Section 196 Appointment of MD, Whole-time director or Manager – Analysis

Section 196 – Appointment of Managing Director (MD), Whole-time director or Manager – with Analysis

Section 196 – Appointment of Managing Director, Whole-time director or Manager.

(1) No company shall appoint or employ at the same time a managing director and a manager.

Analysis–

BUT WHY, We can’t appoint MD and Manager at the same time?

we have to understand the motive of this provision. to understand this, we need to look into the meaning, duties and responsibilities of MD.

As per section 2 (54) “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;

By reading this defination, we conclude the following are Pre-requisites :

A. Managing Director should be a member of Board of Directors

B. He should not be appointed by merely but should be appointed either by virtue of:

• Articles of Association of the company
• An Agreement made between MD and Company i.e Employment Agreement
• Resolution passed by members in General Meeting, or
• Board Resolution

C. he should entrusted with substantial powers of management of affairs of the company

D. The defination also includes a director who, de jure, is not appointed as MD but de facto, he is acting as MD in the company in whatever position or name called.

Again the question arise in our mind is that what is meant by “Substantial powers of management of the company”. The explaination to the section 2 (54) stated the activities which are not comes under the purview of substantial powers of management of the company.

The substantial powers of management of the company consists:

(i) Laying down broad policies and objec­tives of the company, and

(ii) Executing such policies and objectives.

But to understand Substantial Powers of Management of the Company clearly, we also need to know what are the powers, duties and functions comes under the purview of Substantial Powers of Management, which includes, but not limited to, the following:

1. As a member of the Board of Directors he participates in formulating the objectives and policy-making functions of the Board.

2. To execute policies laid down by the Board of Directors.

3. He is the liaison officer between the Board of Directors and the rest of the organisation.

4. To interpret and communicate policies of the company to subordinate employees.

5. To review the operations of the company and present to the Board periodically accounts and statistics showing the progress and the present po­sition of the company.

6. To formulate the employment and compen­sation plan in accordance with the accepted poli­cies of the company.

7. To appoint high officials of the company.

8. To plan the development and expansion of business.

9. To organise meetings with department heads.

Now get a fair idea about Who is manager and What are differences between the powers and functions of managing director and manager.

Definition of Manager:

Section 2 (53) “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.

Analysis–

The Defination states the following:

A. Manager can be an individual who may be director or any other person in the position of manager, by whatever name called.

B. The appointment of manager may or may not be under contact of service.

C. Manager who works under the superintendence or control of the Board of Director.

D. Manager who has the management of the whole or substantially the whole of the affairs of the Company.

Differences between Powers and Functions of MD and Manager:

It is a common practice that the Board of Di­rectors appoints one of its members as MD to manage the affairs of the company as a whole time officer and calls him the Managing Director. But in case of Manager, The Board may appoint a director or an employee as Manager to perform the managerial functions.

MD occupies a position of dual authority and responsibility. As a director, he attends the Board meetings and, as a manager, he performs the managerial functions.

BUT in case of Manager, he may occupies a single position as Manager to perform managerial functions.

MD entrusted or enjoys substantial powers of management but a Manager is given an administrative acts of routine nature and he is subordinate to the Board of the Company.

MD is first a Director and then an employee but a Manager is a regular Employee.

Conclusion– Although the powers of MD are broader than Manager, but more or less the functions of the Managing Director and Manager are very similar and there is no point to appoint Managing Director and Manager at the same time.

(2) No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time:

Provided that no re-appointment shall be made earlier than one year before the expiry of his term.

Analysis–

The term of MD, WTD or Manager is maximum 5 years.

The proviso states that the re-appointment of MD shall be made only during the period of 1 year prior to the date of expire of his term.

E.g Mr. Gautham has appointed as MD for 5 years, on 01.04.2016, then the Company can re-appoint him again as MD only on or after 01.04.2020 and on or before 31.03.2021

(3) No company shall appoint or continue the employment of any person as managing director, whole-time director or manager who –

(a) is below the age of twenty-one years or has attained the age of seventy years:

Provided that appointment of a person who has attained the age of seventy years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person;

Provided further that where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of seventy years may be made

Analysis–

The provisions also applies to MD, WTD or Manager who appointed before the Companies Act, 2013 came into force.

Many companies re-appoints their MD, WTD or Manager who aged more than 70 years because of their valuable and robust experience in the affairs of the company and nature of business of the company, by passing

•  Special resolution or
• Ordinary Resolution with Central Government approval.

Recent example is Mr. M.P Taparia, Managing Director of Supreme Industries Ltd., has continued as MD even after 70 years after passing Special Resolution.

Also, If the company not able to pass Special Resolution but passed Ordinary Resolution then also the Company can continue the MD who aged 70 years or more, only after CG feels it is beneficial to the company and approves the reappointment of such MD.

(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;

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

Analysis–

The managerial personnel who has defaulted in payment of their dues payable to creditors or made compromise arrangements or negotiations with them to settlement of debts, then such persons cannot be appointed as Managerial Personnel.

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

Amended w.e.f.12th September, 2018 

(4) Subject to the provisions of section 197 and Schedule V , a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government in case such appointment is at variance to the conditions specified in Part I of that Schedule

Provided that a notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any:

Provided further that a return in the prescribed form ( i.e MR-1) shall be filed within sixty days of such appointment with the Registrar.

Analysis–

The Appointment, T&C of Appointment and Remuneration payable to, Managerial Personnel shall be approved by Board of Directors subject to passing of Ordinary Resolution in ensuing General Meeting and Central Government approval also needed, only in case when such appointment is variance to the conditions specified in Part I of Schedule V.

First proviso says that the notice convening Board Meeting or General Meeting shall specify the T&C, Remuneration payable and such other matters including interest of any director in such appointment of Managerial Personnel.

In second proviso, the Company needs to file Form MR-1 to ROC within 60days from such appointment.

(5) Subject to the provisions of this Act, where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.

Analysis–

If Mr. Gautham has appointed as MD by passing Board Resolution (on 01.04.2016) subject to approval of Members in ensuing General Meeting and he is not approved by Members in such General Meeting (on 10.08.2016), then in that case, any acts done by MD from 01.04.2016 to 10.08.2016, are considered as valid as per the Act.