Can a Government Employee be a Director in a Private Company?

The author in this article discusses whether a Government employee can be a Director in a Private company. The author further discusses the related provisions to the same and the concepts that explains it better.
Estimated Reading Time: 5 minutes

Introduction

When a company is incorporated, it is said to have a separate entity. Although in reality, it is an association of people with some common objectives carrying out business for profit.  The directors usually run a company, and the shareholdersare nothing but investors in the company, to get return someday. Generally, there are different individuals for control and management and shareholding. This kind of diversification of powers providesvast powers to the controlling and the managing group, which may take decisions that are detrimental to the interest of the shareholders as they have minimal control over it. The power gives the management group an upper hand in the company, and there isa concentration of economic forces in their hands. The unbridled power is detrimental to the interest of the public, creditors and employees. Therefore, it is necessary to have government employees in a private company to have a balance between the shareholders and the management. So, the question comes can a government employee become a director in the private company or not.

Under Company Law

Company law is silent about the appointment of a government employee. It is not mentioned anywhere if the government employee can become a director in a private company or not.

Who can be appointed as a Director in private company

According to Section 149[1] of the Companies Act- only an individual can be appointed as a director and not the firms, corporates or any other association can be selected as a director.

It impliedthat the government employees may also apply for the position of a director if they fulfil other criterion.

Who Is Debarred From Applying?

According to Section 64[2] of the Companies Act- Disqualifications for appointment of director-

(1) A person shall not be eligible for appointment as a director of a company, if —

(a) he is of unsound mind and stands so declared by a competent court;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) a court or Tribunal has passed an order disqualifying him for appointment as a director and the order is in force;

(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

(h) he has not complied with subsection (3) of section 152.

(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the attention due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for five years from the date on which the said company fails to do so.

(3) A private company may in the articles provide for separate disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

Provided that the exclusions referred to in clauses (d), (e) and (g) of sub-section

(1) shall not take effect—

(i) for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order until expiry of seven days from the date on which such appeal or petition is disposed of; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days until such further appeal or petition is disposed of.

So, in disqualifications, it is not mentioned that the director has to do only one employment and government employees are not barred from applying so.

One thing that Company Law talks about is in Section 184 that is the disclosure of interests. The director has to reveal its disclosure of interest in any other company, firms or organization.

The above provisions are about are related to Company law, onehas to note what are the rules and regulations that have to be adhered by the government employees before getting employed anywhere else.

Government rules

[3]The All India Services (Conduct) Rules, 1968 have been made for government employees. The government employees have to follow strictly the rules under this act for their code of conduct.

According to Section 13[4] of the Act- 13(1) Subject to the provisions of sub-rule (2), no member of the Service shall except, with the previous sanction of the government, —

 (a) engage directly or indirectly in any trade or business, or

 (b)negotiate or undertake, any other employment, or
 (c) take part, except in the discharge of his official duties, in the registration, promotion or management of any bank or other company registered or required to be registered under the Companies Act, 1956 (1 of 1956), or any other law for the time being in force, or of any co-operative society for commercial purposes.

According to this section, the government employees are barred from taking any other private employment without prior government sanction. Only if the government provides a prior consent to the employee, then they may become the director of a private company; otherwise, they cannot take any other employment.

Reasons for not allowing the government employee to be a director of a private company

They will get remuneration from both the sides, from the government and the private company. According to the government rules, you cannot have payment from two places at a single point of time. They may use government power, privileges and connections to gain profit in a private company. Also, by misusing government post, a government employee may use it as a weapon to dominate the other directors to run the company, to their disadvantage.

Also read In Re: Shruti Power Projects Private Limited


[1] http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17533

[2] https://www.mca.gov.in/SearchableActs/Section164.htm

[3] Published vide Notification No.8/91/62—AIS(III) dated 18.12.1968 (GSR No.3 dt. 04.01.1969)

[4]https://dopt.gov.in/sites/default/files/AIS_ConductRules1968.pdf

Hey there!

come here often?

Login To Come In