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2006 DIGILAW 1426 (AP)

V. Ranga Rao v. P. Jaya Prasad Raja

2006-11-17

L.NARASIMHA REDDY

body2006
ORDER The petitioners in CRP No.5768 of 2003, filed this application, with a prayer to review the order, dated 19-7-2005, to the effect that the respondent No.1 herein, be restrained or disabled from participating in the meetings or management of the company, in view of the disqualification incurred by him. 2. In relation to the composition of the Board of Directors and the administration of the affairs of M/s. Anupama Homes India Private Limited, the petitioners filed O.S.No.696 of 2003, in the Court of Senior Civil Judge, City Civil Court, Hyderabad. Respondents 1 and 2 are directors, and others are associated with the affairs of the company. Two Interlocutory applications filed in the said suit gave rise to filing of three revisions before this Court, viz CRP Nos.5768, 5792 and 6756 of 2003. Through a common order, dated 19-7 -2005, this Court disposed of the revisions, directing inter alia, that pending the disposal of the suit, the affairs of the company shall be run and conducted, with participation of the petitioners 1 and 2 and respondents 1 and 2, as Directors, and that the day-to-day affairs shall be attended to, jointly by petitioner No.1 and respondent No.1. Certain other directions were also issued. 3. In this review petition, the petitioners contend that the 1st respondent incurred disqualification, from being continued as a director of the Company, in view of the conviction and sentence passed against him in C.C.Nos.76 and 77 of 2003, by the Court of Special Judge for Economic Offences at Hyderabad. Placing reliance upon Section 274(1)(d) of the Companies Act, (for short "the Act"), the petitioners urge that the 1st respondent can no longer be continued as director of the company, and accordingly, they seek modification and review of the order in the CRP. 4. The 1st respondent opposed the application, by stating that he had filer! Crl.A.Nos.222 and 223 of 2006, in the Court of Metropolitan Sessions Judge, Hyderabad, against the orders in C.C.Nos.76 and 77 of 2003, and that the sentence of imprisonment was also suspended. He contends that he had got adequate protection under the Act, to continue as director. 5. 4. The 1st respondent opposed the application, by stating that he had filer! Crl.A.Nos.222 and 223 of 2006, in the Court of Metropolitan Sessions Judge, Hyderabad, against the orders in C.C.Nos.76 and 77 of 2003, and that the sentence of imprisonment was also suspended. He contends that he had got adequate protection under the Act, to continue as director. 5. Sri S. Ravi, learned counsel for the petitioners, submits that Section 274 (1) (d) of the Act is clear in its purport and since the 1st respondent was convicted for an offence, involving moral turpitude and was sentenced to undergo imprisonment for six months and was fined, he can no longer be continued as a director, nor associated with the management of the company. He submits that the application of the provision is not restricted to verification of qualification, when a person is inducted as a director, but also to those who upheld the office. By making reference to clause (f) of the said provision, he contends that no (sic. any) other interpretation would be inconsistent, with the object sought to be achieved. 6. Sri S.R. Ashok, learned Senior Counsel for the 1st respondent, on the other hand submits that though it is a matter of record that the 1st respondent was sentenced to imprisonment in C.C.Nos. 76 and 77 of 2003, the same does not entail in cessation of the office held by him, in view of the specific provision contained in sub-section (2) of Section 283 of the Act. He submits that when the Act itself maintains clear distinction between the two situations, covered by Sections 274 and 283 of the Act, the petitioners cannot insist on the 1st respondent being disqualified. 7. The only question that arises for consideration in this review is as to whether the 1st respondent had incurred disqualification, from being continued on the Beard of Directors. Since this Court directed that he must be associated with the administration of the Company, pending disposal of the suit, and a subsequent development had intervened, the question assumes importance. If the answer is in the affirmative, the order passed by this Court requires modification and review. 8. It is matter of record that the 1st respondent was convicted for offence under Section 628 (a) of the Act, in C.C.No.76 of 2003 by the Court of Special Judge for Economic Offices at Hyderabad, through judgment dated 8-8-2005. If the answer is in the affirmative, the order passed by this Court requires modification and review. 8. It is matter of record that the 1st respondent was convicted for offence under Section 628 (a) of the Act, in C.C.No.76 of 2003 by the Court of Special Judge for Economic Offices at Hyderabad, through judgment dated 8-8-2005. He was sentenced to undergo simple imprisonment for three months and to pay fine of Rs.1,000/-. He was also convicted for offence under Section 628 of the Act, and Section 4091PC, by the same Court in C.C.No.77 of 2003. He was sentenced to undergo simple imprisonment for three months, with a fine of Rs. 1,000/-, for the offence under Section 628 of the Act, and rigorous imprisonment for six months, with a fine of Rs. 1,000/- for offence under Section 409 IPC, in C.C.No.77 of 2003, by the same Court, through the judgment of the same day. Section 274 of the Act enlists the circumstances, under which a person stands disqualified, from being appointed as the director of a company. It reads as under: “274 (1). 1,000/- for offence under Section 409 IPC, in C.C.No.77 of 2003, by the same Court, through the judgment of the same day. Section 274 of the Act enlists the circumstances, under which a person stands disqualified, from being appointed as the director of a company. It reads as under: “274 (1). A person shall not be capable of being appointed director of a company, if- (a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; (b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence; (e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or (f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of Section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section; (remaining portion of the Section is omitted as not necessary) From a perusal of clause (d) of sub-section (1), it becomes clear that if an individual is convicted for an offence, involving moral turpitude and sentenced to imprisonment for six months, he shall not be eligible to be appointed as director, till the expiry of 5 years, from the date of expiry such sentence. If this provision were to have covered the situations, not only of the verification of qualifications, while appointing an individual as a director, but also the eligibility of an individual, who is already on the Board of Directors, to continue; the request of the petitioners certainly deserves acceptance. 9. The Act, however, contains a different provision, in relation to vacation of office by directors, if they incur such disqualification, in the middle of their term. 9. The Act, however, contains a different provision, in relation to vacation of office by directors, if they incur such disqualification, in the middle of their term. It is important to note that the factors or situations that are mentioned in Section 274 of the Act, have almost been treated, as those rendering the person holding the office of director, disqualified to continue in the office. However, a different procedure is prescribed, as regards the manner, in which, the disqualification is to operate. Section 283 of the Act, and in particular sub-section (2) thereof, become relevant, in this regard. The provision reads as under: “283 (1). The office of a director shall become vacant if- (a) he fails to obtain within the time specified in sub-section (1) of Section 270, or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company; (b) he is found to be of unsound mind by a Court of competent jurisdiction; (c) he applies to be adjudicated an insolvent; (d) he is adjudged an insolvent; (e) he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months; (Clauses (f) to -(l) omitted as not necessary) (2) Notwithstanding anything in clauses (d), (e) and (j) of sub-section (1), the disqualification referred to in those clauses shall not take effect- (a) for thirty days from the date of the adjudication, sentence or order; (b) where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of; or (c) where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed of." Clause (e) of Section 283 (1) is almost similar to clause (d) of Section 274 (1) in its purport, notwithstanding slight difference, as to the language employed in, the respective provisions. Sub-section (2) of Section 283, however, brings about a substantial difference, as to the implication of the various circumstances contained in Sections 274 and 283. Sub-section (2) of Section 283, however, brings about a substantial difference, as to the implication of the various circumstances contained in Sections 274 and 283. From a perusal of the said provision,]t is evident that though an existing director of a company is sentenced to undergo imprisonment for six months and had otherwise incurred disqualification under clause (e) of Section 283 (1), such disqualification shall not take effect, initially for a period of 30 days from the date on which the director was sentenced. In case an appeal is preferred within that period, to an appellate forum, the disqualification shall not take effect till expiry of 7 days, from the date on which the appeal has been disposed of, irrespective of the fact whether the appellate forum had granted any order of stay or suspension. 10. From the above, it is clear that the Act maintains a distinction and dichotomy, as to the operation of disqualification, at the time of appointment of an individual as director, on the one hand, and vacation of office by an existing director, on the other hand, as a result of the disqualification suffered, in either case. While Section 274 of the Act governs the matter, at the time of appointment of an individual as director, Section 283 gets attracted, in the matter of attaching disqualification to a person, who is already on the Board of Directors. If the disqualification is suffered by an individual, before he is considered for appointment as director, he is completely precluded from being appointed. The fact whether an appeal is preferred by him, or whether the Court of appeal has suspended the conviction and sentence, or any of them, would, hardly, be of any significance. The impact of such disqualification on the existing director is, however, substantially different. Subsection (2) of Section 283 accords protection, till the remedy of appeal is exhausted by the director, who incurred such disqualification. Here again, the question as to whether the appellate Court had granted any order of stay of conviction or sentence, becomes almost insignificant. 11. Maintenance of dichotomy or distinction, in the matter of disqualifying a person from being appointed or elected to an office on the one hand, and causing cessation of office by a person, who is already holding it, on the other hand, is not something specific to the Act. Several enactments maintain such distinction. 11. Maintenance of dichotomy or distinction, in the matter of disqualifying a person from being appointed or elected to an office on the one hand, and causing cessation of office by a person, who is already holding it, on the other hand, is not something specific to the Act. Several enactments maintain such distinction. For instance, A.P. Panchayat Raj Act, 1994, and the A.P. Municipalities Act, 1965, stipulate certain factors, that disqualify an individual to hold an elected office. Sections 19 (3) and 13-B, respectively, of the said Acts, mandate that a person, who has more than three children subsequent to a stipulated date, shall not be qualified or eligible to be elected as member of the respective bodies. However, where a member of such body incurs such disqualification while in office, a different procedure is prescribed under Sections 22 and 17, respectively, of the said enactments. Even where such disqualification is noticed, the concerned executive officer is placed under obligation, to inform the same to the prescribed authority, who in turn is required to institute proceedings before the stipulated Court, for adjudication. The provisions also mandate that pending such adjudication, the member shall continue to hold the office. 12. From the above discussion, it becomes evident that though the 1st respondent had been sentenced to imprisonment, and incurred disqualification under Section 274 (1) (d) and 283 (1) (e) of the Act, he cannot be compelled to vacate the office, in view of the protection accorded to him, under sub-section (2) of Section 283 of the Act, since he preferred an appeal, against the order of conviction and sentence. 13. In that view of the matter, the review petition is dismissed. There shall be no order as to costs.