2016 (2) TMI 583 - HC - Companies Law

Court rules on Companies Act amendment affecting Managing Directors' age limit, upholding shareholder interests and corporate governance.

Sridhar Sundararajan Versus Ultramarine & Pigments Limited and Rangaswamy Sampath

The court held that the amendment to Section 196(3)(a) of the Companies Act does not apply retrospectively but prospectively, affecting Managing Directors ... Effect of amendment of the Companies Act in 2013 - Appointment of M.D. - 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? - Held that:- 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. 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. 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. Appeal allowed. Issues Involved:1. Whether the amendment to Section 196(3)(a) of the Companies Act, 2013, which disallows the continuation of a Managing Director after attaining the age of 70 years, applies retrospectively.2. Whether the disqualification under Section 196(3)(a) operates automatically upon a Managing Director attaining the age of 70 years without a special resolution.3. Interpretation of legislative intent and public policy regarding the disqualification criteria for Managing Directors.Issue-wise Detailed Analysis:1. Retrospective Application of Section 196(3)(a):The primary issue was whether the amendment to Section 196(3)(a) of the Companies Act, 2013, which came into force on 01/04/2014, applies to Managing Directors appointed before this date. The amendment introduced a disqualification preventing individuals from continuing as Managing Directors after attaining the age of 70 years unless a special resolution was passed. The appellant argued that this disqualification should apply to all Managing Directors, regardless of their appointment date. The respondent contended that applying the amendment retrospectively would affect vested rights and that there is a presumption against retrospective legislation.2. Automatic Operation of Disqualification:The court examined whether the disqualification under Section 196(3)(a) operates automatically upon a Managing Director attaining the age of 70 years without a special resolution. The appellant argued that the language of Section 196(3)(a) is clear, simple, and unambiguous, mandating that the disqualification applies immediately upon attaining the age of 70 years. The respondent argued that the provision should not apply to Managing Directors appointed before the amendment date, as it would otherwise have a retrospective effect.3. Legislative Intent and Public Policy:The court analyzed the legislative intent behind the amendment, noting that the intention was to change the earlier position by providing that a person appointed as Managing Director before turning 70 years old is prohibited from continuing in that role once they attain the age of 70. The court referenced the Apex Court's interpretation in Rama Narang vs. Ramesh Narang, which emphasized the mandatory nature of such disqualifications to protect shareholders' interests and public policy.Judgment Analysis:Retrospective Application:The court concluded that the amendment to Section 196(3)(a) does not operate retrospectively but prospectively affects the continuation of Managing Directors who attain the age of 70 after the amendment's commencement. The court distinguished between adding eligibility criteria (which would apply prospectively) and adding disqualification criteria (which would apply immediately upon the occurrence of the disqualification).Automatic Operation of Disqualification:The court held that the disqualification under Section 196(3)(a) operates automatically upon a Managing Director attaining the age of 70 years unless a special resolution is passed by the company. The court emphasized that the provision's language is plain and unambiguous, and it applies to all Managing Directors regardless of their appointment date.Legislative Intent and Public Policy:The court affirmed that the legislative intent behind the amendment was to ensure that the management of companies is not in the hands of individuals who have attained the age of 70 unless justified by a special resolution. The court referenced the Apex Court's interpretation in Rama Narang, highlighting the importance of disqualification provisions in protecting shareholders' interests and maintaining public confidence in corporate governance.Conclusion:The court allowed the appeal, setting aside the impugned order of the learned Single Judge, and granted the appellant's Notice of Motion, restraining the respondent from continuing as Chairman and Managing Director of the company. The court clarified that the disqualification under Section 196(3)(a) applies automatically upon attaining the age of 70 years, and the provision does not operate retrospectively but prospectively affects the continuation of Managing Directors. The appeal was disposed of, and the related Notice of Motion was also disposed of accordingly.