Companies Act Section 167

Companies Act, Section 167: Vacation of Office of Director

Section 167 of the Companies Act lays down the circumstances under which a director must vacate their office. This provision ensures that only qualified, competent, and ethical individuals continue to hold directorial positions within a company. It provides clarity on disqualifications, legal consequences, and procedural aspects of vacating the office of a director. The provision also specifies the consequences of a director continuing to act despite disqualification and the process for appointing new directors when all board members vacate their offices.

1. Circumstances Leading to Vacation of Office

A director's position shall become vacant in the following cases:

(a) Disqualification Under Section 164

If a director incurs any of the disqualifications mentioned in Section 164 of the Companies Act, they must immediately vacate their position.
Exception: If the director incurs disqualification under Section 164(2) (which generally relates to non-compliance by a company), they must vacate their office in all companies except the one where the default has occurred.
(b) Continuous Absence from Board Meetings

If a director fails to attend all meetings of the Board of Directors held during a consecutive twelve-month period, their office will be deemed vacant.
This applies regardless of whether they sought leave of absence from the Board.
(c) Acting in Contravention of Section 184

Section 184 pertains to disclosure of interest in contracts or arrangements where the director has a direct or indirect interest.
If a director enters into such contracts despite being prohibited under Section 184, they must vacate their office.
(d) Failure to Disclose Interest in Contracts (Section 184 Violation)

A director is legally required to declare any interest (direct or indirect) in contracts or arrangements.
If they fail to do so, their position as a director shall be vacated.
(e) Disqualification by Order of Court or Tribunal

If a court or tribunal issues an order disqualifying a director, their position shall be vacated immediately.
However, certain grace periods apply, as explained later.
(f) Conviction and Imprisonment for at Least Six Months

If a director is convicted of any offence (whether involving moral turpitude or not) and is sentenced to at least six months of imprisonment, they must vacate their office.
Grace Periods for Orders Under Clauses (e) and (f):
30 days from the date of conviction or disqualification order.
If the director appeals within 30 days, they can retain the position until 7 days after the appeal is disposed of.
If a further appeal is filed within those 7 days, the director may continue to hold office until the final appeal is decided.
(g) Removal as per the Companies Act

If a director is removed following due process under the Companies Act, their office shall be deemed vacant.
(h) Ceasing to Hold Employment in the Holding, Subsidiary, or Associate Company

If a director was appointed due to their employment in a holding, subsidiary, or associate company, their directorship shall become automatically vacant upon termination of their employment in that company.
2. Consequences of Acting as a Director After Disqualification

If an individual continues to function as a director despite knowing that their position has become vacant due to any of the above reasons, they will be subject to penalties:

A fine of not less than INR 1,00,000 (one lakh rupees), but which may extend to INR 5,00,000 (five lakh rupees).
This penalty is intended to deter disqualified individuals from misrepresenting themselves as directors and engaging in unauthorized decision-making.
3. Appointment of Directors When All Positions Become Vacant

In cases where all directors of a company vacate their offices due to disqualifications mentioned in Section 167(1), the following process applies:

The promoter of the company shall appoint the required number of new directors.
If no promoter exists, the Central Government shall intervene and appoint directors.
These newly appointed directors shall hold office temporarily until the company formally elects new directors in the general meeting.
This provision ensures that a company is never left without a functional board, which is crucial for business continuity, compliance, and decision-making.

4. Additional Grounds for Vacation of Office in Private Companies

Private companies are allowed to specify additional conditions under which a director must vacate office.
These conditions must be explicitly stated in the articles of association.
This allows private companies greater flexibility in governance while still ensuring compliance with the mandatory provisions of Section 167.