JOB INSECURITY AT 70: IMPLICATION OF AMENDED SECTION 196(3) OF THE COMPANIES ACT, 2013.
The recent judgement of the Division Bench of the Bombay High Court in Sridhar Sundararajan v. Ultramarine & Pigments Limited reviewed the disqualifications which are applicable to a managing director, whole-time director or manager of a company in view of the amendment to Section 196 of the Companies Act, 2013 (Companies Act).
The Court had to determine whether the order of the single judge dismissing the application made by the plaintiff to restrain an individual from continuing to exercise his powers as Chairman and Managing Director of a company after attaining the age of 70 years in view of the new Section 196(3) (a) of the Companies Act was sustainable. Further, the Court also had to determine if the disqualification would have retrospective application and whether it would affect the vested right of a person who was appointed as Managing Director (MD) prior to the amendment. The Court stated that the language of the said amendment is plain and unambiguous and hence, it is not open to the Court to give it more than one meaning. Further, the Court held that the vested right of a person would get affected only with respect to an additional eligibility criteria and not with respect to an additional disqualification, in effect, making the additional disqualification retrospectively applicable to MDs already appointed prior to amendment of Section 196(3).
The erstwhile Section 267 of the Companies Act, 1956 (Old Companies Act) prescribed three disqualifications which are applicable to an MD or a whole-time director of a company.
Section 267 was replaced by Section 196(3) of the Companies Act which added an additional disqualification for appointment/ continuation for any person as MD, whole-time director or manager with respect to his age vide Section 196(3)(a).
SCOPE OF SECTION 196 OF THE COMPANIES ACT
Section 196 provides for the appointment of MD, whole-time director or manager and corresponds to Sections 197-A, 267, 269, 317, 384, 385 and 388 of the Old Companies Act. Vide Amendment Act of 2014, which came into force on 1 April 2014, an additional disqualification with respect to appointment or continuation of employment of any person as MD, whole-time director or manager was introduced to Section 196(3) of the Companies Act as provided under Section 196(3)(a) (Amendment).
The relevant portion of Section 196(3) post the Amendment reads as under:
S. 196. – Appointment of managing director, whole-time director or manager. –
(3) No company shall appoint or continue the employment of any personas managing director, whole- time director or manager who –
(a) is below the age of 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 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.
FACTS OF THE CASE
In the instant case, an individual was reappointed as Chairman and MD of a company on 1 August 2012 for a further period of five years till 2017 and the appellant was appointed as Joint MD of the same company.
The Companies Act came to be amended on 1 April 2014 and vide the Amendment sub-section 196(3)(a) was introduced. As per the new sub-section, an MD could not be appointed or continued after he had attained the age of 70 years.
In view of the above amendment, the appellant sought an order of injunction to restrain the Chairman and MD from functioning or continuing to exercise his powers as Chairman and MD of the company.
SUBMISSIONS BY PARTIES
Counsel for the appellant submitted that the amended Section 196(3) as a matter of public policy contains mandatory prohibition/ bar against any company from continuing the MD in employment once he has attained the age of 70 years.
Whereas the Chairman and MD’s counsel submitted that the amended Section would not apply to the MD who has been appointed before 1 April 2014 and that there is presumption against legislation operating retrospectively which would further affect the vested right of the MD before 1 April 2014. The Division Bench, after hearing the contentions, formulated the following question:
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?
FINDING OF THE COURT
The Court examined the nature of disqualification as provided under the erstwhile Section 267 of the old Act. As reproduced above, the Section provides that certain persons could not be appointed as MDs and no company shall continue the appointment or employment of any person as its MD who is (a) an undischarged insolvent or has been adjudged as an insolvent, (b) suspense or has suspended payment to his creditors and (c) is convicted by a Court for an offence involving moral turpitude.
By reading the above provision, the Court inferred that the Section “obviously provided for cesession or non-continuation of appointment of a personas Managing Director who has incurred these three disqualifications”.
Further by reading the condition prescribed in the erstwhile Section 269(2) of the Old Companies Act, the Court stated that under the previous regime a person was eligible to be appointed, provided his appointment was approved by a special general resolution passed by the company in its general meeting. However post the amendment to Section 196(3) of the Companies Act, any person above the age of 70 years shall be appointed or continued in the capacity of a managerial personal subject to special resolution to that effect by the company with an explanatory statement annexed to the notice for such motion which shall indicate the justification for the said appointment.
The Court observed that the obvious legislative intent was to prohibit a person who was appointed as a managerial personal from continuing in his/her capacity once the person has attained the age of 70.
In the view of the Court, the language of Section 196(3) as well as the erstwhile Section 267 is plain, simple and unambiguous and does not warrant more than one meaning. The Court referred to the Supreme Court decision in Rama Narang v. Ramesh Narang, where the Apex Court had to interpret Section 267 with respect to continuation of a person as MD upon his conviction and sentence by an Additional Sessions Judge in Delhi, notwithstanding the admission of the appeal to the Delhi High Court and the stay granted by the Delhi High Court.
The Apex Court held that the language of Section 267 of the old Act “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”. The Apex Court further held that, “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”.
The Bombay High Court concurred with the decision of the Apex Court and stated that the new disqualification provided under Section 196(3)(a) of the Companies Act cannot be fractured or split from the remaining set of disqualifications from (b) to (d). Holding this to be the correct position, the Court held that the Single Judge erred in dissecting Section 196(3) in two parts and holding application of Section 196(3)(a) in a different footing.
By substantiating this view, the Court held that an interpretation cannot be given to exclude the MD appointed prior to 1 April 2014 from the purview of prohibition contained in Section 196(3). The disqualifications which are set out are a matter of public policy and it is not open to the Court to add or delete words from the provision or change the plain statutory language.
EXISTING RIGHT vs VESTED RIGHT
The primary contention of counsel for the Chairman and MD was that the amendment to Section 196(3) would affect his vested right who was appointed prior to 1 April 2014.
The counsel relied on the Apex Court judgement in P Suseela v. University Grants Commission in which case the constitutional validity of the UGC Regulations 2009 under which NET/SLET which was to be the minimum eligibility condition was challenged.
In Suseela, the Apex Court observed that it was necessary to make distinction between existing right and vested right. The Apex Court relied on the decision in Trimbak Damodhar Rajpurkar v. Assaram Hiraman Patil, where it was held that 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.
In Trimbak, the Court referred to the observations made by Buckley L.J in West v. Gwynne that, 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 is understand to be retrospective.
Further, at paragraph 15 of its judgement in Suseela, the Apex Court observed that in the facts of the case, a vested right would arise only if any of the appellants had actually been appointed as lecturer. Till such appointment, there is no vested right in favour of the appellant. Further, merely because an additional eligibility criteria in the form of NET test is laid down, does not mean that any vested right of the appellant is affected and in effect the new eligibility condition would only be prospective and it would not apply at the stage of appointment.
In the instant case, the above observations in Suseela at paragraph 15, were relied on by the Single Judge to take the view that the individual was already a Chairman and MD when he turned 70 and the Amendment could not operate as an immediate termination of his appointment, which would be in the nature of a retrospective application.
The Hon’ble Court held that the Single Judge erred in applying the ratio of Suseela to the facts of the present case. The Court held that by virtue of amendment to Section 196(3), an additional disqualification was added to the list of existing disqualifications. The new sub-section (a) to Section 196(3) was added as a further disqualification for appointment or continuation as MD of the Company.
The effect of the new sub-section is straight forward that it would not only apply at the stage of appointment but also would operate at the stage were a person has already been appointed and attained the age of 70 years and by virtue of the said amendment, had no right to continue as MD, unless a special resolution was passed to that effect.
Counsel for the Chairman and MD further relied on the Apex Court decision in J S Yadav v. State of Uttar Pradesh and Anr. Here an additional provision requiring seven years’ experience as a District Judge was brought into force after the appointment of the Appellant as a member of the State Human Rights Commission. In the facts of the case, the Apex Court held that the Appellant had a vested right to complete his tenure.
The Hon’ble Court in the instant case stated that the ratio in J S Yadav would not be applicable to the facts of the case. The Court drew distinction between an additional qualification and an additional disqualification to continue in that post after the initial appointment.
According to the Court, if an eligibility criteria is changed after appointment, a vested right is created in favour of the person and the said criteria could not be applied retrospectively. Whereas if it is an additional disqualification is added, a person would cease to continue in his position as MD since the said disqualification would operate as cesession or discontinuation to work as MD which is the position in the facts of the instant case.
One of the principles regarding retrospective applicability of statutes is that unless there are words in the statute which show the intent of affecting existing/ vested rights, the statute is deemed to be prospective. However, the scope of discussion in the instant case revolved primarily on the issue of retrospective application of the additional disqualification and its effect on the vested right of a person.
Applying the principles of statutory interpretation it can be stated that the amendment is unequivocal with respect to its retrospective application which the Court concurred to in the instant matter.
However in practical terms it is desirable to give the said amendment a liberal interpretation especially if companies are to comply with explanation to the special resolution for continuation of a person as MD who suffers from the additional disqualification.
 Sridhar Sundararajan v. Ultramarine & Pigments Limited Company Appeal (L) No 632 of 2015 in Notice of Motion (L) No. 434 of 2015 in Suit (L) No. 146 of 2015 along with Notice of Motion (L) No. 2250 of 2015; judgment dated 8th February 2016, pronounced by Justice V. M. Kanade.
 Para 8.
 Para 10.
 Rama Narang vs Ramesh Narang (1995) 2 SCC 513.
 Para 15.
 Para 17.
 P Suseela vs University Grants Commission 2015 (3) SCALE 726.
 Trimbak Damodhar Rajpurkar v. Assaram Hiraman Patil 1962 Suppl 1 SCR 700.
 1911 2 CH 1 at pp 11, 12.
 Para 18.
 Para 19.
 J S Yadav v. State of Uttar Pradesh and Anr (2011) 6 SCC 570.
 Para 21
 Para 22.