Automatic disqualification of MD at 70 - Fall out of Bombay HC verdict
Anagha Anasingaraju (Partner, Kanjmag & Co. Company Secretaries)
The Notice of Motion in Sridhar Sundararajan v. Ultramarine & Pigments Limited was heard by the Hon’ble Single Judge and decided in favour of the Defendant in July 2015. The Plaintiff went in appeal against the said judgment which was heard by the Division Bench and the order of the Single Judge was reversed. This article attempts to analyze the decision of the Division Bench in appeal.
Facts of the case:
- The Defendant no. 1 is a public limited listed company.
- Defendant no. 2 was appointed as the Chairman and Managing Director of Defendant no. 1 on 13August 1990.
- He was reappointed as Chairman and Managing Director on 01 August 2012 for a further period of 5 years.
- The Defendant no. 2 attained the age of 70 years on 11 November 2014.
- The Appellant was appointed as a director of Defendant no. 1 on 21 May 1998.
- He was appointed as Joint Managing Director of Defendant no. 1 on 01 August 2012.
- The Appellant filed a Notice of Motion contending that in view of clause in Section 196(3)(a), Defendant no. 2 could not continue as MD and sought an order of injunction, restraining him from functioning or continuing to exercise his powers as Chairman and MD of Defendant no. 1 company.
- It was contended on behalf of Defendant No. 2 that the said amendment could not operate retrospectively.
- The Notice of Motion was decided against the Appellant by the Hon’ble Single Judge and hence this appeal to the Division Bench.
ISSUE BEFORE THE DIVISION BENCH WAS:
Whether, after coming into effect of the Companies Act, 2013 from 01 April 2014, any Managing Director who was appointed prior to 01 April 2014 would have a right to continue to act as Managing Director after his attaining the age of 70 years without special resolution being passed by the company in its general meeting?
Held:
The Division Bench of Hon’ble Bombay High Court while giving its decision in the affirmative on the above assertion has analyzed the provisions of Section 196 (3), the meaning and context of the word ‘continue’ in the said section as also the difference between disqualification and eligibility.
The Hon’ble Court has made following observations:
It is not possible to say that Section 196 (3) (a) would operate separately from other sections viz. Section 196 (3) (b) to (d). Section 196(3)(a) to (d) mentions various disqualifications which prohibit appointment or continuation of Managing Director as a policy. In other words, if appointment to the post of Managing Director is made after coming into force of section 196 on 01 April 2014, a person who is above the age of 70 years cannot be appointed on account of disqualification, subject to fulfillment of the proviso. On the other hand, if he was already appointed prior to 01 April 2014 when he was below the age of 70 years, on account of operation of statute, disqualification, whenever incurred after the coming into effect of Companies Act 2013 would operate automatically, subject to proviso i.e. special resolution being passed by the company.
Analysis of the judgment:
The question addressed in this case was whether there is an automatic termination of appointment of a person as Managing Director on attaining the age of 70 years.
To address the question, the judgment deals with the changes in law under the Companies Act 1956 vis-à-vis Companies Act 2013 and also the meaning of the term ‘retrospective operation’.
Prior to the Companies Act 2013 coming into effect, the provisions of section 267 and 269 of the Companies Act 1956 were relevant for appointments of managing directors. Section 267 provided that following persons could not be appointed as managing directors and no company shall continue the appointment or employment of following persons as its managing director:
- An undischarged insolvent or person who is adjudged as insolvent
- Suspends or has suspended payment to his creditors
- Is convicted for an offence involving moral turpitude
Section 267 provided for cessation or non-continuation of appointment of a person as Managing Director who has incurred these three disqualifications.
Further, as per section 269 (2), the following are the eligibility criteria for appointment of MD:
Person who has completed 21 years of age and has not attained the age of 70 years, provided his appointment is approved by way of special resolution passed by the company in its general meeting.
Section 196 of the Companies Act 2013 provides disqualification for appointment as well as for continuation of a person as managing director. Section 196 (3) incorporated the three disqualifications in section 267 for a person to be appointed as a MD. It also added one more disqualification that a person who was below the age of 21 years or who had attained the age of 70 years could not be appointed or could not be continued as managing director if he had attained the age of 70 years.
Section 196 (3) states:
“(3) No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who –
(a) is below the age to twenty-one years or has attained the age of seventy years:
Provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;
(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;
(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or
(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months.”
(1) The legislative intent in introducing section 196(3)(a) is quite clear. The intention was to change the earlier provision by providing that the person who has been appointed as managing director before he was 70 years old is prohibited from continuing as managing director once he has attained the age of 70.
(2) In Rama Narang vs. Ramesh Narang and Others (1995) 2 SCC 513, the Apex Court decided the question whether the managing director was liable to be removed upon his conviction and sentence by Additional Sessions Judge, Delhi notwithstanding the admission of the appeal by the Delhi High Court and notwithstanding the stay granted by the Delhi High Court to the order of conviction and sentence. The relevant portion of para 10 of the said judgment reads as below:
“….The use of the word “shall” brings out its imperative character. The language is plain, simple and unambiguous and does not admit of more than one meaning, namely, that after the commencement of the Companies Act, no person who has suffered a conviction by a court of an offence involving moral turpitude shall be appointed or employed or continued in appointment or employment by any company as managing or whole time director………..The section not only prohibits appointment or employment after conviction but also exercises discontinuance of appointment or employment made prior to his conviction. This in our view is plainly the mandate of Section 267.”
(3) The ratio of this judgment squarely applies to the facts of the present case. After the commencement of the Act, no person who has suffered disqualification can be appointed or continue in appointment as managing director of the company.
(4) Defendant no. 2 was appointed as Chairman and Managing Director of the company who attained the age of 70 years on 11 November 2014. From that date, he was disqualified from continuing as Managing Director, unless he fulfilled the requirements of the proviso that the company has to continue his appointment by a special resolution and the resolution must state the reason why the continuation is necessary.
(5) The disqualifications cannot be split to mean that disqualification (b) to (d) would operate instantly by clause (a) would operate in a different manner than the remaining clauses (b) to (d). That would be contrary to the ratio laid down by the Apex Court in Rama Narang case.
(6) As regards the contention that Section 196(3)(a) would not apply to the managing directors who had been appointed before 01 April 2014 as it would otherwise retrospectively affect the vested right of such Managing Directors and that there is presumption against legislation operating retrospectively, the Bench has observed that the amended Section as a matter of public policy contains mandatory prohibition / bar against any company from continuing the Managing Director in employment once he has attained the age of 70 years. The section does not make any distinction between the managing directors who have been appointed before 01 April 2014 and those after 01 April 2014. The moment a Managing Director attains the age of 70 years, the disqualification would operate immediately. While interpreting any provision, it is not open for the Court to add to or delete words from the provision or change the plain statutory language of the provision.
(7) The Division Bench has also stated as to why the judgment in the case of P. Suseela and Ors. Vs. University Grants Commission and Ors. 2015 (3) SCALE 726 regarding retrospective operation of law would not operate in the given case.
(8) The relevant extract of the judgment in P Suseela is as follows: “…..it is relevant to distinguish between an existing right and a vested right. Where a statute operates in future it cannot be said to be retrospective merely because within the sweep of its operation all existing rights are included……retrospective operation is the matter and interference with existing rights is another……If an Act provides that as at a past date the law shall be taken to have been that which it was not, that Act I understand to be retrospective. That is not this case…”
(9) In para 15 of the said judgment the Apex Court further states that “….a vested right would arise only if any of the appellants before us had actually been appointed….. Till that date, there is no vested right…this right is always subject to minimum eligibility conditions, and till such time as the appellants are appointed, different conditions may be laid down at different times. Merely because an additional eligibility condition……is laid down, it does not mean that any vested right of the appellants is affected, nor does it mean that the regulation laying down such minimum eligibility condition would be retrospective in operation. Such condition would only be prospective as it would apply only at the stage of appointment.”
(10) Thus, since Defendant no. 2 was already a Chairman and Managing Director of the company when he turned 70, the 2013 Act would operate not only at the stage of appointment but also in the case of a person who has already been appointed and attained the age of 70 years and such a person, therefore, by virtue of disqualification, had not right to be continued as managing director, unless a special resolution was passed by the company. There is no question therefore of retrospective application of the provision. Since section 196(3)(a) would apply prospectively, whoever attains the age of 70 after 01 April 2014 would cease to function as Managing Director by operation of statute.
(11) Appointment after the age of 70 years was not permissible under section 269 subject to proviso, but after 01 April 2014, this was added as disqualification for further continuation of a person after he attained the age of 70 years. In a case therefore, where the appointment is already made and thereafter eligibility criteria is changed, then it could be said that the vested right is created in a person who is already appointed prior to the amendment and additional eligibility criteria could not be applied retrospectively. However, in a case where additional disqualification is added, after disqualification is incurred after his initial appointment, he would cease to continue as Managing Director since the disqualification would operate as cessation or discontinuation to work as Managing Director. There is a distinction between disqualification which is added after the appointment and the eligibility criteria which is added after his appointment. In the former case, disqualification would operate even after the appointment but in the latter case, it would operate prospectively.
Conclusion of the judgment:
(1) Thus, if appointment to the post of Managing Director is made after coming into force of the Companies Act 2013, on 01 April 2014, a person who is above the age of 70 years cannot be appointed on account of disqualification, subject to fulfillment of the proviso. On the other hand, if he was already appointed prior to 01 April 2014 when he was below the age of 70 years, on account of operation of statute, disqualification, whenever incurred after 01 April 2014, would operate automatically, subject to proviso i.e. special resolution being passed by the Company.
(2) Thus, the Appeal was allowed and the order of the Single Judge was set aside.
Effect of the judgment:
- While conducting secretarial audit of a company, the practicing company secretary shall keep this judgment in view while ascertaining compliance with provisions of Section 196 of the Companies Act 2013 by the company.
- Where a Managing Director was appointed before commencement of Companies Act 2013 and he attains the age of 70 after 01 April 2014, the company should have passed a special resolution for continuation of the Managing Director in office.
- Where it is proposed to appoint a person as Managing Director after 01 April 2014 and the person would complete 70 years during his term, the company can continue such appointment only after passing of special resolution.
- Section 196 (3) applies to both – private and public – companies alike. Thus, private companies where there is any appointment / reappointment of a managing director / whole time director / manager after 01 April 2014, also will have to comply with the provisions of section 196 (1) to (3).
- The ratio of this judgment can be further applied to the provisions of Section 167. Where a person who was appointed as a director before 01 April 2014 attains the disqualification under section 167 - who is a director of a private company which has not filed its financial statements and returns for a continuous period of three years – such disqualification cannot be said to have retrospective effect but it is merely adding an additional disqualification on commencement of Companies Act 2013. Thus, such a director would also be disqualified as per the provisions of Section 167.
COMMENTS
This judgment has over ruled the initial judgment of the Single Judge while giving most required clarity on the term ‘retrospective application’ of the law. The clarity that mere addition of additional disqualification does not amount to additional eligibility criteria is far reaching in its interpretation and application. This judgment has interpreted the intent of the law succinctly and has once again highlighted the importance of literal interpretation of the law in its most plain simple meaning as it should be.
Comments
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Ajit Parmanand Upadhyay on September 14 2017
Very helpful.