Director turning 70 years - celebration or disqualification?

Facts of the case:

Ultramarine & Pigments Limited (‘Defendant Company’) is a listed public company. Mr. Rangaswamy Sampath (‘Defendant No. 2’) was appointed as the Chairman and Managing Director (‘CMD’) of Defendant Company with effect from August 13, 1990 and was re-appointed as CMD on August 1, 2012 for a further period of 5 years, under the Companies Act, 1956. The Defendant No. 2 attained the age of 70 years on 11, November 2014, after the effective date of Companies Act, 2013 (was effective, April 1, 2014). Mr. Sridhar Sundararajan (‘Plaintiff’) was appointed as a director of Defendant Company on May 21, 1998 and was appointed as Joint Managing Director with effect from August 1, 2012.

Issue before the Bombay High Court:

Since the Defendant No. 2 had attained the age of 70 years on 11 November 2014, whether his appointment as Managing Director, which was originally made for 5-years and had commenced on August 1, 2012, came to an end by operation of law on November 11, 2014, by virtue of the provisions contained in Section 196 (3) (a) of the Companies Act 2013 (‘CA, 2013’).

Held:

The Bombay High Court while giving its decision in the negative on the above assertion has analyzed the provisions of Section 196(3)(a) of CA, 2013 and the meaning and context of the word ‘continue’ in the said section. The Court has made following observations:

Section 196 (3) does not operate to interrupt the appointment of any director made prior to the coming into force of the Companies Act 2013, even in a case where the Managing Director crosses the age of 70 years during the term of his appointment.  It also does not interrupt the appointment of a Managing Director appointed after 1 April 2014 where at the date of such appointment or re-appointment the Managing Director was below the age of 70 years but crossed that age during his tenure.  There is no mid tenure cessation of Managing Directorship as a result of Section 196 (3) (a).

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. 

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.”

The section states that a person who is less than 21 years of age may not hold or ever be appointed to the position of a Managing Director, Whole time director or Manager. However, for a person who attains the age of 70 years, a proviso creates an exception. Section 196 of CA, 2013 was brought into effect from 1 April 2014.  The section can apply to appointments made after 1 April 2014, it cannot apply retrospectively. Section 196 of CA, 2013 cannot operate as an immediate termination of the appointment.  That would mean dating the operation of the Act back to the date of appointment i.e. retrospectively. Further, in case a person who is appointed as Managing Director on or after 1 April, 2014 attains the age of 70 years, he would not automatically cease to be Managing Director on account of provisions of Section 196 (3) (a) of CA, 2013. The context and meaning of the word ‘continue’ in Section 196 (3) (a) of CA, 2013 is a key to the interpretation of this provision. The proviso to the section also helps in its correct interpretation.  Special resolution is not required to continue the appointment; it is required only for appointment or re-appointment. As against Section 196 (3) of CA, 2013, the conditions in Section 196 (3) (b), (c) and (d) result in instantaneous cessation of the office.  Once a Managing Director, Whole time director or Manager attracts any of the disabilities / disqualifications as contemplated in (b), (c) and (d), the person ceases to hold the office instantaneously without any other action to be taken.  Rightly, there are no exceptions to this as against the age bar, which can be relaxed subject to certain conditions.  Thus, the proviso applies only to Section 196 (3) (a) of CA, 2013. Mere age bar cannot put a person in the same category as insolvents, fraudsters and the like as contemplated under Section 196 (3) (d) of CA, 2013. The age bar is not something new in the Companies Act 2013. It was present in Section 269 of the Companies Act 1956 read with Part I of Schedule XIII which contained a similar provision.  In the old provision also, there was no automatic discontinuance of Managing Directorship on attaining the age of 70 – it was applicable to appointments and reappointments.  Again, by way of a special resolution passed, such a person could be appointed / reappointed. Section 196 of CA, 2013 is a combination of Section 267 and 269 of the Companies Act 1956.  The rationale behind these sections has not changed in any way while drafting Section 196 of Companies Act 2013. 

Conclusion of the judgment:

The impact of the word “continue” in Section 196(3)(a) is as regards cessation under section 196 (3) (b), (c) and (d) of CA, 2013 where there is immediate cessation on the happening of the events in these clauses. As regards Section 196 (3) (a) of CA, 2013, the word “continue” in this sense shall apply to appointment and reappointment.  That is to say, in case the appointee is of 70 years at the time of his appointment or reappointment, a special resolution would be required as per the proviso. There would be no interruption in the appointment of any director made prior to 1 April, 2014 even when the person crosses the age of 70 years during the term of his appointment. Further, where a Managing Director is appointed after 1 April, 2014 and he attains 70 years during the term of his appointment, such appointment would also not be interrupted.  There is no mid-tenure cessation of Managing Directorship as a result of Section 196 (3) (a) of CA, 2013.

Impact 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 CA, 2013 by the company. 

Where a Managing Director was appointed before commencement of CA, 2013 and he attains the age of 70 after 1 April, 2014, there would be no automatic cessation of the appointment.  On completion of the term of appointment, if there is a proposal to re-appoint such person as Managing Director, the company would have to comply with the provisions of Section 196(3)(a) of CA, 2013 read with the proviso and pass necessary special resolution.

Where it is proposed to appoint a person as Managing Director after 1 April, 2014 and the person would complete 70 years during his term, the company can go ahead and appoint such a person.  At the time of completion of the tenure, necessary special resolution will be required to be passed if at all he is to be continued further.

Section 196(3) of CA, 2013 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) of CA, 2013. 

Comments:

This is a judgment which has interpreted the law after understanding its spirit. This has come in a quick time and would help all concerned to understand and interpret the law correctly. Defendant’s counsel placed a view that such continuation would be affected only in cases where appointment is done after 1^st April 2014. According to the defendant if a person who is of the age of 68 years is appointed after 1^st April 2014 for five years, he shall not continue after two years once he attains the age of 70 years. The court did not agree to this view either and gave a judgment that the age is relevant only on the date of appointment and not anytime later.

A remark by the judge turning 70 is an occasion for celebration and the person of 70 years should not be compared with fraudsters is interesting. Attaining age should not be a disqualification per se.