Legal experts are divided on the apparent conflict between two provisions in the Companies Bill, recently approved by Parliament, dealing with the ‘disqualifications for appointment of directors’ and ‘vacation of office of director’.
Clause 164 in the new Bill says a person is qualified of being appointed as a director on the Board even if he has made a legal appeal against any conviction involving “moral turpitude” or “otherwise”. However, Clause 167 states if the same person becomes a director and then faces conviction and appeals against it, then he has to vacate the office first. In both cases, the minimum duration for sentence should be not less than six months.
Under the current Companies Act of 1956, there is no disqualification for a director when an appeal is filed against the conviction involving moral turpitude.
The Bill is awaiting the clearance from the upper House of Parliament. Legal experts said there is merit in re-looking the language of these two provisions.
“The contradiction is that a person is not disqualified from being appointed at the stage of initial appointment but if the same person attracts such disqualification post appointment then he has to vacate his office even if an appeal has been preferred,” said a senior company secretary in a leading telecom firm. However, reading out the fineprint of the two clauses, Harinderjit Singh, partner, PriceWaterhouse said: “I feel the provisions are spelled out in detail and they have to be read with the Indian Penal Code. Sometimes a lot of frivolous charges are made against directors. The new Bill protects their rights. I think both these provisions make the laws stronger. They are fine.”
On its part, a senior functionary of the Institute of Chartered Accountants of India said: “In my view, asking a director to vacate his office even before he is finally pronounced ‘guilty’ or ‘not guilty’ is unwarranted and it restricts his rights. This should be reviewed.”
Even the Parliamentary Standing Committee on finance, that examined the Bill in detail, wanted changes to both Clause 164 and 167. In its report, it said: “Clause should cover only offence involving moral turpitude. Vacation of office by a director should be effective only after the conviction has been upheld by the court of final appeal as there could be error in conviction by the court in the first instance.”
However, the corporate affairs ministry rejected the suggestion stating the words “whether involving moral turpitude or otherwise” merely signify the fact that offences carrying a minimum sentence will attract the liability to vacate the position of director.
“Hence there may not be any necessity of any modification in the clause,” the ministry said in its reply. Also, the ministry said that conviction of imprisonment of more than six months is for serious offence and it will be a difficult task to identify which offence in this category involves moral turpitude.
On the clause of vacation of office by a director, the corporate affairs ministry said: “Where an appellate court stays the conviction, the requirement to vacate will also be in abeyance. Hence there may not be any necessity of any modification in the clause.”
