Case Note & Summary
The dispute arose within the Narang family concerning control and management of Narang International Hotels Private Limited, a deemed public limited company engaged in hoteliering and flight catering. Rama Narang, the founder and largest shareholder, was appointed Managing Director on 25 June 1990 and later Chairman and Director for life by amendment of Articles of Association on 29 June 1990. His sons, Ramesh Narang and Rajesh Narang, challenged his continuation as Managing Director on the ground that his conviction on 22 December 1986 by the Additional Sessions Judge, Delhi for offences under Sections 120-B and 420 read with Section 114 IPC involving moral turpitude disqualified him under Section 267 of the Companies Act, 1956. Ramesh Narang first filed Company Petition No. 681 of 1990 under Sections 397 and 398 of the Companies Act, which he unconditionally withdrew on 5 July 1991. Subsequently, Sanjay Narang filed a petition before the Company Law Board, which was disposed of in terms of a family settlement dated 30 January 1992 recognising Rama Narang's valid appointment as Chairman and Managing Director. Disputes resurfaced when Ramesh Narang filed Company Law Board Petition No. 28 of 1992 alleging oppression and mismanagement. In July 1992, Rama Narang issued notice for a Board meeting on 13 July 1992, while Ramesh Narang purported to hold a parallel meeting on the same date and passed resolutions declaring that Rama Narang had ceased to be Managing Director due to Section 267. Rama Narang and respondents 4 and 5 filed Suit No. 2090 of 1992 seeking declarations that the Board meeting was illegal and an injunction against implementation of its decisions. The learned Single Judge of the Bombay High Court, after hearing Notice of Motion No. 1593 of 1992, held that the appointment of Rama Narang was not void ab initio and that the meeting of 13 July 1992 was not properly convened, and granted interim reliefs restraining implementation of the alleged Board decisions and restraining obstruction of Rama Narang's functioning as Chairman and Managing Director. The Division Bench of the Bombay High Court partly allowed the appeal, setting aside the relief regarding obstruction of functioning while maintaining the stay on implementation of Board decisions. The Division Bench reasoned that Section 267 of the Companies Act is mandatory and that an appellate court under Section 389(1) CrPC could not suspend the conviction itself, only the execution of sentence or order; Section 482 CrPC could not be invoked to avoid disqualifications under other statutes. The Supreme Court, on appeal, had to determine the scope of Section 267 and the appellate court's power to suspend conviction. The Court held that if the appellate court suspends the order of conviction under Section 389(1) CrPC or in exercise of inherent powers, the disqualification under Section 267 does not operate. It found that the Division Bench erred in holding that conviction could not be suspended and in setting aside the Single Judge's relief (b). Accordingly, the Supreme Court allowed the appeal, set aside the Division Bench's order insofar as it set aside relief (b), and restored the Single Judge's order granting both interim reliefs.
Headnote
A) Company Law - Disqualification of Managing Director - Section 267 Companies Act, 1956 - Conviction for offence involving moral turpitude imposes mandatory bar on appointment or continuation as managing or whole-time director, with no statutory relaxation unlike Sections 274(2) and 283(2) for directors - Division Bench held the prohibition absolute and applicable to appellant who was convicted on 22 December 1986 under Sections 120-B, 420/114 IPC and appointed as Director in 1988 and Managing Director in 1990 - Held that Section 267 is mandatory and no notification or appeal period relief is provided for Managing Director disqualification (Paras 4, 8). B) Criminal Procedure - Suspension of Conviction - Section 389(1) Code of Criminal Procedure, 1973 - Appellate court can suspend execution of sentence or order appealed against but not the conviction itself; expression 'order' does not include conviction; inherent powers under Section 482 cannot be used to suspend conviction to avoid statutory disqualifications under other enactments - Division Bench rejected the contention that suspension of conviction was permissible, observing that the powers of the Appellate Court do not entitle it to direct that the order of conviction should stand suspended (Para 8). C) Company Law - Oppression and Mismanagement - Sections 397, 398 Companies Act, 1956 - Interim Injunction - Single Judge granted interim reliefs restraining implementation of decisions of allegedly illegal Board meeting and interference with appellant's functioning as Chairman and Managing Director; Division Bench partly allowed appeal setting aside obstruction/interference relief while retaining stay on Board meeting decisions - Appeal to Supreme Court concerned correctness of Division Bench's order in setting aside relief (b) of Notice of Motion No. 1593 of 1992 (Paras 1, 7). D) Civil Procedure - Interim Relief - Notice of Motion No. 1593 of 1992 - Validity of Board Meeting - Single Judge on appreciation of evidence held meeting of 13 July 1992 not properly and validly convened, hence entire proceedings bad in law; such factual finding not disturbed by Division Bench - Interim relief in terms of prayer (a) upheld (Para 7).
Issue of Consideration
Whether Section 267 Companies Act absolutely disqualifies a person convicted of an offence involving moral turpitude from being appointed or continued as Managing Director; whether an appellate court under Section 389(1) CrPC or Section 482 CrPC has power to suspend the order of conviction itself; whether the Board meeting held on 13 July 1992 was validly convened and whether interim reliefs should be granted.
Final Decision
Supreme Court allowed the appeal, set aside the Division Bench's order insofar as it set aside relief (b), and restored the Single Judge's order granting both interim reliefs; held that Section 267 Companies Act disqualification does not operate when conviction is suspended under Section 389(1) CrPC or Section 482.
Law Points
- Section 267 Companies Act imposes mandatory disqualification on managing director convicted for offence involving moral turpitude
- appellate court under Section 389(1) CrPC can suspend order of conviction
- suspension of conviction removes disqualification under Section 267
- Section 274 and Section 283 provide limited relaxation for directors but not managing directors
- inherent powers under Section 482 cannot be used to circumvent statutory disqualifications
- board meeting validity requires proper notice and convening
- interim injunction can restrain implementation of illegal board decisions
