Directors can not be appointed if age above 70 years

Aspi Chinoy, Senior Counsel, Shardul Singh and Viral Shukla for the Appellant. Prembhari Thakkar for the Respondent.

ORDER

V.M. Kanade, J. – Appellant is the original Plaintiff. He has challenged the order passed by the learned Single Judge dated 16th July, 2015. By the said order, the learned Single Judge dismissed the Notice of Motion taken out by the Plaintiff and refused to grant an order of injunction, restraining Respondent No.2/Original Defendant No.2 from functioning or continuing to exercise his powers as Chairman and Managing Director of the 1st Defendant-Company.

2. Brief facts which are relevant for the purpose of deciding this appeal are as under:—

3. For the purpose of convenience, parties shall be referred to as “Plaintiff” and “Defendant”.

4. Appellant is the original Plaintiff. Respondent No.1 is the original Defendant No.1. Respondent No.2 is the original Defendant No.2 who was appointed as Chairman and Managing Director (“MD”) of the 1st Defendant-Company. On 1st August, 2012 the 2nd Defendant was reappointed as Chairman and Managing Director of the 1st Defendant-Company for a period of further five years till 2017 and the Plaintiff was appointed as Joint Managing Director of the 1st Defendant-Company.

5. On 1st April 2014, Companies Act was amended and by the Amendment Act of 2013, a new clause was introduced in Section 196(3)(a). By virtue of the said amendment vide sub-clause (3)(a), additional disqualification was added to the disqualifications which already existed in the said provision namely a Managing Director could not be appointed or continued after he had attained the age of 70 years. The said amendment admittedly came into force on 01/04/2014. Defendant No.2 was appointed for a period of five years as MD on 01/08/2012, prior to the amendment. The contention of the Plaintiff is that in view of the incorporation of the said clause in section 196(3)(a), Defendant No.2 could not continue as MD and, therefore, he has sought an order of injunction, restraining him from functioning or continuing to exercise his powers as Chairman and MD of the 1st Defendant-Company.

6. On the other hand, it was contended by the learned Counsel appearing on behalf of Respondent No.2/Original Defendant No.2 that the said amendment could not operate retrospectively. The learned Single Judge accepted the contention of Defendant No.2 and dismissed the Notice of Motion. Hence, the appeal.

7. We have heard both the learned Senior Counsel at length.

8. The short question which falls for consideration before this Court is : whether, after the amendment of the Companies Act in 2013 which was brought into force with effect from 01/04/2014, any Managing Director who was appointed prior to the Amendment Act i.e. before 01/04/2014 would have a right to continue to act as Managing Director after his attaining the age of 70 years without special general resolution being passed by the Company in its general meeting?

9. Section 267 of the Companies Act, prior to amendment, reads as under:—

“267. Certain persons not to be appointed managing directors.- No company shall, after the commencement of this Act, appoint or employ, or continue the appointment or employment of, any person as its managing or whole-time director who—

10. Prior to the Amendment Act of 2013, Section 267 provided that certain persons could not be appointed as Managing Directors and no Company shall continue the appointment or employment of any person as its Managing Director who is (a) an undischarged insolvent or has been adjudged as an insolvent, (b) suspends or has suspended payment to his creditors and (c) is convicted by a Court for an offence involving moral turpitude. The said section obviously provided for cesession or non-continuation of appointment of a person as Managing Director who has incurred these three disqualifications.

11. Secondly, prior to the amendment, the eligibility criteria for appointment as MD was provided in section 269(2). Section 269 (2) of the Companies Act reads as under:—

“269. Appointment of managing or whole-time director or manager to require Government approval only in certain cases.—

12. Part-I of Schedule XIII of the Companies Act reads as under:—

SCHEDULE XIII

(See sections 198, 269, 310 and 311)

CONDITIONS TO BE FULFILLED FOR THE APPOINTMENT OF A MANAGING OR WHOLE-TIME DIRECTOR OR A MANAGER WITHOUT THE APPROVAL OF THE CENTRAL GOVERNMENT

PART I

APPOINTMENTS

No person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:—

13. By virtue of section 269(2), therefore, a person who had completed the age of 21 years and has not attained the age of 70 years was eligible to be appointed, provided his appointment was approved by the special general resolution passed by the Company in its general meeting. Thus, by the amendment, the eligibility criteria was introduced as a disqualification.

14. This position changed after the amendment in 2013.

Section 196(3) provided disqualification for appointment as well as for continuation of a person as Managing Director. The said section 196(3) not only incorporated three disqualifications which were mentioned in Section 267 for a person to be appointed as MD viz. (a) a person who is an undischarged insolvent or has adjudged as an insolvent, (b) a person who suspends or has suspended payment to his creditors and (c) a person who is convicted by a Court for offence viz moral turpitude but one more disqualification was added to section 196(3) by way of the said amendment and 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 MD if he had attained the age of 70 years. The said section 196(3) reads as under:—

“196(3) No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who —

15. The legislative intent in introducing section 196(3)(a) is quite clear. Obviously, the intention was to change the earlier position 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.

The Apex Court in Rama Narang v. Ramesh Narang and Others [1995] 2 SCC 513 had an occasion to interpret Section 267 of the Companies Act. The Apex Court in the said case was called upon to decide 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 Apex Court in para 10 of the said judgment has examined the said question and has observed as under:—

“10. The above resume would show that the principal question which falls for our determination is whether the appellant is liable to be visited with the consequence of Section 267 of the Companies Act notwithstanding the interim order passed by the Delhi High Court while admitting the appellant’s appeal against his conviction and sentence by the Additional Sessions Judge, Delhi. As we have said earlier the factum of his conviction and the imposition sentence is not in dispute. Section 267 of the Companies Act, to the extent it is relevant for our purposes, may be set out:—

“267. No company shall, after the commencement of this Act, appoint or employ, or continue the appointment or employment of any person as its managing or whole-time Director who—

(c) is, or has at any time been convicted by a court of an offence involving moral turpitude.”

On a plain reading of this section it seems clear to us from the language in which the provision is couched that it is intended to be mandatory in character. 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 its managing or whole-time Director in 1990 after his conviction on 22-12- 1986. On the plain language of Section 267 of the Companies Act, the Company had, in making the appointments, committed an infraction of the mandatory prohibition contained in the said provision. 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. As rightly pointed out by the Division Bench of the High Court, Section 274 of the Companies Act provides that a disqualification which a Director incurs on conviction for an offence involving moral turpitude in respect of which imprisonment of not less than six months is imposed, the Central Government may, by notification, remove the disqualification incurred by any person either generally or in relation to any company or companies specified in the notification to be published in the Official Gazette. Such a power is, however, not available in the case of a Managing Director. Secondly, Section 283 of the Companies Act provides that the office of a Director shall become vacant if convicted and sentenced as stated hereinabove but sub-section (2) thereof, inter alia, provides that the disqualification shall not take effect for thirty days from the date of sentence and if an appeal is preferred during the pendency of appeal till seven days after the disposal of the appeal. This benefit is not extended in the case of a Managing Director. The Companies Act has, therefore, drawn a distinction between a Director and a Managing Director; the provisions in the case of the latter are more stringent as compared to that of the former. And so it should be because it is the Managing Director who is personally responsible for the business of the Company. The law considers it unwise to appoint or continue the appointment of a person guilty of an offence involving moral turpitude to be entrusted or continued to be entrusted with the affairs of any company as that would not be in the interests of the shareholders or for that matter even in public interest. As a matter of public policy the law bars the entry of such a person as Managing Director of a company and insists that if he is already in position he should forthwith be removed from that position. The purpose of Section 267 is to protect the interest of the shareholders and to ensure that the management of the affairs of the company and its control is not in the hands of a person who has been found by a competent court to be guilty of an offence involving moral turpitude and has been sentenced to suffer imprisonment for the said crime. In the case of a Director, who is generally not in-charge of the day-today management of the company affairs, the law is not as strict as in the case of a Managing Director who runs the affairs of the company and remains in overall charge of the business carried on by the company. Such a person must be above board and beyond suspicion.” (Emphasis supplied)

In our view, ratio of the said judgment would squarely apply to the facts of the present case. The Apex Court has therefore held that the language in which the provision is couched is plain, simple and unambiguous and does not admit of more than one meaning viz that after the commencement of the Amendment Act, no person who has suffered disqualification can be appointed or continue in appointment as Managing Director of the Company. Respondent No.2, in this case, was appointed as Chairman and Managing Director of Respondent No.1 – Company on 13/08/1990. The amendment came into force on 01/04/2014. He completed the age of 70 years on 11/11/2014 and therefore, from that date, he was disqualified from continuing as Managing Director, unless he fulfilled the requirements of the proviso viz that the Company has to continue his appointment by a special resolution and, secondly, that the resolution must state the reason why the continuation is necessary. The said disqualifications which are mentioned in clauses (a) to (d) cannot be fractured or split or dissected to mean that disqualifications (b) to (d) would operate instantly but clause (a) viz appointment or continuation of Managing Director beyond the age of 70 years would operate in a different manner than the remaining clauses (b) to (d). The learned Single Judge, therefore, in our view, has clearly erred in dissecting the said section in two parts and by holding that clause (a) would operate differently than clauses (b) to (d). The said observation is contrary to the ratio laid down by the Apex Court in Rama Narang (supra).

16. We do not agree with the submission of Mr. Seervai, the learned Senior Counsel appearing on behalf of Respondent No.2 that ratio of the judgment in Rama Narang (supra) would not apply to the present case. We also do not find force in the submission of Mr. Seervai, the learned Senior Counsel for Respondent No.2 that Section 196(3)(a) would not apply to the Managing Directors who had been appointed before 01/04/2014 (which is the date on which the the amended section 196(3)(a) was brought into force) as it would otherwise retrospectively affect the vested right of such Managing Directors and, secondly, that there is presumption against legislation operating retrospectively.

17. In our view, Mr. Aspi Chinoy, the learned Senior Counsel appearing on behalf of the Appellant has correctly submitted 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 language of section 196(3)(a) is plain, simple and unambiguous and it applies to all the Managing Directors who have attained the age of 70 years and the Section does not make any distinction between the Managing Directors who have been appointed before 01/04/2014 and those after 01/04/2014. The moment therefore Managing Director attains the age of 70 years, disqualification mentioned in Section 196(3) (a) would operate immediately. In our view, it is not open now to alter its clear terms by a process of interpretation for excluding the Managing Directors appointed prior to 01/04/2014 from the purview of prohibition contained in Section 196(3). The disqualifications which have been mentioned in section 196(3) are introduced as a matter of public policy and they contain mandatory prohibition/bar for continuing the Managing Director in employment, once he has attained the age of 70 years. It is well settled position in law that 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.

18. Mr. Seervai, the learned Senior Counsel appearing on behalf of Respondent No.2, in support of his submission, had relied on the judgment in P. Suseela and Ors. v. University Grants Commission and Ors. 2015(3) SCALE 726. His submission was that section 196(3)(a) would not operate to affect the vested right of Managing Director before 01/04/2014. In the said case, facts were as under:—

In the said case, constitutional validity of the University Grants Commission Regulations, 2009 under which NET/SLET was to be the minimum eligibility condition for recruitment and appointment of Lecturers in Universities/Institutions, was under challenge. Delhi High Court vide judgment dated 06/12/2010 dismissed the Petition and held that the Regulations did not violate Article 14 and were, in fact, prospective. Same view was taken by the Madras and Rajasthan High Court. Initially, the Allahabad High Court vide judgment dated 06/04/2012 observed that Regulations were issued outside the powers conferred by the UGC Act and therefore held that the eligibility conditions laid down would not apply to M.Phil and Ph.D. degrees awarded prior to 31/12/2009. However, by subsequent judgment dated 06/01/2014, the said Regulations were upheld by the Allahabad High Court. In the Apex Court, a submission was made that the said Regulations should not be given retrospective effect so as not to prejudicially affect the interest of any person to whom such Regulations may be made applicable. The Apex Court then observed that it was necessary to make distinction between the existing right and vested right. It relied on the earlier Judgment of the Apex Court in Trimbak Damodhar Rajpurkar v. Assaram Hiraman Patil 1962 Suppl 1 SCR 700. In the said case, the Apex Court was called upon to consider the question as to whether the amendment made to section 5 of the Bombay Tenancy and Agricultural Lands Amendment Act could be said to be retrospective because its operation took within its sweep existing rights. In the said case five judges Bench of the Apex Court held that Section 5 had no retrospective operation. The Apex Court, in the said case of P. Suseela (supra), relied upon the observations made by the Apex Court in Trimbak Damodhar Rajpurkar (supra), which read as under:—

“In this connection 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. As observed by Buckley L.J. in West v. Gwynne [(1911) 2 Ch 1 at pp 11, 12] retrospective operation is one 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. The question here is whether a certain provision as to the contents of leases is addressed to the case of all leases or only of some, namely, leases executed after the passing of the Act. The question is as to the ambit and scope of the Act, and not as to the date as from which the new law, as enacted by the Act, is to be taken to have been the law.”. These observations were made in dealing with the question as to the retrospective construction of Section 3 of the Conveyancing and Law of Property Act, 1892 (55 & 56 Vict. c. 13). In substance Section 3 provided that in all leases containing a covenant, condition or agreement against assigning, underletting, or parting with the possession, or disposing of the land or property leased without licence or consent, such covenant, condition or agreement shall, unless the lease contains an expressed provision to the contrary, be deemed to be subject to a proviso to the effect that no fine or sum of money in the nature of a fine shall be payable for or in respect of such licence or consent. It was held that the provisions of the said section applied to all leases whether executed before or after the commencement of the Act; and, according to Buckley, L.J., this construction did not make the Act retrospective in operation; it merely affected in future existing rights under all leases whether executed before or after the date of the Act. The position in regard to the operation of Section 5(1) of the amending Act with which we are concerned appears to us to be substantially similar.

A similar question had been raised for the decision of this Court in Jivabhai Purshottam v. Chhagan Karson [Civil Appeal No.153 of 1958 decided on 27-3-1961] in regard to the retrospective operation of Section 34(2)(a) of the said amending Act 33 of 1952 and this Court has approved of the decision of the Full Bench of the Bombay High Court on that point in Durlabbha Fakirbhai v. Jhaverbhai Bhikabhai [(1956) 58 BLR 85]. It was held in Durlabbhai case [(1956) 58 BLR 85] that the relevant provision of the amending Act would apply to all proceedings where the period of notice had expired after the amending Act had come into force and that the effect of the amending Act was no more than this that it imposed a new and additional limitation on the right of the landlord to obtain possession from his tenant. It was observed in that judgment that “a notice under Section 34(1) is merely a declaration to the tenant of the intention of the landlord to terminate the tenancy; but it is always open to the landlord not to carry out his intention. Therefore, for the application of the restriction under sub-section 2(a) on the right of the landlord to terminate the tenancy, the crucial date is not the date of notice but the date on which the right to terminate matures; that is the date on which the tenancy stands terminated”. (Emphasis supplied)

The Apex Court then observed in para 15 of its judgment in P.Suseela (supra) as under:—

“15. Similar is the case on facts here. A vested right would arise only if any of the appellants before us had actually been appointed to the post of Lecturer/Assistant Professors. Till that date, there is no vested right in any of the appellants. At the highest, the appellants could only contend that they have a right to be considered for the post of Lecturer/Assistant Professor. 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 in the form of NET test 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. It is clear, therefore, that the contentions of the private appellants before us must fail.”

The Apex Court therefore held in the facts of P.Suseela that a new eligibility condition would only be prospective and it would apply only at the stage of appointment.

19. The learned Single Judge relied on the judgment of the Apex Court in P. Suseela (supra) and in para 9 observed that the observations of the Apex Court in para 15 of the said judgment would be applicable to the facts of the present case. The learned Single Judge observed that since the second Defendant was already a Chairman and Managing Director of the 1st Defendant when he turned 70, the 2013 Act could not operate as an immediate termination of his appointment, as that would give a retrospective application to the 2013 Act.

20. In our view, the learned Single Judge has clearly erred in applying the ratio of the Judgment in P. Suseela (supra) to the facts of this case. In P. Suseela, by virtue of the power vested under the Act, Regulations were framed and an additional minimum eligibility criteria was introduced, apart from existing criteria for the appointment of Lecturers. The Apex Court in para 15 has observed that till the Appellants were actually appointed to the post of Lecturer/Assistant Professor, no vested right was created in any of the Appellants. It held that, at the most, the Appellants could contend that they have a right to be considered for the post of Lecturer/Assistant Professor and, secondly, it held that this would not mean that Regulations laying down such minimum eligibility criteria would be retrospective in operation.

21. In our view, the learned Single Judge has erred in holding that ratio of the said judgment is applicable to the facts of the present case. It has to be borne in mind that by virtue of the Amendment Act of 2013, which came into force on 01/04/2014, one additional disqualification was added to the list of disqualifications which were in existence under the old Act under Section 267. Since a new clause was added as further disqualification for appointment or continuation as Managing Director of the Company, it would operate not only at the stage of appointment but also would operate 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 no right to be continued as Managing Director, unless a special resolution was passed by the Company. There is no question therefore of the retrospective application of the provision. Since Section 196(3)(a) would apply prospectively, whoever attains the age of 70 after the Amendment Act came into force would cease to function as Managing Director by operation of statute. Ratio of the said judgments therefore on the retrospective application, which have been relied upon by the learned Senior Counsel appearing on behalf of Respondent No.2 viz. in K.S. Paripoornan v. State of Kerala and others [1994] 5 SCC 493 (paras 64-68), Commissioner of Income Tax, U.P. v. M.S. Shah Sadiq and Sons [1987] 3 SCC 516 (Para 15), J.S. Yadav v. the State of Uttar Pradesh and another [2011] 6 SCC 570 (paras 20-24 and 28-29) and other judgments relating to retrospective application of the statute will not apply to the facts of the present case.

In J.S. Yadav (supra), facts were that the appellant was a member of the State Human Rights Commission. The provision requiring seven years’ experience as a District Judge was brought into force after his appointment. The Apex Court held that he had vested right to complete his tenure. In our view, ratio of the said judgment would not apply to the facts of the present case. A distinction will have to be made between addition of eligibility criteria to the existing provision and addition of disqualification to continue in that post after the initial appointment.

22. In the present case, prior to 2013 Amendment Act, appointment after the age of 70 years was not permissible subject to proviso but after the Amendment Act came into force, 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, in that event, 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 to the Section then in such a case, after disqualification is incurred after his initial appointment, he would cease to continue as Managing Director since the disqualification would operate as cesession or discontinuation to work as Managing Director. In our view, the learned Single Judge has failed to note this distinction between the 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. The judgments in P. Suseela (supra) and J.S. Yadav (supra) therefore would not apply to the facts of the present case. For the same reasons, Section 6(c) of the General Clauses Act 1897 will not be applicable in the present case.

23. The last submission made by Mr. Seervai, the learned Senior Counsel for Respondent No.2 was that executive interpretation of the said section supported the interpretation placed by the Respondent No.2 on Section 196(3)(a). Reliance was placed on a Circular issued by Government of India, Ministry of Industry (Department of Company Affairs), in the context of the Companies (Amendment) Act, 1988 clarifying that the conditions specified in Schedule XIII Part-1 of the 1956 Act were required to be satisfied only at the time of appointment. It further observed that if the appointee, after appointment, did not satisfy any of the said conditions, it would not debar the person concerned from continuing in office for the full tenure of his appointment. Secondly, reliance was also placed on Schedule-V of 2013 Act which is also in pari materia with Schedule XIII of 1956 Act which speaks about the conditions to be fulfilled for the appointment of managing or full time Director or Manager without the approval of the Central Government. It was submitted that Clause (c) of Schedule-V of 2013 Act is exactly the same as Section 196(3)(a) and therefore it was submitted that Section 196(3)(a) would apply only in cases of appointment.

24. In our view, again, the said submission is without any substance. As mentioned hereinabove, prior to the amendment, section 196(3)(a) was a part of section 269 which mentioned the eligibility criteria for appointment of Managing Director and, in that context, the Circular dated 13/04/1989 was issued. After the amendment, however, since the said clause has been incorporated in the list of disqualifications, the meaning which was given earlier i.e. prior to the amendment to Schedule XIII of 1956 Act, cannot be given now to disqualification which is added in Section 196(3)(a). It will not be possible therefore 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 matter of public policy.

25. In other words, if appointment to the post of Managing Director is made after coming into force of the Amendment Act, 2013 on 1-4-2014, 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 1-4-2014 when he was below the age of 70 years, on account of operation of statute, disqualification, whenever incurred after the Amendment Act, would operate automatically, subject to proviso i.e. special resolution being passed by the Company.

26. Appeal is therefore allowed. The impugned order passed by the learned Single Judge is set aside. Notice of Motion (L) No.434 of 2015 taken out by the Appellant in Suit (L) No.146 of 2015 is allowed in terms of prayer clause (a).

27. Appeal is accordingly disposed of. Since appeal itself is disposed of, Notice of Motion (L) No.2250 of 2015 taken out by the Appellant does not survive and it is accordingly disposed of.