This article is written by Harsha Aswani, pursuing Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).

Introduction

A company is clothed with an independent personality that is distinct from that of its members. However, being an artificial person, a company cannot act on its own, and is, therefore, run and managed by an association of persons known as the Board of Directors. The directors are the brain of the company, who are responsible for:

• Achieving the objectives enshrined under the Memorandum of Association;
• Formulating policies; and 
• Establishing an organizational setup to implement the policies framed, in line with the objects of the company. 

The Companies Act, 2013 read with Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the appointment of directors, their disqualification, vacation, removal, DIN, etc. 

Section 164 and 167 of the Companies Act, 2013 penalize the directors for non-compliance of certain provisions by disqualifying and vacating their offices, respectively, and Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 enlists the grounds of Cancelling, Surrendering and Deactivation of DIN of directors. Rule 11 empowers Central Government, Registrar Director or any officer authorized by Registrar of Director to cancel or deactivate the DIN of directors in certain circumstances, none of which points to the grounds of disqualification under Section 164 or vacation under Section 167, as the case may be. However, despite this, in the year 2017, the Registrar of Companies, on the directions of the Ministry of Corporate Affairs, began identifying the directors who have been disqualified under Section 164(2) of the Companies Act, 2013 and published the list of the same, followed by deactivating their respective DINs. Agitated, the directors moved to the Courts, challenging the validity of such a move on the part of ROC.

This article shall first explain the grounds for disqualification and vacation of directors, the allotment of DIN and the reasons for its deactivation. It shall then dive into the main question of whether the Registrar of Companies (ROC) has the power to deactivate the DIN of disqualified directors of companies in India and the related judicial pronouncements. 

“Director” under the Companies Act

The term “Director” is not exhaustively defined under the Companies Act, 2013. Section 2(34) simply says that a “director” means a director appointed to the Board of a company.

Section 2(10) of the Companies Act, 2013 defines “Board of Directors” or “Board”, in relation to a company, to mean the collective body of the directors of the company. 

Further, section 149 of the Companies Act mandates the Board of Directors of every company to consist of individuals only and prohibits the appointment of a body corporate, association or firm to be a director.

Thus, a director under the Companies Act is an individual appointed to the Board of directors of the company, which consists of two or more such individuals forming an association, and collectively controlling, guiding and managing the affairs of the company. 

Director Identification Number (DIN)

DIN or Director Identification Number is a unique number allotted, by the Central Government, to every individual intending to be a director in any company, whether new or existing, for the purpose of his identification as a director of a company. The DIN so allotted by the Central Government to an individual is for his or her lifetime, and the same shall not be allotted to any other individual. A person is even forbidden to apply or obtain another identification number, once the Central Government has allotted him/her the DIN under Section 154 of the Companies Act.

Application for allotment of DIN

In the case of a new company, the application for the request of allotment of DIN for the proposed director can be made at the time of incorporation of such company only through the SPICe+ (INC 32) Form, and names of a maximum of three directors can be given during such incorporation. 

Section 153 of the Companies Act mandates the filing of an application for allotment of Director Identification Number (DIN) by every individual who intends to be appointed as a director in any existing company. Rule 9 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes the detailed procedure on this behalf. According to Rule 9, any person intending to be a director of an existing company must make an electronic application in Form DIR-3 to the Central Government, along with payment of prescribed fees as provided under the Companies (Registration Offices and Fees) Rules, 2014. During the filing of Form DIR-3, the applicant has to attach the following set of documents electronically:

1. Photograph;
2. Attested proof of Identity;
3. Attested proof of Residence;
4. Board Resolution proposing his/her appointment as director in an existing company;
5. Specimen signature duly verified.

Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital Signature Certificate, and shall be verified either by:

1. A Company Secretary in full-time employment of the existing company; or 
2. The Managing Director of the existing company; or
3. The CEO or CFO of the existing company,

in which the applicant is intended to be appointed as the director.

In case the name of the person does not have the last name, then his or her father’s or grandfather’s surname shall be mentioned in the last name along with the declaration in Form No. DIR-3A.

Cancellation or surrender or deactivation of DIN

Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 empowers the following authorities to cancel or deactivate the DIN, upon being satisfying itself by verifying the particulars and documentary proof attached with the application received along with the prescribed fees:

1. Central Government; or
2. Regional Director, in case of Northern Region; or
3. Any officer authorized by the Regional Director.

Rule 11 also lays down the following grounds on which such Competent Authority may cancel or deactivate the DIN of the Director:

1. The DIN is found to be duplicated in respect of the same person. Provided the data related to both the DIN shall be merged with the validly retained number;
2. The DIN was obtained in a wrongful manner by fraudulent means;
3. Upon the death of the concerned individual;
4. The competent court declared the concerned individual as a person of unsound mind;
5. The concerned individual has been adjudicated an insolvent;

In case of DIN being obtained in a wrongful manner by fraudulent means, it is the duty of the competent authority to follow the principles of natural justice and give the concerned individual an opportunity of being heard, prior to cancelling or deactivating his/her DIN.

The competent authority further has an additional power to deactivate the DIN in case the concerned individual fails to intimate his particulars in e-Form DIR-3-KYC or the web service DIR-3-KYC-WEB, within the stipulated time as mandated by Rule 12A. The deactivated DIN shall be reactivated only after filing e-Form DIR-3-KYC along with payment of prescribed fees.

Rule 11 also allows any director to surrender his/her DIN by way of an application made in Form DIR-5, to the Central Government, along with the declaration that:

1. He/she has never been appointed as a director in any company, and
2. The said DIN has never been used for filing any document with any authority.

The Central Government, after verifying the e-records, shall cancel or deactivate the DIN.

Disqualification and vacation of Directors

Disqualification for appointment of Director

Section 164 of the Companies Act, 2013 prescribes three broad categories on the basis of which a person shall be disqualified from being appointed as a director of a company, whether public or private:

1. Disqualification in Individual Capacity,
2. Disqualification by reason of default of the Company in which he/she is director,
3. Additional grounds of disqualification.

Earlier, Section 274 of the 1956 Act dealt with the disqualification of directors, however, it applied only to public companies. By including private companies, the legislature has increased the scope of section 164, to target shell companies and reduce the menace of black money or money laundering.

Disqualification in an individual capacity

Section 164(1) lays down the following grounds on which a person shall not be eligible for appointment as a director:

1. He is of unsound mind, and stands so declared by a competent court;
2. He is an undischarged insolvent;
3. He has applied to be adjudicated as an insolvent, and his application is pending;
4. He has been convicted by a court of any offence involving moral turpitude or otherwise, and has been sentenced in respect thereof to:

1. Imprisonment for at least six months and a period of five years has not elapsed from the date of expiry of the sentence; or
2. Imprisonment for at least seven years or more.

5. A court or tribunal has passed an order disqualifying him for appointment as a director, and the order is in force;
6. He has defaulted in payment of calls in respect of any shares of the company held by him, either alone or jointly with others, and a period of six months has elapsed from the last day fixed for payment of the call;
7. He has been convicted of the offence under Section 188 of the Companies Act, dealing with Related Party transactions, at any time during the last preceding five years;
8. He has not complied with Section 152(3) of the Companies Act;
9. He has not complied with Section 165(1) of the Companies Act, by accepting directorships exceeding the maximum number, i.e., exceeding twenty directorships;

Disqualification by reason of default of the company

Section 164(2) lists down two grounds when a person shall be temporarily disqualified from being re-appointed as a director of the company in which he is already a director, or he shall not be eligible to be appointed as a director in another company:

1. The company has failed to file financial statements or annual returns for three financial years consecutively; or
2. The company has not repaid the deposits accepted, or has failed to pay interests thereon, or has not redeemed any debentures on the due date or not paid interest thereon or not paid any dividend declared, and such failure to pay or redeem continues for one year or more.

Such disqualification shall last only for a period of five years from the date of the above-mentioned defaults. 

Also, proviso to Section 164(2) prohibits the disqualification of such director for a period of six months from the date of appointment, in case the company is in default of clause (a) or (b) above. This proviso attempts to provide a cool-down period to the new director, for six months, who has been appointed to make the company compliant with the provisions and rules of the Companies Law.

The company is obligated to intimate the Registrar of the failures mentioned in Section 164(2) by filing Form DIR-9. An application for removal or disqualification of a director shall also be made by the company to the Registrar by filing Form DIR-10.

Additional grounds of disqualification

Section 164(3) of the Act empowers a private company, not being a subsidiary of a public company, to provide any additional grounds of disqualification in its Article of Association if it so desires.

Vacation of office of Director

Section 167(1) of the Companies Act lays down the following grounds on which the office of a director shall become vacant if:

1. He is disqualified under Section 164;
2. He is not present in any of the meetings of the Board of Directors for twelve months, whether with or without seeking leave of absence of the Board;
3. He acts in contravention of Section 184, dealing with entering into contracts or arrangements in which such director is directly or indirectly interested;
4. He fails to disclose his interest in any contract or arrangement in which such director is directly or indirectly interested, which is in contravention of Section 184;
5. Any court or tribunal disqualifies him by way of an order;
6. He is convicted of any offence involving moral turpitude or otherwise, and has been sentenced for the same for at least six months;
7. He is removed in pursuance of the provisions of the Companies Act, 2013;
8. He ceases to hold any office or other employment in the holding, subsidiary or associate company, then he shall have to cease to be a director in that company in which he has been appointed by virtue of holding such office or other employment.

In relation to clause a, it is important to note that a director, if becomes disqualified under Section 164(2), i.e., by reason of default of the company, then his office of director shall become vacant in all the other companies, except the company which is in default under section 164(2).

For instance, if Person A is a director in Company A Ltd., Company B Ltd., and Company C Ltd., and Company A has failed to file annual returns for three consecutive financial years, then in such case, Person A’s appointment as a director shall continue to hold the office in Company A until the term for which he is appointed expires, and only after the expiry of such term, Person A shall become ineligible for re-appointment in Company A. However, from the date of such default, he shall become disqualified from being appointed as a director in the other two companies− Company B Ltd. and Company C Ltd., in the sense that such director will have to vacate the office under Section 167(1)(a), and such disqualification shall continue for five years from the date of such failure.

Section 167(3) empowers any private company to prescribe any additional grounds for the vacation of office of the director under its Articles of Associations if it so desires.

The company has to intimate the Registrar of Companies about the vacation of the office of director by filing Form DIR-12.

Incapacity of ROC to deactivate DIN of disqualified directors of companies in India

In the wake of the 2017 demonetization exercise, the Ministry of Corporate Affairs directed the Registrar of the Companies all over India to publish the lists of the directors who have been disqualified under Section 164(2) of the Companies Act, 2013 for the default in filing of the financial statements or annual returns for a consecutive period of three financial years. The move was made with the objective of curbing the formation of shell companies and the consequent act of money laundering. In the said initiative, the ROC not only published the list of 74,920 disqualified directors but also began blocking their DINs. The move did not go well with these directors, as a result of which they filed a writ petition in the Delhi HC, questioning the power of the MCA and ROC to deactivate their DINs, amongst other important issues, in pursuance of the Companies Act, 2013 read with The Companies (Appointment and Qualification of Directors) Rules, 2014.

With respect to the capacity of the ROC to deactivate the DIN of the directors’ facing disqualification under Section 164(2), the single judge of the Delhi HC, in Mukut Pathak’s Case, quashed the action taken by ROC, and ordered the re-activation of the DINs of all the directors disqualified. The rationale behind the decision of the court was:

1. Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 empowers only three authorities to cancel or deactivate the DIN− the Central Government, the Regional Director, or the officer authorized by the Regional Director. The rule nowhere empowers the Registrar of Companies (ROC) to deactivate the DIN of any directors.
2. Rule 11 lays down the grounds for the deactivation of DIN, and none of it relates to the disqualification of directors.
3. DIN is important for a person to act as Director. However, it is not important that a person having a DIN is to be appointed as a director.
4. Section 164(2) only prescribes the temporary disqualification of a director as per which such director will not only be appointed or re-appointed for five years. It does not mandate the DIN of such a director to be deactivated. 

In another incident, MCA ordered ROC to publish the list of directors who are associated with companies whose names have been “Struck off” under Section 248 of the Companies Act, 2013, and show their status as “disqualified” directors under Section 164(2) of the Companies Act. The ROC, Gujarat, along with the publication of the list, dated 12.09.2017, deactivated the DINs of the disqualified directors. The list also included names of those directors who were associated with the companies that were already dissolved prior to the publication of such a list. This implied that such companies were not obligated to file their financial statements and annual returns, and therefore, the question of disqualification of these directors under Section 164(2) does not arise. The deactivation of DINs of such directors made them unable to file their documents related to the other non-defaulting companies in which they were still holding the office of directors. Aggrieved by the action of ROC, Gujarat, multiple writ petitions were filed before the Gujarat HC, in Gaurang Balvantlal Shah’s Case, seeking the issuance of a writ in the nature of certiorari quashing and setting aside the list of directors associated with the “Struck-Off Companies” to the extent it includes the names of petitioners as disqualified directors.

The Gujarat HC, while quashing the MCA order requiring ROC to publish the list of “disqualified” directors, and subsequent deactivation of their DINs held the disqualification to be not legally tenable. This article shall not go into the question of the legal tenability of such disqualification and would restrict itself only to the issue of deactivation of DIN by the ROC. With respect to the issue of deactivation of DIN, the HC said that neither any of the provisions contained in the Companies Act give suo moto powers to the Central Government, or the Regional Director, or the officer authorized by the Regional Director to cancel or deactivate the DIN allotted to the Director, nor does any of the Rules talk about the cancellation or deactivation of DINs of the directors of the “struck-off company” or the directors who become disqualified under Section 164 of the Companies Act.

Section 155 of the Companies Act, 2013 read with Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 very specifically lists down the circumstances under which the DIN could be deactivated, and such circumstances do not include the ground of disqualification. The reason is that the DIN once allotted remains valid for the lifetime of the director, and could never be allotted to another applicant. Simply, on the basis of a single DIN, an applicant can become director of other companies, simultaneously. Thus, even if the names of any of the companies in which the concerned individual is the director is “struck-off” from the register by the ROC under Section 248 of the Companies Act, 2013, his/her DIN would still not be cancelled or deactivated as that would run counter to Rule 11.

The issue of ROC publishing the list of disqualified directors continued year on year, throughout India, with the deactivation of DINs of such disqualified directors. Again in 2019, a similar incident attracted the attention of the Allahabad HC, when 161 writ petitions were filed by the directors who were declared disqualified for five years by the ROC, Kanpur, under Section 164(2) of the Companies Act, 2013, and their DINs were yet again suspended by ROC. These petitioners sought a mandamus directing the ROC to reactivate the DINs and restore their names on the Roll of Directors.

The Allahabad HC in Jai Shankar Agrahari’s Case, arrived at a similar decision as that of the Delhi HC, with respect to the question of the power of ROC deactivating the DINs of the disqualified directors. The Court, after considering the following points, held that the ROC has no power under the relevant rules to deactivate the DIN of the directors:

1. As per Rule 10(6) of the Companies (AQD) Rules, 2014, DIN is valid for the lifetime of the applicant and shall not be allotted to any other person.
2. Rule 11 of the Companies (AQD) Rules, 2014 nowhere provides for the cancellation or deactivation of DIN upon disqualification under Section 164(2).
3. Deactivation of DIN would rather be contrary to Section 164(2) read with Section 167(1) since the concerned individual continues to hold the office of the director of the Defaulting Company.

A similar decision was given by the Telangana HC in Venkata Ramana Tadiparthi’s Case and by the Lucknow bench in Tariq Siddiqui’s Case. Both the courts concluded that the action of ROC in deactivating the DINs of the disqualified directors cannot be sustained in law because the grounds enumerated under Clauses (a) to (f) of Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014, dealing with cancellation or deactivation of DIN are different from those envisaged under Section 164(2)(a) of the Act. Therefore, the DINs cannot be deactivated or cancelled, except in accordance with Rule 11 of the concerned Rules. 

Conclusion

On a conjoint reading of Sections 164 and 167 of the Companies Act, 2013 read with Rule 11 of the Companies (AQD) Rules, 2014, it becomes amply clear that except Central Government, or Regional Director, or any officer authorized by Regional Director, no other person including Registrar of Companies has the power to cancel or deactivate the DIN of any director. Rule 11 also makes it sufficiently clear that the DIN shall be deactivated only on the grounds envisaged therein, and none of the grounds is similar to those enumerated under sections 164 and 167 of the Companies Act, 2013 dealing with disqualification and vacation of office of directors, respectively. It is important to understand that if a company defaults in filing its financial statements or annual returns for a continuous period of 3 years, under Section 164(2) of the Companies Act, the director of such company still holds the office in the defaulting company until the expiry of the term, and becomes only temporary ineligible for appointment in all the non-defaulting companies in which he is a director. Pursuant to such disqualification, the office of such a director, in all the non-defaulting companies, becomes vacant, as per Section 167. Since the director still holds the office in the defaulting company, his/her DIN would be required to remain valid.

Thus, it can be said that the ROC has no power to deactivate the DIN of any disqualified director(s) of companies in India, and the said deactivation, if any, must be set aside for being arbitrary and not legally tenable.

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