When Can A Disqualified Company Director Continue In Office? Karnataka High Court Clarifies

The Karnataka High Court has clarified that a director disqualified because of a company's statutory defaults can continue to hold office in that defaulting company so that the director can undertake the statutory compliance required to rectify the defaults and authorities can pursue proceedings against the person responsible.

It also held that such a director must vacate office in companies that are not in default.

Justice Suraj Govindaraj passed the order while partly allowing a review petition filed by Dilipraj Pukkella and Muhammed Imthiyaz, directors of Vihaan Direct Selling (India) Pvt. Ltd., seeking modification of portions of the High Court's July 25, 2025 judgment.

The court ruled, "A harmonious reading of Sections 164(2) and 167(1) of the Companies Act indicates that, insofar as the defaulting company is concerned, the disqualified Director does not vacate office. Such continuation is necessary both to enable the authorities to initiate and pursue appropriate proceedings against the Director responsible for the default and to ensure that the Director remains in a position to undertake the statutory compliance required to rectify the default. Any contrary interpretation, resulting in automatic vacation of office in the defaulting company, would frustrate the legislative intent by leaving the company without the very person upon whom the statutory obligations are imposed."

The directors sought a review of the earlier judgment, contending that it did not adequately recognise the distinction drawn under the Companies Act between defaulting and non-defaulting companies.

They argued that while a disqualified director continues in office in the defaulting company to discharge the statutory obligations cast upon the director and facilitate compliance with the Companies Act, the same director vacates office in companies that are not in default, enabling those companies to appoint replacement directors. They also sought correction of the findings recorded in paragraphs 11.13 to 11.18 of the earlier judgment.

Appearing for the Union government, Additional Solicitor General Aravind Kamath concurred with the petitioners' submissions. He submitted that treating a disqualified director as having vacated office even in the defaulting company would deprive regulatory authorities of the ability to proceed against the very person responsible for ensuring statutory compliance.

Such an interpretation would also make it impossible for the director to remedy the defaults, thereby defeating the object of the legislation.

Accepting these submissions, the court held that the distinction between defaulting and non-defaulting companies assumes considerable significance and had not been expressly recognised in the earlier judgment.

The court further observed, "In contrast, in respect of companies which are not in default, a Director who incurs disqualification under Section 164(2) cannot continue to hold office. In such companies, the office of the disqualified Director stands vacated under Section 167, thereby enabling the concerned company to appoint another Director and ensuring that its governance is not adversely affected by the disqualification incurred on account of defaults committed elsewhere."

Holding that the earlier judgment required modification to recognise this statutory distinction, the court specified the corrections to be made to its July 25, 2025 judgment. It directed the Registry to carry out those corrections, issue a fresh certified copy and allowed the review petition in part.