|
"Managing
Director" [Clause (26)]
Managing Or Wholetime Director Or Manager
A managing director, as defined in Section 2(26), means a director who
is encrusted with substantial powers of management which would not
otherwise be exercisable by him. The "substantial powers" of management
may be conferred upon him by virtue of an agreement with the company, or
by a resolution of the company or the Board or by virtue of its
memorandum and articles. The powers so conferred are alterable by the
company. He is also removable the same way as he was appointed
irrespective of the fact that his appointment has been approved by the
Central Government. But if he is prematurely removed from office he is
entitled to compensation. A managing director is an employee of the
company, but not to the extent so as to be entitled to preferential
payments.(News Papers Proprietary Syndicate Ltd,Re, [1990]2Ch349).
It is an essential requirement of
his office as "managing director" that he should hold the office of a
director. A managing director who is not a director is contradiction in
terms. Shirlaw v. Southern Foundaries Ltd., (1940) 10 Com Cases I I (CA)
affirmed on appeal Southern Foundaries Ltd. v. Shirlaw, (1940) 10 Com
Cases 255 :(1940) 2 All ER 445 (HL); Balchand C v. Devashola (Nilgiri)
Tea Estates Co. Ltd., (1972) 42 Com Cases 623 (Mad).
A managing director occupies the dual capacity of being a director as
well as employee of the company. Thus for example, the Supreme Court
observed that he can be regarded as a principal employer for the
purposes of the ESI Act, 1948. Employees State Insurance Corpn. v. Appex
Engineering P. Ltd., (1998) 1 Comp LJ 10: [19981 1 LLJ 274 (SC). He is
not a mere servant, he is an agent of the company with capacity to bind
the company within the sphere of management authorised to him. Happy
Home Builders (Karnataka) P. Lid. v. Delite Enterprises, (1994) 13 Corpt
LA 405 (Kar).
The day to day management is
entrusted to the managing director who can exercise powers of management
without referring to the Board. It is necessary that the articles must
provide for such an appointment being made. Boschoek Proprietary Co.
Ltd. v. Fuke, (1906) 1 Ch 148.
A managing director who was
prosecuted for default under S. 220 contended that he was not liable as
he had resigned before the last date for filing accounts. The court held
that a managing director combines in himself two capacities, namely,
manager and director. The capacity as manager cannot be terminated by
merely sending up resignations. It becomes effective only when the
company accepts the resignation and relieves him from his duties (on
facts held that despite resignation, he
continued to be managing director). Achutha Pai v. ROC, (1966) 36 Com
Cases 598 (Ker). In our view the observation that a managing director
holds two offices namely that of manager and of a director is not
correct. The concept of a 'manager' as defined by the Act is different
from that of managing director. A managing director as defined by the
Act is a director who is entrusted with substantial powers of
management. It is, however, true that a managing director may resign his
office and
continue! to be an ordinary director. His resignation as managing
director becomes effective only when accepted by the company.
A managing director cannot be
equated with an ordinary director. Section 2(26) and S. 2(13) show the
intention of the legislature to treat the two as separate categories.
Therefore, when the term of a managing director expires, he cannot
continue as a managing director without being reappointed. Sishu Ranjan
Dutta v. Bhola Nath Paper House Ltd., (1983)
53 Com Cases 883, 898 (Cal). A person does not acquire the status of a
manager or managing director only on being appointed as a director. Deen
Deyalu, T. v. Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP).
The question whether a managing
director, inasmuch as he is both a 'director' and 'employee' should in
his capacity of employee be considered a 'servant' or agent of the
company is unimportant for purposes of the Companies Act, though it may
be relevant for determining whether his remuneration is salary or
business income for purposes of theincome-tax Act. For a discussion of
his position as 'servant or 'agent' see Rant Prasad v. CIT (1972) 42
Corn Cases 544 : AIR 1973 SC 637; CIT v. M.S.P. Rajes, (1993) 77 Com
Cases 402 (Kar). See also Hindustan Vacuum Glass Lid. v. Union of India,
1981 Tax LR 2438 (Del); Southern Foundries (1926) Ltd. v. Shirlaw,
(1940) 10 Corn Cases 255 : (1940) 2 All ER 445 (HL); Union India Sugar
Mills Co. Ltd., Re, (1933) 3 Corn Cases 424 : AIR 1933 All 607, managing
director regarded an agent and therefore his knowledge as the knowledge
of the company; CIT v. L. Armstrong Smith, (1946) 16 Corn Cases 172
(Born), remuneration of managing director taxed! as salary and not as
income from business. CIT v. B.P. Dalmia (1994) 3 Comp LJ 268 (Ca!)
where also the managing director was viewed as a servant and his
remuneration taxable as salary. CIT v. M.S.P. Rajes, (1993) 77 Com Cases
402 (Kant).
The Civil Court will not grant an
injunction to restrain the company from interfering with a managing
director carrying out the duties of managing director who is removed
from his office. Joginder Singh Palta v.Time Travels (P.). Ltd., (1984)
56 Corn Cases 103 (Cal).
Where, for recovery of dues from the
company, a decree was passed against the company as well as its managing
director, it was held that the managing director was not the
judgment-debtor in his individual capacity and, therefore, he was not
liable to be arrested and detained in civil prison for enforcement of
the decree. Maruti Lid. v. Pan India Plastic P, Ltd., (1995) 83 Com
Cases 888 (P&H).
Managing Or
Wholetime Director, Link With Nature Of Duties, Not Designations
Department's Clarification.-Whether a director is to be regarded as a
whole-time director or as a managing director of the company would
depend on the nature and extent of the duties entrusted to him and that
the designation under which the appointment is made would no! make any
difference in this regard. Thus, if a director is entrusted with
managerial functions, he would be in the position of a Managing Director
notwithstanding the fact that he may be designated as a technical
adviser or as a technical director of the company. [Fourth Annual Report
Year ended 31 st March, 19601.
Company May Have More Than One Managing Director
Department's Clarification-"Section 2(26) defines "Managing director" as
a director who is entrusted with substantial powers of management which
term refers to the nature of the powers and not the quantum thereof.
Section 2(24) of the Companies Act, 1956, on the other hand has defined
the word manager' as an individual who has the management of the whole
or substantially the whole of the affairs of a company. Thus the
managing director of a company may be entrusted with substantial power
of management but not necessarily of the whole or substantially the
whole of the affairs of a company. A company may, therefore, have more
than one managing director. [Department's Clarification F. No.
8/16/(1)/61-PR].
Other Statutory Provisions.-Section
269 makes it obligatory for a company having capital of a sum as may be
prescribed (w.e.f. 18-9-1990 Rs. Five crores or more) to appoint a
managing director or wholetime director or manager. Section 267
disqualifies certain persons from being appointed as managing director.
Section 316 prescribes the number of companies in
which a person can be appointed as managing director at the same time;
section 317 restricts the maximum term of appointment to five years. The
remuneration of a managing director is now governed by section 309 and
Schedule XIII.
Procedure Of Appointment [S. 269]
Section 269 has been recast by the amendment of 1988. In the case of
public companies or their subsidiary private companies, Teaching a
figure of paid-up share capital which may be prescribed [Rs 5 crores or
more] the appointment of a managing director, whole-time director or
manager has been made compulsory. The appointment has to correspond with
the conditions specified in Parts I and II of Schedule XIII, which parts
are subject to the provisions of Part III. The appointment and
remuneration require approval of shareholders in general meeting. The
auditor of the company or company secretary has to certify that
requirements have been complied with. A return of the appointment in a
prescribed form must be filed with the Government within 90 days.
Approval of the Central Government is not necessary in such cases. But
if the appointment does not comply with the schedule, the approval
becomes necessary. Application for approval must be made within 90 days.
The Central Government may not accord the approval if it is satisfied
that the candidate is not a fit and proper person for the post and his
appointment is not in public interest and the terms and conditions of
the appointment are not fair. The Government may accord the approval for
a shorter period than proposed.
If there is no approval, the
appointee should vacate the office from the date of the communication of
the refusal to the company, failing which he incurs a penalty of Rs 500
for every day of usurpation of the office.
Where the Government suo motu or on
information received is prima facie of opinion that an appointment has
been made without approval in contravention of the requirements of the
schedule, the Government shall be competent to refer the matter to the
Company Law Board for a decision.The Board has to give notice to the
company, the appointee and any other officer of the company who was
responsible for compliance of Schedule XIII to show cause why the
appointment should not be terminated and the penalty of sub-section (10)
imposed. The Board should give appropriate opportunity and then may make
an order declaring that there has been a contravention. The declaration
will have the following effects: (1) the company is liable to a fine
extending upto Rs 5000 ; (2) every officer of the company who is in
default is liable to a fine of Rs 10,000 ; (3) the appointment comes to
an end and the appointee is liable to a fine of Rs 10,000 and is also
liable to refund the entire
amount of salaries, commissions and perquisites received by him upto the
date of the order.
Any violation of the order of the
Board or any default in meeting its consequences is further punishable
under sub-section (II). Every officer of the company who is in default
and the managing or whole-time director or the manager, shall be
punishable with imprisonment extending upto three years and also fine
extending upto Rs 50 for every day of default. Whether such a double
penalty amounts to a violation of the doctrine of double jeopardy, only
time will decide.
Sub-section (12) provides that the
acts of such a person done by him upto the date of the finding that his
appointment was void would be valid provided that they were otherwise
valid.
The section concludes with an
Explanation that the word "appointment" includes reappointment and
"whole-time director" includes a director in the wholetime employment of
the company.
The Government examines whether the
proposed candidate is a fit and proper person. The Government may refuse
the proposal where there is a pending prosecution against the person
concerned. Further, the Government may sanction the appointment subject
to any condition that it considers necessary. Thus where the person
proposed to be appointed was
a promoter of the company and had in that capacity made a secret profit
of three lakh rupees, the Government approved his appointment subject to
the condition that he restored the profit to the company.
Disqualifications [S. 267]
The following cannot be appointed managing or whole-time directors: (1)
A person who is an undischarged insolvent or has at any time been
adjudged insolvent. (2) A person who suspends or has at any time
suspended, payment to his creditors or makes or has made a composition
with them. (3) A person who is or has been convicted by a court of an
offence involving moral turpitude. The first Part of Schedule XIII gives
the list of statutes and provides that any person convicted for
violating them and sentenced to imprisonment or fine up to Rs 1000 shall
not be appointed without the approval of the Central Government.
Where a person is already a managing
director of another company he can be appointed only with the unanimous
resolution of the board of directors. 16 The Central Government may
permit Any person to be appointed managing director of more than two
companies if the 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 [S 316(2), proviso]
The maximum term of appointment can
be five years at a time and a new term cannot be sanctioned earlier than
two years from the date on which it is to come into force. The terms of
appointment can be changed, when they are to be different from those
prescribed by Schedule XIII, only with the approval of the Central
Government.
The remuneration of a managing
director cannot exceed five per cent of the net profits and if there are
more than one managing directors, ten per cent for all of them together,
[S. 309] Where a managerial personnel is working in more than one
company, he can draw remuneration from one or both companies provided
that the total remuneration drawn from the companies does not exceed the
higher maximum limit admissible from any one of the companies of which
he is a managerial personnel.
|
