by A director is a natural person appointed to the Board of a company, entrusted with the responsibility of managing its affairs and steering its strategic direction. As a company is an artificial legal entity without a physical presence, it relies on directors to act as its “brain and body”. They are collectively known as the Board of Directors. Directors are legally required to act in good faith, with due care and diligence, and in the best interests of the company, its shareholders, and the community. Section 166 of the Companies Act, 2013, codifies their duties to avoid conflicts of interest and not seek undue gains.
Qualification of Director:
A director is a person appointed to the Board of Directors to manage and supervise the affairs of a company. Under the Companies Act, 2013, a person must satisfy certain qualifications to be eligible for appointment as a director.
The qualifications of a director are as follows:
- Natural Person: Only an individual (natural person) can be appointed as a director. A company, firm, or association cannot act as a director.
- Competent to Contract: The person should be legally competent to enter into a contract. He or she should not be disqualified under the provisions of the Companies Act, 2013.
- Director Identification Number (DIN): Every person proposed to be appointed as a director must obtain a valid Director Identification Number (DIN) from the Central Government before appointment.
- Written Consent: The proposed director must give written consent to act as a director in the prescribed form.
- Age Requirement: The Companies Act does not prescribe a minimum or maximum age for becoming a director. However, the person must be legally capable of entering into a valid contract.
- Educational Qualification: No specific educational qualification or professional experience is prescribed under the Companies Act. However, knowledge of business, finance, law, or management is desirable for effective functioning.
- Share Qualification: A company may require its directors to hold a specified number of shares if its Articles of Association so provide. However, under the Companies Act, 2013, there is no mandatory requirement for share qualification.
Disqualification of Director:
The Companies Act, 2013 lays down the circumstances under which a person is disqualified from being appointed or continuing as a director of a company. These provisions are mainly contained in Section 164 of the Act. The purpose of disqualification is to ensure that only competent, honest, and financially responsible individuals manage the affairs of companies and protect the interests of shareholders, creditors, and the public.
A person is disqualified if he or she is declared to be of unsound mind by a competent court and the declaration remains in force. A person is also disqualified if he or she is an undischarged insolvent or has applied to be adjudicated as an insolvent and the application is pending. Such individuals are considered financially incapable of managing a company’s affairs.
A person who has been convicted by a court of any offence involving moral turpitude or any other offence and sentenced to imprisonment for not less than six months is disqualified for a specified period. If the sentence is seven years or more, the person becomes permanently disqualified from being appointed as a director.
A person is also disqualified if an order has been passed by a court or tribunal disqualifying him or her from acting as a director, and the order is still in force. Similarly, failure to comply with legal obligations relating to company management may also result in disqualification.
Under Section 164(2) of the Companies Act, 2013, a person cannot be reappointed or appointed as a director in any company if the company in which he or she is a director has failed to file financial statements or annual returns for three consecutive financial years or has failed to repay deposits, redeem debentures, pay declared dividends, or repay interest thereon for one year or more.
1. Unsound Mind
A person is disqualified from being appointed or continuing as a director if he or she has been declared to be of unsound mind by a competent court and the declaration remains in force. Under Section 164 of the Companies Act, 2013, such a person cannot effectively perform the duties and responsibilities of a director. This provision protects the company by ensuring that only individuals capable of making sound and informed decisions serve on the Board of Directors.
2. Undischarged Insolvent
An undischarged insolvent is disqualified from becoming or remaining a director under Section 164 of the Companies Act, 2013. Insolvency indicates financial incapacity and may affect the person’s ability to manage the company’s affairs responsibly. The law prevents such individuals from holding directorship until they are legally discharged from insolvency. This provision safeguards the interests of the company, shareholders, creditors, and other stakeholders by ensuring financially responsible management.
3. Applied to be Adjudicated as Insolvent
A person who has applied to be adjudicated as an insolvent and whose application is pending before a court is disqualified from acting as a director under Section 164 of the Companies Act, 2013. Since the individual’s financial status is uncertain, the law restricts appointment until the matter is resolved. This provision helps maintain confidence in corporate governance and protects the company’s financial interests.
4. Conviction for an Offence
A person convicted of an offence involving moral turpitude or sentenced to imprisonment of six months or more is disqualified under Section 164 of the Companies Act, 2013. The disqualification generally continues for five years after completion of the sentence. If imprisonment is seven years or more, the person becomes permanently disqualified from holding the office of director. This provision promotes integrity and ethical corporate management.
5. Non-Payment of Calls on Shares
A person who has failed to pay any calls on shares held by him or her for a period of six months from the due date is disqualified from being appointed as a director under Section 164 of the Companies Act, 2013. This provision ensures that directors fulfill their financial obligations towards the company and demonstrate responsible conduct expected from corporate leadership.
6. Conviction for Related Party Transactions
A person convicted of an offence relating to related party transactions under Section 188 of the Companies Act, 2013 is disqualified from appointment as a director for the prescribed period. Related party transactions require transparency and fairness. Conviction for violations indicates misconduct and affects the individual’s credibility. This disqualification protects shareholders and strengthens corporate governance by preventing persons involved in such offences from managing companies.
7. Non-Compliance by the Company
Under Section 164(2) of the Companies Act, 2013, a person serving as a director becomes disqualified if the company has failed to file financial statements or annual returns for three consecutive financial years. The director is also disqualified if the company defaults in repayment of deposits, debentures, interest, or dividends for one year or more. The disqualification generally applies for five years.
8. Disqualification by Court or Tribunal
A competent court or tribunal may disqualify a person from holding the office of director if circumstances justify such action under applicable laws. The order may arise due to fraud, misconduct, breach of fiduciary duties, or violations of company law. During the period specified in the order, the individual cannot be appointed or continue as a director. This provision strengthens accountability and protects corporate governance.
Director Position (Fiduciary):
A director occupies a fiduciary position in a company under the Companies Act, 2013. A fiduciary relationship means that the director must act honestly, in good faith, and in the best interests of the company rather than for personal benefit. Directors are entrusted with managing the company’s affairs and must exercise due care, skill, diligence, and loyalty while performing their duties. They should avoid conflicts of interest, maintain confidentiality, and not misuse company assets or opportunities for personal gain. If a director breaches these fiduciary duties, they may be held personally liable and may face civil or criminal consequences under the Companies Act, 2013. The fiduciary position ensures transparency, accountability, and responsible corporate governance while protecting the interests of shareholders, employees, creditors, and other stakeholders.
