Critical analysis of provision relating to KMP & Directors

Introduction:

As the saying goes…… ‘Change is the only constant in life’. Similarly we can aptly say that ‘Change is the only constant in Laws’. We have already stepped into new era of change called the Companies Act, 2013 (‘the Act’) and even after completing half of decades still professionals and Industry grappling with the heat of changes in the Act and struggling to cope with the complexities and additional burden of compliances brought by the Act. It also cast onerous responsibility particularly on managerial personals and Key Managerial Personnel (KMP). Even after plethora of changes still there are many issues which need to ponder upon. The effort has been made in this exposition to articulate some important issues which are concerned with directors and KMP.

1. Can company have one Whole Time KMP for more than one subsidiary?

Section 203(3) of the Act provides that whole-time Key Managerial Personnel shall not hold office in more than one company except in its subsidiary company at the same time. This throws the question can company appoint one whole-time KMP for more than once subsidiary. Since there is no any clarification from Ministry of Corporate Affairs (MCA) so some experts formed an opinion that as per section 13 of the General Clauses Act, 1897 ‘singular’ shall include the ‘plural’, unless there is anything repugnant in the subject or the context. Thus, whole-time KMP may hold office in more than one subsidiary company.

The cardinal rule of interpretation of statue is that when the words of statute are precise and unambiguous then literal interpretation applied. If it’s throwing unclear, vague or ambiguous meaning then purposive interpretation resorted for finding out the true purpose of legislator by using external aids. When the language is plain and unambiguous and admits of only one meaning, no question of construction of a statute arise, for the Act speaks for itself.[1]

In the matter of Renula Bose V Rai Manmatha Nath Bose, the court have clarified that the plain ordinary grammatical meaning affords the best guide to ascertain the intention of legislator, other methods resorted if the language used in statute is ambiguous or leads to absurdity.

Section 13 of the General Clauses Act, 1897 has to be read keeping in view the words “unless there is anything repugnant in the subject or context”.  The most common rule of interpretation of statute is that every part of the statute must be read and construed together in harmonious manner, no any word shall be added or omitted while interpreting it. The legal maxim “A verbislegis non estrecedendum” which means, “from the words of law, there must be no departure” in other words it means that the word of the statue shall not change or alter while interpreting it. Hence the word “unless there is anything repugnant in the subject or context” shall not be ignored while resorting it.

It is pertinent to note that the Hon’ble. Supreme Cour in the matter M.T. Khan & Ors V. Government of Andhra Pradesh & Ors^[2] while dealing with the leave appeal against the impugned order of High Court said that the High Court committed an error while interpreting the section 13 of the General Clauses Act inasmuch as they failed to consider the important words under Article 367 of the Indian Constitution “unless the context otherwise requires”.

The key Managerial person may be hold the Key Managerial position in other companies but when it is construed with the word whole time, it denotes the intention of the legislature is to restrict his appointment to only one subsidiary.

Also the section 383A(1) of the Companies Act, 1956 which deals with the appointment of Company Secretary, the first proviso of Section 383A(1) of the Companies Act, 1956 used the word “employ”. Similarly, the Third proviso of Section 203(3) of the Act provides that:

“A 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 and 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 directors then in India.”

This indicates that the intention of the legislator is not to have a one person as KMP for multiple companies.

Even the Bombay High Court[3] clarified the expression “whole time” with respect to whole time director. The court clarified that the expression “whole time” refer to a director who spends all his time in management of the company in the same way as a managerial director does though he may accept the office of non-whole-time-director in other companies subject to the limits prescribed under section 275 read with section 277 and 278 of the Companies Act, 1956[4].

Therefore, from the above exposition it is clear that the intention of the legislator is not to have one whole time KMP for more than once subsidiary. Thus the word ‘subsidiary’ shall be construed singular only i.e for only one subsidiary.

2. Anomaly between Companies Amendment Act, 2017 and Schedule V of the Act:

On 12^th September, 2016 MCA amended schedule V whereby MCA added exemption clause in clause B of section II, Part II of schedule V of the Act for the requirement of Central Government (CG) approval if the Managerial person functioning in a professional capacity subject to certain conditions.

The Companies Amendment Act, 2017 removed the requirement of CG approval under section197 and schedule V except the appointment or re-appointment is in variance to the conditions specified in part I of Schedule V of the Act. Which means companies having insufficient profit can pay Managerial remuneration in excess of 11% limit as specified under first proviso of sec 197(1) by passing ordinary resolution or paying excess managerial remuneration above the 5% limit as provided under second proviso of section 197(1) of the Act by passing special resolution. Consequent to this amendment Schedule V part II also amended whereby the requirement of CG approval under section II, part II of the Act is removed.

Since the clause B of section II, Part II of schedule V of the Act is itself is the exemption clause for CG approval so after the above amendment, the said clause should have been removed but might be by mistake instead of removing this clause the Companies Amendment Act, 2017 also amended this clause by substituting the word “no approval of Central Government is required” with the word “remuneration as per item (A) may be paid”

This throwing the confusion in the minds of professionals. If the company can pay the excess remuneration without going for CG approval under amended Section 197 and clause A of section II, Part II of the Act, then why company would needs to go under clause B and ensure compliance of additional conditions for paying excess remuneration to the director who is working in the professional capacity.

Earlier Rule 7(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 was overriding the section 197 and schedule V of the Act and carving out the exception for the requirement of central government approval for paying managerial remuneration in the event of no profit or inadequate profit beyond ceiling specified in Section II, Part II of Schedule V of the Act subject to complying with the certain conditions but later the Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2018 omitted Rule 7(2) and rectified this anomaly.

3. Does filing consent of director as per section 152 of the Act after 30 days would affect the directorship of a person?

Section 152 (5) of the Act says that no person shall act as a director unless he provides his consent to the company. The text of Section 152 (5) of the Act is reproduced as under:

“A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner”

From the above, it is inferred that a person can act as a director only if his consent is filed with registrar within 30 days. What if he gives his consent but it got filed after 30 days. Does it mean he cannot act as a director or act done by him would invalid?

It is well settled that when the language employed in the statute is negative then it is ordinarily regarded as peremptory and mandatory in nature[5]. Negative language is worded to emphasis the insistence of compliance with the provisions of the Act.[6] Therefore it is well settled that the prohibitive or negative words are ordinarily indicative of mandatory nature of the provision; although not conclusive.

This is quite a common that the directors are not properly appointed or continue to hold office even after their term of office is over. Lots of such incidents were observed in the proceedings of section 397 / 398 of the Companies Act, 1956 (241 and 242 of the Act) where the appointment of a person or act done by person is challenged on this grounds. A question which invariably arise in most of such cases is that whether the act done of such person is valid and binding on the company.

Section 176 of the Act which is similar to erstwhile section 290 of the Companies Act, 1956 which saves the genuine act of directors from any defects or disqualification and termination. The text of section 176 of the Act is reproduced as under:

“No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company:

Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.”

From the above it is inferred that the section 176 of the Act protect the company and covers any defects in the appointment of directors and applies both to members of the company and to strangers dealing with the company[7]. Since this section protect the genuine act of the director, if the director aware of such defect then this section cannot be resorted[8]. However it is worth to be noted that the section 176 of the Act is framed in such a way that to avoid questions being raised as to the validity of transactions where there has been a slip in the appointment of a director. However it could not be utilized for the purpose of ignoring or overriding the substantive provisions relating to such appointment.[9]

Also regulation 74 of Table Fin schedule I to the Companies Act, 2013 contains a similar provision, which reads as follow:

74. All acts done in any meeting of the Board or of a committee thereof or by any person acting as a director, shall, notwithstanding that it may be afterwards discovered that there was some defect in the appointment of any one or more of such directors or of any person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such director or such person had been duly appointed and was qualified to be a director.

Also there has been a department’s clarification[10] under erstwhile Act 1956 under which DCA has clarified that the consent failed to be file within 30 days, the person does not ipso facto cease to be director or vacate his office. Except additional fees and penalty under section 629A[11], there won’t be any further consequences of it.

Hence failing to file the consent of director within 30 days does not affect his directorship and does not invalidate the act done by him by virtue of his office.

4. Does act done by MD after expiration of his term hold valid:

The definition of section 2(54) of the Act, contain particular phase “occupying the position of Managing Director, by whatever name called”, which signifies that it is the position and not the nomenclature or designation that matters in order to decide whether a person is managing Director or not, it is power confirmed upon and exercised by person which is the determinative factor. In other words, a person may not be appointed or designated as Managing Director and, nonetheless, by virtue of his position and power may be regarded as such.

Hence de facto doctrine can be applied to a case where there was a technical flaws in the appointment of Managing Director. In a case decided by the Madras High Court P. Mahamani V. Tamil Nadu Magnesite Ltd.[12], the original term of Managing Director was expired and re-appointment was not placed before the Board for approval. It was held that even if there was a technical flow in the appointment of Managing Director, the doctrine of de facto officer was applicable.

Hence the technical flaws in the appointment or re-appointment of Managing Director do not invalidate the act done him by virtue of his position.

5. Does Company Secretary be held liable for any wrong information in financial statements?

Since the Company Secretary is the signatory of financial statement so whether a Company Secretary can be held liable for any wrong information in the financial statements or any manipulation of financial statements of the company in discharge of his statutory duties cast on him merely signing the financial statements of the company? This is the question which needs to ponder upon.

Unless Company Secretary is authorised by the Board to look into the financial statements and responsibility of preparation or finalization of financial statement delegated to him, mere signing the financial statements while discharging his statutory duty does not render any liability on him for any manipulation or fraud in the financial statements as the authentication denotes that the documents are genuine and not fake. It does not guarantee the truth or accuracy of transactions in the financial statement.

Since Company Secretary and ordinary directors are not involved in the preparation and finalization of the financial statements, hence it’s illogical to expect them to guarantee the accuracy and truth in the financial statement.

When Company Secretary is authorised by the board to sign the financial statements, it means he is signing on behalf of board and it amounts to representation of the company. It does not mean he is signing through his personal capacity. Hence any misrepresentation in financial statements would hold the company liable for such misrepresentation and not the Company Secretary. In the matter of U.B.A.F. Ltd. V. European American Banking Corporation it was held that “a representation signed by a duly authorized agent or officer of a company acting within the scope of his authority and on behalf of the company in the course of its business may amount to a representation and signature of the company.”[13]

Also there has been a DCA clarification[14] with respect to erstwhile section 215[15] of the Companies Act, 1956[16] under which the Department had clarified that the authentication by the Company Secretary is “on behalf of the board”   and   not   in   his   “personal   capacity”. Hence Company Secretary can be held responsible as an “officer” of the company within the meaning of section 628[17] of the Companies Act, 1956[18] for commission of errors, etc and not because of authentication done by him under section 215[19] of the Companies Act, 1956[20] in discharge of his statutory duty.

Even Section 447 of the Act which prescribes the punishment for fraud, the person would be held responsible under section 447 only if the fraud is established and the person is found to be guilty of fraud. Both this conditions needs to be fulfilled for punishing the person under section 447 of the Act. In the absence of any authorization from the Board or management for maintenance of accounts or records and the responsibility to prepare the financial statements of the company, the Company Secretary shall not be held guilty under section 447 of the Act.

6. Who can terminate the Company Secretary?

Section 203 (2) of the Act provides that the appointment of every whole-time key managerial personnel of a company shall be done by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration. As like removal of director there is no specific provision in the Companies Act, 2013 for the removal or termination of Company Secretary. Hence this issue needs to ponder that the termination or removal of Company Secretary by management as per the terms of his agreement is valid act or not.

Section 16 General Clauses Act, 1897 provides that the power to appointment to include power to suspend or dismiss.— Where, by any Act or Regulation a power to make any appointment is conferred, then, unless a different intention appears, the authority having power to make the appointment shall also have power to suspend or dismiss any person appointed by it in exercise of that power.

Since the appointment of whole-time Company Secretary is done by Board hence only Board have the authority to terminate the appointment of the whole-time Company Secretary. It is pertinent to note that Section 179 of the Act prescribes certain matters which shall be dealt at the meeting of Board only. Rule 8 (2) of the Companies (Meeting of Board and its Powers) Rules, 2014 prescribed that the appointment or removal of key managerial personnel (KMP) shall be done at meeting of the Board only. Hence company may terminate whole-time Company Secretary from his office on the grounds as mentioned in his terms of appointment but for this approval of the Board is required for terminating him on this ground. Also the fundamental right of opportunity of being heard which conferred by Article 14 of the Indian Constitution cannot be denied.

Similar issue came before Hon’ble. High Court in Punjab and Haryana High Court in Haryana Seeds Development Corporation Ltd. V J. K. Aggarwal[21], under this special leave petition was filed by the company against the verdict of High Court was rejected by Hon’ble. Supreme Court and affirmed the decision of High Court. Under this the question for consideration was does Managing Director had power to terminate the service of Company Secretary or not. The division of bench upheld the decision of single judge and held that that MD does not have power to terminate the Company Secretary.

This High Court Judgment inasmuch as it may be to reach on to conclusion that Managing Director / Management cannot remove a Company Secretary, only Board have that power to terminate the Company Secretary. Therefore, from the above exposition it can be said that the removal of Company Secretary by management without the approval of the Board devoid of legal backing and can be challenged at court of law.

Conclusion:

As the saying goes no law can ever be perfect as it is the creation of man. Even after completing half of decades still we are having several contradiction and inconsistencies. The frequent changes in Act further adding more inconsistencies and contradictions.

Considering the frequent changes in statute and onerous responsibility cast on directors and KMP, one must understand the critical issues and avoid speculative conjectures or avoid of taking benefit of gray area because we would never know when the government would comes up with any amendment or clarification and apply them retrospectively. We already witnessed such retrospective application of amendments like application of section 164, mandating transfer of shares to IEPF in certain cases and recent amendment where MCA proposed the punitive action if the allocated CSR remain idle for specified period which is again put forth for further consideration and amendment. We have no option to accept the statute stoically and deal with the nuances and follow the stricter interpretation wherever we find the critical issues or inconsistencies.

[1] Cable Corpn. of India Ltd. v. Commr. of Labour (2008) 7SCC 680.

[2] M.T. Khan & Ors V. Government of Andhra Pradesh & Ors[2] [2004] RD-SC 10 (5 January 2004)

[3] Ramaben A Thanawala v Jyoti Ltd. (1957)

[4] Section 165 of the Companies Act, 2013

[5] statutory interpretation by justice G.P. Singh 11^th edition, 2008

[6] State of Bihar V. Maharajadhiraja Sir Kameshwar singh of Darbhanga (1952) SCR 889,988-89; K. Pentiah V. Muddala Veeramallappa(1961) 2SCR 295, 308(SC)

[7] Modal Bank of India V Janwi Narain (1932)2 Comp Cas 137(Lah)

[8] Shiromani Sugar Mills Ltd. V Debi Prasad(1950) 20 Com Cases 296: AIR 1950 All 508.

[9] Tyne Mutual Stamship Insurance V Brown (1896) 74 LTR 283.  Similar view was expressed Moorthy(M.) V Drivers & Conductors Bus Services(P) Ltd(1991) 71 Comp Cas 136(Mad) (1991)1 Comp LJ 266 (Mad)(DB).

[10] File No. 05/06/68-CL-V

[11] Section 450 of the Companies Act, 2013

[12] P. Mahamani V. Tamil Nadu Magnesite Ltd.[12] (1994)2 CLA 314 (Mad)  

[13] U.B.A.F. Ltd. V. European American Banking Corporation, (1984) 2 All ER 226 : 1984 BCLC 112. (CA)

[14] Circular No. 7/72, dated 12-5-1972

[15] Section 134 of the Companies Act, 2013

[16] Companies Act, 2013

[17] Section 448 of the Companies Act, 2013

[18] Companies Act, 2013

[19] Section 134 of the Companies Act, 2013

[20] Companies Act, 2013

[21] Haryana Seeds Development Corporation Ltd. V J. K. Aggarwal (1989) 65 Comp. Cas. 95/[1989]2 CLA 41(Punj. & Har),