Disqualification Deferred: How M.K. Rajagopalan Dilutes Section 164(2)(b)

Section 164(2)¹ of the Companies Act, 2013² lays down the grounds for disqualification of directors. It states that no person who is or has been a director of a company which either: (a) has not filed financial statements or annual returns for a continuous period of three financial years; or (b) has failed to repay deposits, interest thereon, redeem debentures, or pay declared dividends and such failure continues for a period of one year or more, shall be eligible for reappointment in that company or appointment in any other company for a period of five years from the date of default. The object behind this provision is clear and deliberate — to ensure compliance with essential corporate obligations, foster accountability among directors, and enhance overall corporate governance. The disqualification imposed is not intended as a punishment for wrongdoing per se but as a regulatory measure to exclude those presiding over prolonged non-compliance from further opportunities to mismanage companies. It is a prospective, automatic ineligibility arising from objective facts of default, not from any subjective administrative finding or penalty.

However, the recent judgment of the Supreme Court in M.K. Rajagopalan v. Periasamy Palani Gounder³ marks a troubling departure from this scheme. In this case, the Court was dealing with the question of whether a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (IBC)⁴ would be disqualified under Section 29-A(e) of the IBC⁵ on account of his disqualification as a director under Section 164(2)(b) of the Companies Act, 2013.⁶ The applicant had allegedly continued as a director under Section 164(2)(b). The Court, however, ruled that no disqualification could be said to have been incurred unless the Registrar of Companies had actively considered and declared such disqualification, noting that ”there is no concept of deemed disqualification under Section 164(2)”.

The interpretation fundamentally undermines the statutory mechanism under Section 164(2). The use of the term “shall be disqualified”⁷ in the provision indicates that the disqualification is not contingent on any further adjudication or determination by the Registrar of Companies (RoC) or the Ministry of Corporate Affairs (MCA). It is a consequence that flows from the factual occurrence of default. This reading has been affirmed in several decisions of the High Courts, including Mukut Pathak v. Union of India⁸ (Delhi High Court), where the Court held that the disqualification arises ipso facto once the factual predicate is met. The logic is compelling: the provision is intended to serve as a strict, objective filter that precludes errant directors from holding office in other companies.

The judgment in M.K. Rajagopalan case⁹, however, introduces an artificial requirement — that the disqualification under clause (b) is effective only upon recognition or action by the MCA. This requirement is problematic, particularly in the context of clause (b), because unlike clause (a), where the MCA can detect defaults in filing of financial statements through its portal, the defaults under clause (b) — such as failure to repay deposits or redeem debentures — are not information that the MCA receives automatically. The only means by which such violations might come to light is through voluntary reporting by the company or its directors under Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014¹⁰. Rule 14 requires directors to inform companies of their disqualification via Form DIR-8, and obliges companies to file Form DIR-9 with the RoC upon becoming aware of such defaults. However, relying on these filings assumes that directors will voluntarily report defaults that would make them ineligible — an assumption that is implausible and contrary to practical corporate behaviour.

The result of the Supreme Court’s interpretations is that the directors who continue to hold office in companies that have failed to repay public deposits or redeem debentures — defaults that may impact creditors, investors, and public confidence — can remain immune from disqualifications unless they or the company self-report. This creates an enforcement vacuum: if the MCA cannot detect these defaults independently and the statute does not operate unless the default is first reported, the provision loses its deterrent force. The ruling thereby allows the most serious violations — those involving potential fraud or financial misconduct — to escape regulatory consequences, while comparatively minor defaults under clause (a), such as non-filing of returns, remain automatically punishable due to their visibility on the MCA portal.

This interpretation also leads to incoherence in the operation of Section 164(2).¹¹ It results in clause (b) being effectively unenforceable except in rare cases of self-reporting or complaint-based detection, which defeats the statutory objective of comprehensive director accountability.

Further, the Court’s refusal to acknowledge the ipso facto nature of disqualification under Section 164(2)(b) ignores binding principles of statutory construction. In Satya Narayan Banik v. Union of India¹², the Court correctly noted that the consequences for non-compliance with Section 164(2) follow from the existence of factual circumstances — the disqualification is “by operation of law”. There is no adjudicatory discretion or inquiry required. The logic is Mukut Pathak case¹³ also aligns with this, reinforcing that a director’s ineligibility arises from the statutory framework and not from an MCA order. The Supreme Court’s insistence on administrative action as a precondition for disqualification not only contradicts this settled interpretation but effectively nullifies an important limb of corporate accountability under the Companies Act, 2013.

In conclusion, the Supreme Court’s ruling in M.K. Rajagopalan case¹⁴ has created a serious enforcement loophole in the statutory scheme of director disqualification. By holding that disqualification under Section 164(2)(b) is not deemed and must be established or recognised by the MCA, the Court had rendered the provision ineffective for practical purposes. Since violations under clause (b) are not traceable via the MCA’s digital compliance system, and given the improbability of voluntary disclosures, this interpretation means that directors of companies defaulting on crucial financial obligations can continue in office indefinitely unless regulators are independently alerted. This not only frustrates the legislative purpose of ensuring financial discipline and protecting stakeholders, but also dilutes the principle of automatic accountability embedded in the Companies Act, 2013. The decision should ideally be revisited or legislatively corrected to restore the mandatory and self-executing nature of Section 164(2), without which the integrity of directorial responsibility stands significantly compromised.