR committee.
  17. Consolidation of financial statements (Clause 129) – Consolidation of financial statements mandatory in case a Company has one or more subsidiaries
  18. Directors (Chapter XI) – (a) One of the directors of the company shall be a person who has stayed in India for 182 days or more; (b) Maximum no. of directors in a company increased from 12 to 15 which can be increased further by special resolution; (c) Maximum no. of directorship increased from 15 to 20 (with maximum 10 public companies)
  19. Issue of Preference shares beyond 20 years (Clause 55) – For infrastructural projects, preference shares can be issued for a period exceeding 20 years.
  20. Loan to directors (Clause 185) – No Company shall directly or indirectly make any loan including book debt or give any guarantee or provide any security to its directors or to any persons in whom the director is interested. However, this provision shall not be applicable to managing director / whole time director subject to conditions, etc.
  21. Independent director (Clause 149) – Concept of independent director introduced. Applicable to listed companies and CSR committee.

 

Let’s hope that the Bill receives assent from the Rajya Sabha and the President of India and get’s enacted. Once the Bill becomes an Act, the Central Government will notify a date/s for coming into force of the Act, and only from such date / dates the provisions of the Act will come into force.

Note on FDI allowed in LLP

The Cabinet Committee of Economic Affairs (CCEA) has today approved Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) firms. The FDI in LLP has been permitted subject to the following conditions:
-FDI upto 100% will be permitted with the prior approval of Foreign Investment Promotion Board (FIPB) for the sectors falling under 100% automatic route.
-Foreign investment shall not be allowed in LLP engaged in the following:

  • Where FDI-linked performance related condition is attached (minimum capitalization, lock-in period);
  • Sectors which are prohibited;
  • Sectors which are restricted with caps; and
  • Sectors which are under the FIPB approval route.

-LLPs having foreign investment would not be eligible to make any downstream investment.
-Indian companies having foreign investments would be eligible to make downstream investment in LLPs, only if the Indian company as well as LLP are operating in 100% automatic route sector and there are no FDI linked performance related conditions.
-Contribution in the capital of the LLP should be through inward remittance or by debit to NRE/FCNR account of the designated partner
-Investment by FIIs and FVCI in LLP is not permitted, even LLP would not be eligible to raise External Commercial Borrowing.
-In case LLP has a body corporate as a partner, companies registered under the Companies Act can only become partner in LLP.
-The definition of “persons resident in India” as contained in FEMA would be applicable instead of that given in the LLP Act.
-Conversion of a company into LLP would be allowed with prior FIPB approval
– The partners would be responsible for compliance and would be held liable for all penalties for any contravention
As the proposal has been approved by the CCEA, the Department of Policy & Promotion will introduce the policy changes in the form of a Press Note.

Compliance under SEBI Insider Trading Regulations

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations states that an insider shall not-

  • on his behalf or on behalf of any other person deal in securities or
  • communicate such information to any other person, who while in possession of such information shall not deal in securities.

“Insider means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or who has received or has had access to such unpublished price sensitive information”

The requirements under the SEBI Insider Trading regulations are as follows:

  • The Company shall frame a code of internal procedures and conduct as near thereto the Model Code specified in Schedule I of the Regulations without diluting it in any manner and ensure compliance of the same.
  • The Company shall abide by the Code of Corporate Disclosure Practices as specified in Schedule II of the Regulations.
  • The Company shall adopt appropriate mechanisms and procedures to enforce the codes.

Initial Disclosures

  1. Disclosure of interest or holding by substantial shareholders: Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company [in Form A], the number of shares or voting rights held by such person, on becoming such holder, within 2 working days of:—
    • the receipt of intimation of allotment of shares; or
    • the acquisition of shares or voting rights, as the case may be
  2. Disclosure of interest or holding by directors and officers: Any person who is a director or officer of a listed company, shall disclose to the company [in Form B], the number of shares or voting rights held by such person and positions taken in derivatives by such person and his dependents, within 2 working days of becoming a director or officer of the company.
  3. Continual disclosure

  4. Substantial shareholder: Any person who holds more than 5% shares for voting rights in any listed company shall disclose to the company [in Form C]
    • the number of shares or voting rights held and
    • change in shareholding or voting rights, even if such change results in shareholding falling below 5%,

    if there has been change in such holdings from the last disclosure made as initial disclosure or continual disclosure and such change exceeds 2% of total shareholding or voting rights in the company.

  5. Directors and officers: Any person who is a director or officer of a listed company, shall disclose to the company [in Form D], the total number of shares or .voting rights held and change in shareholding or voting rights, if there has been a change in such holdings of such person and his dependents (as defined by the company) from the last disclosure, and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower.
  6. The disclosure mentioned under continual disclosure shall be made within 2 working days of:
    • the receipts of intimation of allotment of shares, or
    • the acquisition or sale of shares or voting rights, as the case may be.
  7. Disclosure by company to stock exchanges

  8. Every listed company, within two days of receipt, shall disclose to all stock exchanges on which the company is listed, the information received as initial and continual disclosures by substantial shareholders, directors and officers [in the respective formats specified in Schedule III of the Regulations]
  9. Trading window

  10. The company shall specify a trading period, to be called “trading window”, for trading in the company’s securities. The trading window shall be closed during the time the price sensitive information is unpublished. When the trading window is closed, the employees/directors shall not trade in the company’s securities in such period.
    All directors/officers/designated employees of the company shall conduct all their dealings in the securities of the Company only in a valid trading window and shall not deal in any transaction involving the purchase or sale of the company’s securities during the periods when trading window is closed or during any other period as may be specified by the Company from time to time
    The Company shall decide the date of commencement of ‘closing of trading window’ which shall be opened, 24 hours after the price sensitive information is made public.
    The trading window shall be, inter alia, closed at the time:—

    • Declaration of financial results (quarterly, half-yearly and annually).
    • Declaration of dividends (interim and final).
    • Issue of securities by way of public/rights/bonus etc.
    • Any major expansion plans or execution of new projects.
    • Amalgamation, mergers, takeovers and buy-back.
    • Disposal of whole or substantially whole of the undertaking.
    • Any changes in policies, plans or operations of the company.
  11. Pre-clearance of trades

  12. All directors/officers/designated employees of the company who intend to deal in the securities of the company (above a minimum threshold limit to be decided by the company) should pre-clear the transaction by making an application to the Compliance Officer providing the details as prescribed in the Model Code
  13. Reporting Requirements for transactions in securities

  14. All directors/officers/designated employees of the listed company shall be required to forward the following details of their securities transactions including the statement of dependent family members (as defined by the company in the Model Code) to the Compliance Officer:
    • all holdings in securities of that company by directors/officers/designated employees at the time of joining the company;
    • Periodic statement of any transactions in securities (the periodicity of reporting may be defined by the company. The company may also be free to decide whether reporting is required for trades where pre-clearance is also required); and
    • Annual statement of all holdings in securities.

Consequences of Non compliance

Liability under Sections 11, 11B, 11D, Chapter VIA and Section 24 of the Act.”

Resignation of a Director

The Companies Act does not have any provision governing the resignation of a Director. Section 284 of the Act provides for removal of a Director in a General Meeting, whereas Section 283 deals with vacation of office in certain specific circumstances. Nothing has been mentioned in the statute with reference to resignation of a Director or its acceptance by the Board of Directors; however a Director is merely an agent and may determine his agency.

In absence of any specific provision in the statute, the resignation of a Director should be dealt with reference to Articles of Association of the Company. Hence subject to the articles of association, resignation of a Director is effective from the date of communication of his intention to the Company or the Board of Directors of the Company.

Articles containing provision for resignation of Director

If the articles contains a provision for resignation of Director, then the said procedure has to be complied accordingly. This contention is further supported by the following case law: In Pandurang Camotim Sancoalcar v. Suresft Prabhakar Prabhu [2003] 53 CLA 265, the Bombay High court has held that since the articles of association of the company in the said case provided how it should be dealt with, the immediate effect of resignation was that the person resigning would cease to be a director, without having to wait for ‘its acceptance by the Board of directors’.

Articles not containing provision for resignation of Director

In the absence of the any provision in memorandum or articles, it is settled that the resignation of Director is effective immediately when the intention to resign is made clear to the Company.

Conclusion

In Abdul Huq v. Katpadi Industries Ltd. AIR 1960 Mad 482, 483, it was held that
“The net result of this analysis is that a director, who has submitted his resignation, will be deemed to have resigned from the date of his resignation, without prejudice, of course to his liabilities and obligation which has occurred up to that date and which he cannot evade by severing his connection with the company.”

The filing of necessary forms with the Registrar of Companies with respect to the resignation of the Director has to be done by the Company as required under Section 303(2).

Disqualification of Directors u/s 274(1)(g)

The provision of Section 274(1) (g) was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13-12-2000. The provision states as follows:

Provision:

A person shall not be capable of being appointed director of a company, if such person is already a director of a public company which-

(A)Has not filed the annual accounts and¹ annual returns for any continuous three financial years commencing on and after 1st day of April 1999;

(B)Has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more.

Provided that such person shall not be eligible to be appointed as a director of any other² public company for a period of five years from the date on which such public company, in which he is a director failed to file annual accounts and annual return under sub clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in sub clause (B)

Rules

On October 21, 2003 the Central Government made the a set of rules to carry out the purpose of clause (g) of sub-section (1) of section 274 of the said Act, namely Companies (Disqualification of Directors under section 274(1)(g) of the Companies Act, 1956) Rules, 2003

Guidance Note

The Institute of Chartered Accountants of India came out with a guidance note on disqualification of Directors in the month March 2005.

Notes

  • ¹Under sub clause (A), disqualification attracts when both annual account and annual return are not filed in due time for consecutive period of three years, i.e. if either of them is filed within due time in any one year in a block of three years then no disqualification attracts.
  • All the directors who have been directors in the relevant year, from the due date to the expiry of one year after the due date, will be disqualified
  • The provision and rules shall also apply to the reappointment of a director
  • ²The Rules have made distinction between ‘disqualifying company’ and ‘appointing company’. A Director is disqualified from being appointed or reappointed in appointing company but he can be reappointed in disqualifying company.
  • The provision of Section 274(1)(g) does not apply to Government Company.
  • Statutory Auditors responsibility to report the disqualification of Directors u/s 227(3)(f)
  • Company to intimate disqualification of Director in Form DD-B to Registrar of Companies

For any detailed opinion in the matter, please contact neha@nehasinghi.com or call at +91-33-40083385