Three Companies, One Defaulting Subsidiary and a Notice Under Section 167
Mr. Ajay Rane has for several years been a non-executive director of Alpha Infra Limited, Beta Foods Limited and Gamma Logistics Private Limited. Alpha Infra Limited failed to file its annual returns and financial statements for the financial years 2020-21, 2021-22 and 2022-23; those returns were eventually filed only in December 2024. Gamma Logistics has eight directors and holds board meetings every quarter; Mr. Rane, who lives abroad, attended no board meeting of Gamma between 1 April 2024 and 31 May 2025 and applied for no leave of absence. On 10 May 2025 Beta Foods Limited proposed a board resolution appointing him as its managing director for five years, and Gamma Logistics issued him a notice stating that his office as director had become vacant. Mr. Rane argues that his disqualification ended when Alpha filed the pending returns in December 2024, that in any case the disqualification cannot travel to other companies, and that Gamma's notice is invalid because no Board resolution was passed against him.
1. Is Mr. Rane disqualified, and does Alpha Infra filing its returns in December 2024 bring the disqualification to an end?
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The disqualification. Section 164(2)(a) disqualifies a person who is or has been a director of a company which has not filed its financial statements or annual returns for any continuous period of three financial years. He is then ineligible for re-appointment in that company, or for appointment in other companies, for five years from the date on which the company fails to do so. Alpha Infra's default ran across three continuous financial years, 2020-21 to 2022-23, so Mr. Rane stands disqualified simply by virtue of having been a director - his non-executive status and lack of involvement in the default are irrelevant.
Does late filing cure it? No. The disqualification attaches to the failure; the period runs for five years, and a subsequent filing does not undo it. The statute provides no power of condonation, and the Registrar cannot waive it. The only exit is by expiry of the five-year period.
A caveat worth flagging. There has been litigation on whether the five years run from the date of the first default or from the date on which the third continuous year ends. On either construction the disqualification was operative throughout 2024 and 2025, so the dispute does not help Mr. Rane. Where the precise starting date matters - for example to fix the date of vacation for DIR-12 purposes - the company should record the date on which the third year's filing fell due.
2. Does the disqualification extend to Beta Foods and Gamma Logistics, and is the proposed appointment as managing director of Beta Foods valid?
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The ordinary rule. Section 164(2) disqualifies a person from being appointed in other companies for five years, so on its face the disqualification travels.
The statutory qualification. The proviso to section 167(1)(a) refines this: where a director incurs disqualification under section 164(2), his office becomes vacant in all companies other than the company which is in default. Mr. Rane therefore continues to hold office in Alpha Infra (the defaulter) but ceases, by operation of law, to be a director of Beta Foods and Gamma Logistics. The vacancy arises from the statute, not from any decision of those companies.
The Beta Foods resolution. A person disqualified under section 164(2) cannot be appointed as a director of any other company during the five-year period, and a managing director must first be a director. The resolution proposed on 10 May 2025 is therefore void, and any appointment purportedly made under it would be ineffective. Beta Foods should rescind the proposal and file nothing.
If he acts anyway. A person who knowingly functions as a director after his office has become vacant is punishable under section 167(2) with a fine of not less than ₹1 lakh and up to ₹5 lakh, and every resolution he votes on is open to challenge. Both Beta Foods and Gamma Logistics should record the vacancy in their registers and file the requisite e-forms.
3. Is Gamma Logistics' notice invalid because no Board resolution was passed against Mr. Rane, and what is the effect of his absence from its meetings?
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Vacation is automatic. Under section 167(1)(a) read with the proviso, the office becomes vacant on the director incurring the disqualification. No Board resolution, show-cause or hearing is contemplated for a section 164(2) disqualification; the Board's function is only to note the vacancy, record it in the minutes and register, and file the prescribed form with the Registrar. Mr. Rane's objection therefore fails.
An independent ground. Section 167(1)(b) vacates the office of a director who absents himself from all board meetings held during a period of twelve months, with or without seeking leave of absence. Gamma holds quarterly meetings, and Mr. Rane attended none between 1 April 2024 and 31 May 2025 - fourteen months - and applied for no leave. Even if the section 164(2) argument had gone his way, his office in Gamma would have fallen vacant under this clause.
Practical points. The twelve-month test is satisfied only if he missed all meetings in the period; one attendance would defeat it. The Board should record the dates of the meetings held and those not attended. The notice to him is a courtesy, not a condition precedent, and any defect in it does not revive an office that the statute has already vacated. He remains free to challenge the disqualification before the Tribunal, but until it is set aside, none of the three companies should record him as a director.