MDs/WTDs crossing 70 years of age mid-tenure lose their jobs

The
Bombay High Court has held that Managing/Whole-time Directors (“EDs”) will lose
their jobs if they cross 70 years of age during their tenure of appointment. This
is the new position of law under Section 196(3)(a) of the Companies Act, 2013,
which came into effect from 1
st April 2014, and which was not so
under the corresponding Section 267 of the Companies Act, 1956. (Note:- It was misleadingly
reported in media that
all
directors, whether Executive or Non-executive, will so lose their jobs).

The
implications of this decision are serious, even if in narrow cases of soon-to-be-septuagenarian EDs. There may be several such persons
who may already have crossed 70 years on or after 1st April 2014.
All of them would be deemed to have lost their jobs. 
The
facts of that case will make the position clearer. A Managing Director was
appointed for a term of 5 years with effect from 1st August 2012. He had
crossed 70 years halfway of his term on 11th November 2014. On that
day, it was held that he is deemed to have vacated his office as MD. The Court reversed the decision of the Single Judge who had held that such an MD should
be allowed to complete his full tenure. 
The
contention of the MD that this section cannot be held to have retrospective
effect was rejected.
Section
196(3)(a) contains a new disqualification. It provides that “no company shall appoint or continue the employment of any person as managing director,
whole-time or manager who (a) is below the age of twenty-one years or has attained the age of seventy years..”
This
is not merely a transitional issue. This applies to persons who were appointed
whether before or after 1st April 2014. Thus, there may be EDs who
are appointed before 1st April 2014 for a term at a time when such
disqualification did not exist in law. Such persons would lose their jobs if
they crossed, after 1st April 2014, 70 years of age. It would also
apply if the appointment were made after 1st April 2014.
The
decision applied to a case where the ED crossed 70 years of age midway through
his tenure. What about a person who is already more than 70 years old when he
is sought to be appointed? The proviso to Section 196(3)(a) states that he can
be appointed by passing a
special resolution and indicating in the explanatory statement the
justification for appointment of such person.
The
drafting of Section 196(3)(a) and the proviso thereto leaves much to desire.
Can such an appointment be made if the person is expected to cross 70 years
during his term? Can a special resolution be passed in advance so as to permit such ED to continue as such even
if he crosses 70 years midway of this term? Applying the Section/decision
literally and strictly, this is not possible. A fresh special resolution during
the term would have to be passed to ensure continuation. The proviso to Section
196(2) makes this more difficult as it prohibits re-appointment of EDs earlier
than one year of expiry of their tenure.

However, considering the
peculiarities of such a situation, it is submitted, with due respect to the
court, that if the substantive requirements of passing special resolution/giving such justification are complied with, the Section deserves a liberal
interpretation. Thus, such an ED ought to be allowed to complete his term. However,
it is better that a due clarification or relaxation is issued by the Ministry
of Corporate Affairs, or an amendment made to Section 196.


About the author

CA Jayant Thakur

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