MANAGING DIRECTOR/WHOLE TIME DIRECTOR/MANAGERS

In today’s highly volatile and dynamic business environment the need of professional business managers or corporate runners is the key to achieve desired growth. In a country like India, where the traditional way of family business had become a culture and even the corporate form of business were also being managed in the same way, the Indian corporates are also adopting the new culture of professional and skilled business managers. Many Indian corporates have on their Boards foreign nationals as their Managing Directors or Whole Time Directors.

In India, the legal framework also acknowledges the need of “managerial personnels” and has made it mandatory for certain specified class of Companies to have Key Managerial Personnel (KMP). Apart from this, many closely held Companies who do not statutorily require to have KMPs are now hiring the professionals from across the globe.

Managerial Personnel

Legal provisions as to KMPs:

In terms of Section 2(51) which defines the term “Key Managerial Personnel” as follows:

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer;

(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed.

The above definition provides 6 categories of KMP for any kind of Company. Whether any Company, being Public or Private, appoints any individual in any of the categories shall become the Company’s KMP even if the company do not require to appoint such KMPs in terms of Section 203 or Rule 8 or 8A of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014. Every category of KMP has its own significance and role to play in a company in a professional manner. Legally speaking, the difference between a KMP for company NOT covered under Section 203 and a KMP for a company covered under Section 203 is only that for companies covered by Section 203 its KMPs are engaged on “whole time basis” whereas for companies not covered, KMP may be whole time or part time depending upon the terms and conditions on which KMP is appointed by such companies.

KMP & Officer in default:

Any company having KMPs as aforesaid becomes an “officer in default” and thereby protects the Board of Directors from the prosecution or penalty for not observing the proper compliance of the Companies Act, 2013 and the rules made thereunder. To understand this, the provisions of Section 2(60)(ii) and 2(60)(iii) are produced hereunder:

“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;”

As per the above definition, a KMP appointed by the Company, is the prime officer in default and not the Board of Directors of the Company. The sub-caluse (iii), starts as “where there is no key managerial personnel….” stipulate that, in case any company having any category of KMP, the Board of Directors are saved from the prosecution/penalty under the Companies Act. In case, any company does not have any KMP, and has filed with the ROC e-Form GNL-3 [Rule 12(3) of the Companies (Registration Offices and Fees) Rules, 2014] specifying any Director(s)  to be the prime officer in default with their consent, then such specified Director(s) shall be the officer in default. In case no Director(s) have been specified and not filed e-Form GNL-3, then all the Directors shall be the officer in default. The above definition is clear enough that KMPs not only a professional business manager but also act as a shield from incurring penalties or undergoing prosecutions and all the liabilities of an officer in default are subsumed by such KMP.

Provisions governing appointment of KMP:

Sections 196 & 203 governs the appointments of KMP. Whereas Section 196 provides for qualifications and conditions for appointment of Managing Director, Whole Time Director or Manager, Section 203 provides for a specific class of companies who mandatorily appoint KMP in the following category:

(i)  CEO/MD/Manager and in their absence, a Whole Time Director

(ii)  Company Secretary; and

(iii) Chief Financial Officer.

Definition of MD – Section 2(54) of CA, 1956 vs.  2(24) of CA, 1956:

Surely, in the transition from Companies Act, 1956 to Companies Act, 2013, the nomenclature “Managing Director” has taken a shift. Text of the definitions: –

Section 2(26) of 1956 Act-

“managing director means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with  substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called:

Provided that the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management:

Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of directors;

Section 2(54) of the 2013 Act-

managing director means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the AFFAIRS of the company and includes a director occupying the position of managing director, by whatever name called.

Explanation.—For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within the substantial powers of management;”

In the old definition –  words were “substantial powers of management”.

In the new definition – words are “substantial powers of management of AFFAIRS of the company”.

The lawmakers, by using “affairs of the Company” attempted to make the role of a Managing Director concrete and focused towards the core business of the company. This is directly connected to the “Powers of Board” envisaged in Section 179 of the Act. Every Act that could be exercised by any company as a legal corporate entity is authorised to do, shall  be authorised by the Board. Company being an artificial person cannot act on its own, thereby every act or thing that could be done by a company shall vest with the Board of Directors. Hence, the Board of Directors are entrusted by Section 179 for the management of affairs of the Company.

The word “affair” is the essence in harmonising interpretations of Section 2 (53) & (54) and Section 179, grammatically “affairs” means business of financial dealings. In absence of any “Manager” or “Managing Director” the power to manage lies with the Board of Directors, collectively. This would definitely create a kind of inconvenience to the stakeholders of a company having substantial business dealings and every now and then, Board authorisation even for a routine business task is required which is not possible. Appointment of Managers/Managing Directors could relieve the Board, and Board authorisation will be required only for major decisions not for the routine nature.

Let’s take an example, ABC Transporters Ltd, engaged in logistics and supply chain, having four Directors on its Board lets say A, B, C & D. A, B & C arev key promoters, D was appointed as MD. Now, D comes to know that in the current fleet of heavy commercial vehicles owned by the Company, 15 trucks are almost obsolete, he sold those 15 trucks and in place of them 15 new trucks were bought by him in the name of company. In this case D as MD, can purchase the trucks and also sell them or hire employees or engage an agent, because it’s directly related to the affairs of the company and that’s where the relevance of the wordings “affairs of the company” lies. The power to enter into such transactions vested in him as he is the MD and Board  authorisation may not be mandatory to take through a Board Resolution. However, any act done by an MD, if it is not falling within the scope of “affairs of the Company” will be void. Suppose in this same example, D would have purchased a piece of land in the name of the company, would not be valid unless D is duly authorised to enter into such a transaction by the Board of Directors through a duly passed Board Resolution.

Definition of Whole Time Director (WTD):

Section 2(94) of the Act defines a Whole Time Director as – “whole time director” includes a director in the whole time employment of the company.

The Whole Time Director shall be a one who is in full time employment of the company and also by virtue of Rule 2(1)(k) of the Companies (Specification of Definitions) Rules, 2014 becomes an Executive Director for such company.

So, to distinguish between Executive and Non-Executive Directors, Section 2(94) plays a key role. No where in Act, the tems “Executive Director and Non-Executive Director” is defined. However, Rule 2(1)(k) defines the term “Executive Director” as follows:

“Executive Director” means a whole time director as defined in clause (94) of section 2 of the Act.

Therefore, a Whole Time Director is always an Executive Director; those who are not WTDs in the company, otherthan Managing Director (if appointed) or Independent Directors (if any), are categorised as Non-Executive Directors.

By the definitions of Managing Director and Whole Time Director, an individual shall be a “Director”. So, an individual has to qualify as Director in terms of Section 164 and also as MD/WTD/Manager in terms of Section 196(3).

However, there is no provision that MD shall be in whole time employment, MD may be in whole time employment or not. Provided  that for companies covered under Section 203, if they appoint MD then he shall be on a whole time basis. But, in case of a WTD, irrespective of the fact that company is covered under Section 203 or not a WTD is always a whole time employee.

Definition of “Manager”:

“manager” means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;”

The definitions of “manager” and “managing director” have been drawn on similar lines, that is management of AFFAIRS of the company. Manager, in line with the MD, is vested to manage the affairs substantially, the only difference is that, MD is a part of the company’s Board of Directors whereas a Manager could be any individual, he may be a Director or may not be.

So, for a non-director to get appointed as a Manager, conditions as specified in Section 196(3) are to be satisfied.

As per Section 196(1), no company is allowed to appoint an MD and a Manager simultaneously. Company may have two or more MDs, or two or more Managers and an MD and a WTD simultaneously, or two or more MDs and two or more WTDs simultaneously, or a Manager and a WTD simultaneously, or two or more Managers and two or more WTDs simultaneously. There is a logical intent behind this provision, as Managers and MDs have a similar kind of roles, authority and responsibilities, if a company has a Manager and a MD at the same point of time, then there will be a conflict between the two positions. So to avoid overlapping of duties of Managers and MDs, this provision seems logical.

Appointment of Managing Director, Whole Time Director or Manager – Sectio 196:

Any company may appoint MD, WTD or Manager, if following conditions are satisfied:

(1) if the individual below the age of twenty-one years or has attained the age of seventy years:

However, appointment of a person who has attained the age of seventy years may be made by passing a special resolution, and the Explanatory Statement annexed to the notice calling general meeting for passing the special resolution shall contain the justification for his appointment.

If in case the special resolution could not be passed as aforesaid, but the votes casted in favour of the resolution exceeds the votes casted against the resolution, that is an Ordinary Resolution is secured instead of Special Resolution and Central Government has approved the appointment, on filing an application in Form No. MR-2, such individual having attained 70 years of age can be appointed.

(2) if the individual an undischarged insolvent or has at any time been adjudged as an insolvent;

(3) if the individual has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or

(4) if the individual has at any time been convicted by a court of an offence and sentenced for a period of more than six months.

Appointments requiring Central Government approval –  Schedule V Part-I:

If an individual who falls in any of the below mentioned conditions then such appointment shall require Central Government approval:

(a) 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 prescribed 19 Acts (list enclosed at the end).

(b) he had been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA).

If the Central Government has approved appointment of an individual who has been convicted or detained under point (a) or (b), no approval is required for all subsequent appointments/ reappointment. However, if such individual, at any time after approval of the Central Government, is convicted or detained, fresh approval shall be required.

(c) has attained the age of seventy years.

If the company has passed a special resolution, an individual of seventy years or more can be appointed without approval of the Central Government. If at the general meeting, Ordinary Resolution is secured instead of special resolution, then through approval of Central Government, individual who is 70 years of age or above, can be appointed.

Harmonious Interpretation of Second Proviso to Section 197(3)(a) with Paragraph (C) of Part I in Schedule V:

The Second proviso to Section 197(3)(a) provides for securing Ordinary Resolution, however, Schedule V Part I Paragraph (c) is silent, then even if Central Government is sought Ordinary Resolution shall be mandatory.

(d) he is not a resident of India.

As per Section 197(4), even after satisfying the conditions of Section 197(3), approval of the Central Government is required if the appointee falls in any conditions above.

No company has been exempted from the provisions of Section 196, except:

1. Private Companies are exempted from Sub-sections (4) and (5).

2. Government Companies are exempted from Sub-sections (2), (4) and (5).

3. Unlisted Public Companies incorporated under Gujarat IFSC (Gandhinagar) and licensed to operate by RBI/SEBI/IRDAI are exempted from Sub-section (4).

TABULAR PRESENTATION FOR CONDITIONS OF APPOINTMENT AS MD/WTD/MANAGER:

Designation Section 164 Section 196(3) Schedule V Part I Remarks
Managing Director Yes Yes Yes For MD, if Section 164 disqualification is applied he cannot be appointed.

In  case Schedule V Part I is violated then CG approval.

NO NA NA
Yes NO NA
Yes Yes NO
Whole Time Director Yes Yes Yes For MD, if Section 164 disqualification is applied he cannot be appointed.

In  case Schedule V Part I is violated then CG approval.

NO NA NA
Yes NO NA
Yes Yes NO
Manager NA Yes Yes In  case Schedule V Part I is violated then CG approval.
NA NO NA
NA Yes NO

NA = Not Applicable

In the next part provisions related to appointment of CEO/CFO/CS and Remuneration of Managerial Personnel will be discussed.

List of 19 Acts as per Schedule V Part I:

1. the Indian Stamp Act, 1899 (2 of 1899);

2. the Central Excise Act, 1944 (1 of 1944);

3. the Industries (Development and Regulation) Act, 1951 (65 of 1951);

4. the Prevention of Food Adulteration Act, 1954 (37 of 1954);

5. the Essential Commodities Act, 1955 (10 of 1955);

6. the Companies Act, 2013 (18 of 2013) or any previous company law;

7. the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

8. the Wealth-tax Act, 1957 (27 of 1957);

9. the Income-tax Act, 1961 (43 of 1961);

10. the Customs Act, 1962 (52 of 1962);

11. the Competition Act, 2002 (12 of 2003);

12. the Foreign Exchange Management Act, 1999 (42 of 1999);

13. the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);

14. the Securities and Exchange Board of India Act, 1992 (15 of 1992);

15. the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922);

16. the Prevention of Money-Laundering Act, 2002 (15 of 2003);

17. the Insolvency and Bankruptcy Code, 2016 (31 of 2016);

18. the Goods and Services Tax Act, 2017 (12 of 2017);

19. the Fugitive Economic Offenders Act, 2018 (17 of 2018)

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