Directors’ Personal Disqualifications Declaration

As a legal entity, a company relies on natural persons, notably its Board of Directors, to represent it and oversee daily operations. The Board of Directors, elected by shareholders, acts as their representatives and plays a pivotal role in shaping the company’s direction and strategy, managing its affairs, and ensuring that it operates in the shareholders’ best interests.

The Companies Act 2013 mandates that the Directors of a company must make various declarations and disclosures concerning their interests to the company and its shareholders, as the company’s success and sustainability hinge on the effective functioning of the board. The amendment has obligated directors to file DIR-8 to inform directors of personal disqualifications.

The Companies Act 2013 includes key provisions regarding disclosures and declarations aimed at promoting transparency and accountability within corporate governance. One such provision, Section 149(7), focuses on Independent Directors who are required to declare their independence during the appointment process, ensuring an impartial viewpoint free from connections that might compromise objectivity. Another critical aspect is outlined in Section 167(1)(c) and (d), specifying conditions leading to the vacation of a Director’s office, such as disqualification by a court order or a declaration of unsound mind. These provisions serve to maintain the integrity of directorial roles.

Additionally, Section 184 and Rule 9(1) mandate Directors to disclose any interests they have in contracts, agreements, or arrangements with the company. This disclosure requirement aims to foster transparency, ensuring that stakeholders are fully informed about the nature of directors’ interests in the company’s dealings.

Furthermore, Section 189(2) emphasises the maintenance of a register of contracts and arrangements in which Directors have a vested interest. This register serves as a tool for keeping shareholders and other stakeholders informed about potential conflicts of interest that Directors may have with the company’s business transactions, enhancing overall corporate governance.

Directors’ Personal Disqualifications Disclosure and Declarations: Their Significance and Contents

Directors’  personal disqualification declarations and disclosures hold significant importance in corporate governance. These statements, made by Directors of a Company, shed light on their personal circumstances and interests, especially their holdings in other corporate entities, partnerships, or associations that might influence their capacity to act in the best interests of the Company, i.e., all matters of directors’ personal disqualifications. These declarations play a vital role in ensuring that Directors maintain transparency and accountability to a wide spectrum of stakeholders, including shareholders, regulatory bodies, and the general public.

When an individual is appointed as a director, they are required to provide the following information to the Company and its shareholders:

1. Consent to Act as Director (Form DIR-2):

Before taking up the role, the individual must submit their consent to act as a director in Form DIR-2. This form signifies their willingness to serve in this capacity.

2. Disclosure of Disqualification (Form DIR-8):

Directors are obligated to disclose any disqualifications that might prevent them from being appointed as a director, including directors’ personal disqualifications. This information is submitted through Form DIR-8.

3. Details of Interests (Form MBP 1):

Directors must furnish details regarding their involvement as a director, partner, or member in other entities. This disclosure, captured in Form MBP 1, is crucial for understanding potential conflicts of interest.

4. Declaration of Independence:

Those aspiring to serve as Independent Directors must provide a declaration of their independence. Independent Directors are expected to offer impartial guidance, and this declaration affirms their ability to do so.

5. Debarment Declaration:

If an individual is seeking to be appointed as a director of a Listed Company, they must declare that they are not debarred from holding such a position by SEBI or any other relevant authority. This declaration ensures the director’s eligibility for the role in a publicly traded company.

In sum, these disclosure and declaration requirements promote transparency and act as safeguards to prevent potential conflicts of interest and maintain the integrity of directorships. They enable stakeholders to make informed decisions and ensure a company’s board’s smooth and ethical functioning.

The Importance of Director’s Declarations

Director’s declarations are integral for various compelling reasons. They empower shareholders with vital information concerning potential conflicts of interest, whether financial or otherwise, enabling them to make informed decisions regarding the company’s governance. These declarations act as a fundamental safeguard against unethical behaviour, ensuring the company can identify and mitigate situations where a director may exploit their position for personal gain. Moreover, the openness and transparency exhibited by Directors in sharing their personal circumstances and interests serve to cultivate trust and confidence in the company, demonstrating its unwavering commitment to ethical and responsible governance. This transparency, in turn, nurtures a sense of trust among shareholders, stakeholders, and the wider public in the integrity of the organisation’s leadership.

Recent Amendment to Section 164: Expanded Reporting Obligations for Director Disqualifications   Section 164 of the Companies Act, 2013, addresses the disqualification for the appointment of Directors. Until recently, a person would be ineligible for appointment as a Director if they fell under Section 164, sub-sections 1 and 2. In the past, compliance involved filing Form DIR-8 for disqualifications as specified in sub-section 2 of Section 164, as per Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. However, a notable change has been introduced by the Ministry of Corporate Affairs (MCA) through a recent amendment, effective from January 23, 2023. This amendment, encapsulated in Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014, expands the reporting requirements. Now, in addition to disqualifications under sub-section 2 of Section 164, the requirement to file Form DIR-8 has been extended to include disqualifications under both sub-section 1 and 2 of Section 164, i.e., amounting to disclose directors’ personal disqualifications.

Section 164(1) of the Companies Act 2013 specifies instances of directors’ personal disqualifications, where he is ineligible to be appointed as a director of a company, which includes:

1. Being declared of unsound mind by a competent court.
2. Being an undischarged insolvent.
3. Having a pending application for insolvency adjudication.
4. Having a conviction by a court for an offence, with a minimum prison sentence of at least six months, whether related to moral turpitude or not.
5. Failing to pay calls related to company shares, either individually or jointly with others, with a lapse of six months from the last date for call payment.
6. Having a conviction for an offence related to transactions with related parties under section 188 of the Companies Act, 2013, within the previous five years.
7. Failing to obtain a Director Identification Number (DIN) as mandated by section 152(3) of the Companies Act, 2013.
8. Not complying with the provisions of section 165(1) regarding restrictions on the number of directorships. This clause was added through the Companies (Amendment) Act, 2019, effective from November 2, 2018.
9. Being disqualified as a director by a court or the National Company Law Tribunal (NCLT) with the disqualification order currently in force.

Rule 14 of The Companies (Appointment and Qualification of Directors) Rules, 2014 – Post Amendment:

Following the recent amendment, Rule 14 now mandates that every director must notify the concerned company if they have any disqualification under either sub-section (1) i.e., directors’ personal disqualifications or sub-section (2) of section 164, using Form DIR-8, before their appointment or re-appointment.

Upon receiving the information in Form DIR-8, the company is required to submit Form DIR-9 to the Registrar within thirty days of receiving such notification.

It’s worth noting that the term “sub-section (1)” has been added to this rule, with effect from the date mentioned above.

Following the amendment, if a director discloses their disqualification under either sub-section (1) or sub-section (2) of section 164 by submitting Form DIR-8 before their appointment or re-appointment, the company must ensure that Form DIR-9 is filed with the Registrar within thirty days of receiving such disclosure. This procedure enhances the reporting and compliance requirements related to directors’ personal disqualifications as well.

Changes in Forms under DIR Rules

DIR-3 – Application for allotment of DIN before appointment in existing Company/LLP:

Introduction of linkage with Digilocker.

In the particulars of the address, include the jurisdiction of the police station.

DIR-5 – Application for surrender of DIN:

Addition of new particulars: Date of Birth, PAN, Date of Death, Declaration of Unsound Mind/Adjudged as Insolvent, and details of the applicant if applying in place of a director.

DIR-6 – Intimation of change in particulars of director/DP to be given to Central Government:

Removal of fields related to changing mobile and email addresses.

In cases of a change of address, the form now requires mentioning the jurisdiction of the police station.

DIR-11 – Notice of resignation of director to Registrar:

Introduction of a mandatory professional certification.

DIR-12 – Particulars of appointment of directors and KMP and changes among them:

Addition of the option to select the purpose of DIR-12 as ‘appointment due to disqualification of all existing directors’ or ‘appointment by liquidator/IRP/RP’ alongside the existing purposes.

The requirement is to mention the SRN of INC-28 and attach the order of NCLT, if applicable.

DIR-2 no longer needs to be attached separately; it is to be certified within the DIR-12 form by the director.

Consequences of Failing to Disclose Director’s Interests

The failure to disclose a director’s personal disqualifications or interests can have serious repercussions, impacting both the individuals involved and the companies they serve. Here are the key consequences:

1. Vacation of Office of Director:

Directors who incur disqualifications outlined in section 164 of the Companies Act, 2013 may be compelled to vacate their office due to directors’ personal disqualifications, affecting their ability to continue serving as directors.

2. Levy of Penalty:

Directors who contravene section 184 of the Companies Act 2013 by not disclosing their interests can face a penalty of Rs. 1 lakh, imposing a financial burden and potential legal consequences.

3. Directors’ Obligations:

Section 166 of the Companies Act 2013 mandates that directors must always act in the company’s best interests, avoiding situations where their personal interests conflict with those of the company. Violating this provision may result in penalties ranging from Rs. 1 lakh to Rs. 5 lakhs, emphasisingthe importance of maintaining ethical and transparent corporate governance.

4. Register of Contracts or Arrangements in which Directors are Interested:

Every company is required to maintain a register of contracts and arrangements in which directors have vested interests. Failing to adhere to this obligation could lead to a penalty of Rs. 25,000 for every director, further underscoring the significance of disclosure and compliance.

In essence, non-disclosure of directors’ personal disqualifications or interests exposes individuals to disqualification and financial penalties and undermines the principles of responsible corporate governance, transparency, and the paramount obligation of directors to act in the best interests of the company and its stakeholders.

Conclusion

The amendment to Section 164 of the Companies Act 2013 emphasises the importance of proactive disclosure and action regarding directors’ personal disqualifications. When a director informs the company about their disqualification under sub-section (1), i.e., directors’ personal disqualifications or (2) of Section 164 using Form DIR-8 before their appointment or re-appointment, the company is now obligated to file Form DIR-9 with the Registrar within 30 days of receiving this information. This amendment ensures that companies are informed of directors’ personal disqualifications ahead of appointments or re-appointments, enabling them to take necessary and timely actions. Failure to adhere to this provision can result in penalties and legal consequences.

Form DIR-9 serves as a critical tool for maintaining transparency in corporate governance. It contains details of all directors of the company and is required to be filed along with the company’s annual return. Its purpose is to inform the Registrar about directors’ personal disqualifications so that appropriate actions can be taken.

Frequently Asked Questions (FAQs)

Read Our Article: Section 167 Vacation of Office for Directors