Compliance
If a company fails to file its financial statements or annual returns for three straight years, every current or former director faces a five‑year disqualification from any board, costing lost opportunities and potential fines for acting while disqualified.
Check your DPDP readiness — free More on the blogSection 164 of the Companies Act, 2013, sets out who cannot be appointed as a director. Personal grounds include unsound mind, insolvency, certain criminal sentences, court orders, unpaid share calls, recent convictions under section 188, lack of a director identification number, and exceeding the maximum number of directorships allowed.
The second sub‑section shifts focus from the individual to the company. If a company does not file its financial statements (AOC‑4) or annual returns (MGT‑7/MGT‑7A) for any continuous three‑year period, or defaults on deposits, debentures or declared dividends for a year or more, every person who is or has been its director is barred from reappointment to that company or any other company for five years from the date of default. This rule applies even if the director had no personal fault. The disqualification is automatic and does not require a separate order. It is designed to compel companies to keep up with statutory filing obligations, as the cost of non‑compliance spreads to every board member.
When a director is caught by the Section 164(2) bar, his office becomes vacant in every company except the one that is in default. Under section 167(1)(a) the vacancy is deemed to have occurred automatically, and continuing to act as a director after that point attracts a fine of one lakh to five lakh rupees under section 167(2).
A person appointed to a board that is already in default does not immediately fall under the five‑year ban. The law provides a six‑month grace period from the date of appointment before the disqualification attaches. This window allows the new director to address the filing gaps without immediately losing eligibility for other board roles. However, once the six‑month period ends, the director faces the same five‑year restriction as any other director of the defaulting company. Planning appointments carefully can avoid unexpected loss of board talent. Private companies may add further disqualifications in their articles of association under section 164(3). The additional clauses continue to apply even while an appeal or petition against a conviction or order is pending, meaning that relying on an appeal does not automatically lift the bar. Common pitfalls include letting dormant companies drift without filing, joining boards without checking compliance status, assuming other companies are safe, and treating an appeal as a stay on disqualification. Each mistake can lead to lost board positions and monetary penalties. The financial impact of the five‑year bar can be significant. Directors lose the ability to earn fees, influence business strategy, and access networking opportunities. Moreover, the risk of a fine for acting while the office is vacant adds a further monetary burden that can affect personal finances and the reputation of the business.
The ban is triggered when a company fails to file its financial statements or annual returns for three consecutive financial years, or defaults on deposits, debentures or a declared dividend for a year or more. All current and former directors of that company become disqualified from any directorship for five years from the date of default.
No. The vacancy created by section 164(2) applies to every other company the director holds office in, but the director can remain on the board of the company that is in default until the filings are regularised.
Acting as a director after the office has been deemed vacant under section 167(1)(a) attracts a fine ranging from one lakh to five lakh rupees, as prescribed in section 167(2). The fine is imposed to deter directors from ignoring the automatic vacancy.
If a person is appointed to a board that is already in default, the five‑year disqualification does not start immediately. It only begins after six months from the date of appointment, giving the new director a short window to address the filing defaults before the ban takes effect.
Published 3 November 2026. Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this
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