Appointment of Managerial Personnel – Insight on amendments notified on 12th Sep 2018

As on 12th September 2018, Ministry of Corporate Affairs has notified Section 66 to 70 of Companies Amendment Act, 2017, introduced Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2018 and amended schedule V of Companies Act, 2013.

Applicability: Public Companies

The amendments brought out are summarized as follows:

Approval of Central Govt. is required in two cases:

  1. When the appointee is not complying with provisions of Part I of Schedule V.
  2. When the special resolution could not be passed for appointment of person above the age of 70 years, however, company has received higher votes in favour compared to against.

In both the circumstances, the company may apply to Central Government in Form MR-2.

Interest of stakeholders, if company has defaulted:

For payment of remuneration exceeding limits or waiver of recovery of excess remuneration paid, prior approval of banks, financial institutions, non convertible debenture holders or secured creditors will be required, in case the company has defaulted in payment of their dues before general meeting.

Excess Remuneration, Waiver and duty to report:

Directors shall repay the excess remuneration to the Company within a maximum period to 2 years. However, the company on passing of special resolution within 2 yrs from the date the amount becomes refundable may waive such recovery with prior approval of banks, financial institutions, non convertible debenture holders or secured creditors will be required, in case the company has defaulted in payment of their dues.

Further, duty is casted on auditors to report payment of remuneration in conformity with the provisions of the Act and disclose any excess remuneration.

Schedule V – Amendments

1. No person shall be eligible for appointment as a managing or whole-time director or a manager if he had been sentenced to imprisonment for any period or to a fine exceeding one thousand rupees, for the conviction of an offence under any of the following Acts – Three new acts has been introduced under the above head

a) The Insolvency and Bankruptcy Code, 2016,

b) The Goods and Services Tax Act, 2017 &

c) The Fugitive Economic Offenders Act, 2018

2. No restriction on payment of remuneration on passing of special resolution considering parameters as defined under rule 6.

3. Restriction of payment to companies’ managerial personnel under special economic zone is removed.

4. Concept of current relevant profit is removed as Part II is modified to such extent.

Points of clarification:

What if the managerial personnel have crossed the age of 70 during his tenure and the company has not obtained any approval as required under section 196? Can it be ratified later on?                                                                                                              

Firstly, while passing of resolution by Board subject to approval of shareholders in General Meeting under section 196 of Companies Act, 2013, the company shall comply with all requirements including the eligibility criteria as to age of managerial personnel but in any case the company omits to take such an approval, it may file application for compounding of offence and rectify the default by obtaining approval of shareholders in general meeting.

The sequence for approval shall be as follows:

  1. Approval of Board
  2. Approval of Shareholders
  3. Approval of Central Government

The approval of the above shall be complied before appointment of managerial personnel.

In case the company omits to obtain approval or delays in obtaining approval, any act done by managerial personnel shall not be invalidated due to defect in his appointment.

Can the company by passing special resolution and as per parameters of schedule V read with rule 6 provide remuneration without any ceiling?

Yes, the approval of Central Government is restricted to Part I of Schedule V and with regards to age of managerial personnel.

No approval of Central Government would be required to provide remuneration to managerial personnel with due compliance with provisions of Companies Act, 2013.

What if the company has filed the application to Central Government under section 197 read with Schedule V before notification of the above amendments i.e., 12th September 2018?

Any application made to Central Government shall stand cancelled and the company shall take necessary approval till 11th September 2019 as required under section 197 as amended.

Following the above query, if the appointment of managerial personnel is approved by Board subject to approval in ensuing Annual General Meeting and the due date to conduct the AGM falls on 30th September 2019, then when the company should conduct AGM with respect to above scenario?

The company shall obtain such approval within one year from the commencement of section so amended and hence the due date to comply would be 11th September 2019 within which company should have taken approval in General Meeting or extraordinary general meeting.

Disclaimer: The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed.

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