DISQUALIFICATIONS OF A MANAGING DIRECTOR

[Mr. M. GOVINDARAJAN]

Section 267 of the Companies Act deals with appointment of Managing Directors. It provides that 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-

a) Is an undischarged insolvent, or has at any time been adjudged an insolvent;

b) Suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, a composition with them; or

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

Thus Section 267 provides who should not be appointed as managing directors. Section 316 of the Companies Act deals with the number of companies of which one person may be appointed managing director. Section 316 provides that-

1) No public company and no private company which is a subsidiary of a public company, shall after the commencement of this Act, appoint or employ any person as managing director, if he is either the managing director or the manager of any other company (including a private company which is not a subsidiary of a public company), except as provided in sub-section (2);

2) A public company or a private company which is a subsidiary of a public company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company (including a private company which is not a subsidiary of a public company):  Provided that such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the director then in India.

3) Where, at the commencement of this Act, any person is holding the office either of managing director or manager in more than two companies of which each one or at least one is a public company or a private company which is a subsidiary of a public company, he shall within one year from the commencement of the Companies (Amendment) Act, 1960, choose not more than two of these companies as companies in which he wishes to continue to hold the office of managing director or manager, as the case may be; and the provisions of clauses (b) and (c) of sub section (1) and of sub sections (2) and (3) of section 276 shall apply mutatis mutandis in relation to this case, as those provisions apply in relation to the case of director.

4) Notwithstanding anything contained in sub sections (1) to (3), the Central Government may, by order, permit any person to be appointed as a managing director of more than two companies, if the Central Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director.

In the appointment of managing directors many cases are reported in law journal.  One recent case came under a different perception.  In 'Ashok Mittal V. Ram Parshotam Mittal and others' - (2009) 90 CLA 214 (Del) the plaintiff has sought an interim order restraining the defendants to consider and act upon agent item No. 3 and 4 in the forthcoming meeting of the Board of defendant company.   The notice of Board meeting was issued on 17th December, 2007 and agenda item Nos. 3 and 4 are as under:

3. To consider reappointment of Shri R.P. Mittal as managing director of the company for a further period of 5 years from 1st January, 2008;

4. To fix date, time and place for convening extraordinary general meeting to approve the reappointment of Shri R.P. Mittal as managing director.

Plaintiff is one of the directors of the defendant No.5 Company while defendant Nos. 1 and 2 are also directors of the Board of the Company.  Defendant No.2 is the wife of defendant No.1, defendant Nos.4 and 5 are additional directors. The plaintiff contended the following:

> The defendant No.1 who is sought to be appointed as managing director of defendant No.5 company was not qualified in terms of provisions of companies Act;

> The plaintiff relied on Section 267 and 316 of the Companies Act, 1956;

> Section 267 was attracted since defendant No.1 has played fraud with several persons. The modus operandi of defendant No.1 was to incorporate companies, lure investors in the company, thereafter misappropriate the funds and send the company in liquidation;

> The disqualification stated in Section 267(b) was also attracted if a person acting as a managing director or director of a company plays fraud with the creditors and the company of which he is a director or managing director is not able to make payment or suspends payment to creditors;

> The defendant No.1 was declared defaulter or Reserve Bank of India since he cheated Punjab National Bank and failed to pay creditors and financial institutions viz., IFCI, ICICI, IDBI, PNB, UBI, Bank of India and South Indian Bank;

> The defendant No.1 cheated the above banks/financial institutions through companies viz., Mittal Fertilizers Ltd., Mittal Ispat Limited and Sharda Castings Ltd.,;

> Since he as managing director had not conducted the affairs of above companies in a prudent manner and the creditors were not paid, he was disqualified from becoming director of defendant No.5 company;

> The court can pierce the veil and see that the person behind playing fraud with the creditors or banks was defendant No.1;

> By virtue of Section 316 he cannot become a managing director since he was already a managing director of more than two other companies viz., Mittal Ispat Ltd., and Sharda Castings Ltd., etc.,

> The plaintiff was holder of preference shares and since plaintiff had not been paid dividends for two years, the plaintiff was entitled to vote in the Board meeting and general body meeting as a shareholder and the entire effort of defendant No.1 is to deprive the plaintiff of the fruits of its investment;

The defendant in written statement has denied the allegations and submitted the following:

> He was not the managing director of Mittal Ispat Ltd., and Sharda Castings Ltd.,;

> If defendant had been a managing director, the plaintiff, as a director, would have been in the custody of annual report and other documents showing that defendant No.1 as the managing director but the plaintiff has not produced those documents deliberately since they would have gone against plaintiff;

> The share capital of the alleged companies was less than Rs.5 crore and as per the Act the company was not obliged to have a managing director;

> In order to succeed in application the plaintiff has to show that he has a good prima facie case and balance of inconvenience was in favor of the plaintiff and the plaintiff would suffer irreparable loss and the plaintiff failed to prove it.

The Court after hearing both sides held that a perusal of Section 267 of the Act would show that disqualification under this section is personal. A combined reading of Section 267 (a) (b) and (c) makes it clear and if a person, who is sought to be appointed as managing director in his individual capacity was suffering from disqualification as specified under Section 267(a), (b) and (c) then only, he cannot be allowed to become managing director. This disqualification is not attracted if a person is alleged to have mismanaged the affairs of another company or another company in which he was director or managing director has not been able to pay debts of some creditors. The plaintiff has filed many documents but has not filed any document showing that defendant No.1 in his individual capacity failed to make payment to his creditors or at any time made a composition with any of them or at any time past or present, suspended the payment to his creditors.  Therefore the court considers that Section 267 of the Act will not be attracted in this case and no ground to grant temporary injunction.