Whether the provisions of Section 167(1)(a) of the Act are applicable in respect to offices of Directors, who have incurred the disqualification under Section 164(2) of the Act?

The Director would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company.

A plain reading of Clause (a) of Section 167 (1) of the Act indicates that a Director would demit office if he incurs the disqualification under Section 164 of the Act.

The conditions as set out in sub- section (1) of Section 164, which disqualify a person from being appointed as a Director are directly attributable to him/her. In contrast to the above, the provisions of sub-section (2) of Section 164 of the Act stipulates the defaults committed by a defaulting company, which results in the directors of that company incurring the disqualification being vicariously responsible for such defaults. It is possible that a particular director may not be, in fact, directly responsible for such defaults; nonetheless, he is disqualified to act as a director on account of being responsible for the affairs of the defaulting company by virtue of his holding the office of a director.

A person who has incurred the disqualification under section 164 (1) of the Act is not eligible for being appointed as a director of any company. Any person who has incurred the disqualification under sub-section (2) of section 164 of the Act is not eligible for being re- appointed as a director of the company that has defaulted in terms of clause (a) and (b) of subs-section (2) of section 164 of the Act. He is also disqualified for being appointed to any other company for a period of five years. In terms of Section 164, a person who has incurred the disqualification is not eligible for appointment as a director.

The disqualification under Sub-Section (2) of Section 164 is applicable only to a person who is or was a director. Such disqualification thus, operates on his reappointment in the defaulting company or for an appointment in any other company. A plain reading of Sub-Section (2) of Section 164 indicates that his functioning as a director in companies, in which he holds such office at the time of incurring the disqualification, is not affected. Such disqualification triggers in respect of appointment in the future after he has incurred the disqualification.

There is no difficulty in the operation of Section 164 of the Act on a standalone basis. The controversy, essentially, arises in the context of clause (a) of Section 167 (1) of the Act. Insofar as the conditions that disqualify a person disqualified from acting as a director under Section 164(1) are concerned, there is no difficulty in reading such conditions to also result in the particular director demitting office in terms of section 167(1)(a) of the Act. This is so because the conditions as stipulated in section 164(1) of the Act are attributable to the individual and not to all directors of a company.

The problem, essentially, arises in implementing the provisions of Section 167(1) (a) in respect of directors who have incurred disqualification under Section 164(2) of the Act. This is so because the disqualification incurred in Sub-Section (2) are not directly on account of reasons attributable to an individual director but on account of defaults committed by a company. Any person who is or has been a director of a company, which commits the defaults as set out in clauses (a) and (b) of Sub-Section (2) of Section 164 of the Act, incurs the disqualification for being appointed/reappointed as a director. If the provisions of Section 167(1)(a) of the Act are applied in such a case, all directors of such a defaulting company would demit their office as directors immediately on incurring the disqualification under section 164(2) of the Act. In addition, such directors would also cease to be directors of any other company in which they are directors. This results in an absurd situation where a defaulting company can never appoint a director. This is so because as soon as the person – who is otherwise eligible for being appointed as a director and has not incurred any disqualification either under sub-section (1) or (2) of Section 164 of the Act – is appointed as a director of a company that has committed the defaults as stipulated in clauses (a) or (b) of Section 164(2) of the Act; he would immediately incur the said disqualification and consequently demit office of not only that company but any other company in which he is a director.

Based on these contentions, the Honourable Judge ordered the Directors would not demit their office on account of disqualifications incurred under Section 164 (2) of the Act by virtue of Section 167(1)(a) of the Act prior to the statutory amendments introduced with effect from 07.05.2018. However, if they suffer any of the disqualifications under Section 164(2) on or after 07.05.2018, the clear implication of the provisos to Section 164(2) and 167(1)(a) of the Act are that they would demit their office in all companies other than the defaulting company.

(Link : https://indiankanoon.org/doc/183261464/)