Compliances in Appointment of a Person not being a Director as Managing Director and Whole Time Director

COMPLIANCES IN APPOINTMENT OF A PERSON NOT BEING A DIRECTOR AS MANAGING DIRECTOR AND WHOLE TIME DIRECTOR

ROHITH KAMATH,

ADVOCATE & CS, REX LAW CHAMBERS, BENGALURU

A Managing Director (MD) is one of the most senior role in any given company. Pursuant to the Companies Act, 2013, a 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.[1]

A Managing Director (MD) is one of the most senior role in any given company. Pursuant to the Companies Act, 2013, a 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.[2]

Analogy is made with references to the definition of “whole time director” and “independent director” to show the vagrancy of the lacunae contained in the legislation, “Companies Act, 2013”. The definition of a “Whole-Time Director”, to every rational person would be in reference to a Director who is in whole-time employment of the Company. However, the Companies Act, 2013 gives scope for those who are in part-time employment of the company to fall under the definition of a Whole Time Director, as the definition is not exhaustive and comprehensive but rather inclusive in nature as it provides that “whole-time director” includes a director in the whole-time employment of the company.

ROLE OF COMPLIANCE

Compliance Requirements are to be facilitative rather than complicative. The compliances must not route the budding entrepreneurs, who start with little investments, being savings or borrowings from various sources, out of competition. The processing fee of the returns, however minimal, are nevertheless, a major cost to the budding entrepreneurs. The purpose of company law, both letter and spirit, cannot and never is intended to cause hardship to these persons who come together to earn their meals out of a joint venture, in the form of a company.

With the introduction of the Companies Act, 2013 there is a long standing practice prevailing that every person to be appointed as Managing Director if not already a Director in the Company is to be routed through by first appointing him as Additional Director and then to re-designate such person as the Managing Director of the company, subject to regularisation at the ensuing Annual General Meeting. In this practice, there are multiple forms filed: firstly, E-Form DIR-12 for designation as Additional Director; secondly another E-form DIR 12 for change in designation to Managing Director/Whole Time Director, and thirdly another e-form GNL-2 for regularisation of the Additional Director.

A sincere attempt is made to provide an alternate to this practice, and directly appoint a person, not being a director, as a Managing Director or Whole Time Director in a company, by way of Board Resolution, and in case of a public company subject to the approval of the appointment at the subsequent general meeting. The proposed method involves the filing of a single e-form DIR-12 for the designation of a person as Managing Director.

APPOINTMENT OF MANAGING DIRECTOR

The is a long standing conventional practice prevailing that every person to be appointed as Director, including Managing Director is to be routed through the members, even in the case of a Private Company. However, it is contended that a person may be appointed as a Managing Director by way of a Board Resolution, subject to the consent of the members only in case of a Public.

It is to be understood that a Managing Director is essentially a Director and is thereby required to be appointed to the Board. It is made clear to the whole world at large that the Managing Director, one among the several Key Managerial Personnel[3] of the company, unlike the rest, is a Director. However, the term “director”, the definition provided under the Companies Act, 2013 is of little help for it is provided that a “director” means a director appointed to the Board of a company.[4]

Under the Companies Act, 2013 (Hereinafter, the Act), as funnier as it gets, the definition of Managing Director under Section 2(54), instead of routing us to Section 196 of the Act, that talks specifically about the Appointment of Managing Director leaves us to foreplay with Section 152 that pertains to the Appointment of a Director.

The analogy in understanding the definition of a Managing Director lies in the fact that, if a person is required to be appointed as a Managing Director, then such person is to be appointed to the Board.

The provisions for appointment of a Director are essentially contained under Chapter XI Appointment and Qualifications of Directors. Section 152 of the Companies Act, 2013 titled ‘Appointment of Directors’ provides for the detailed procedure for the appointment of a Director. Section 152(2) provides that, “Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting.”

It may be observed that in the usual cases, a Director can be appointed to the Board, and only be appointed to the Board by way of a resolution passed by the Members in the General Meeting. It is to be noted that in the unusual cases, it may so happen that a Director, may be appointed to the Board, by otherwise than by way of a resolution passed by the Members in the General Meeting. However, so as to be appointed in an otherwise manner, it is a prerequisite that an express provision in respect of the same be made.

Save as Otherwise Expressly Provided under this Act

Section 152(2) provides that Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting. There is a cardinal rule of interpretation of statutes, viz., when there is a general provision and a specific provision in regard to a subject, the general provision should yield to the specific provision and it is the latter that prevails, as portrayed by the Latin maxim ‘Generalibus specialia derogant’. If a special provision is made on a certain matter, that matter is excluded from the general provision.[5]

The expression “save as otherwise provided” in Sub-section (2) means ‘except to the extent specific provision is made’. It therefore subsides that where there is a specific provision made for appointment by way of other means, such as that of a Board Resolution, in such cases, the Director need not be appointed through the Members Resolution Route.

It is in light of this rule that it is contended where the provision for appointing a Managing Director and Whole Time Director is provided specifically in Section 196 and Section 203, the general provision contained under Section 152 is required to yield to the specific provisions contained under Section 196 and Section 203 of the Companies Act, 2013.

APPOINTMENT OF A PERSON NOT BEING A DIRECTOR AS MANAGING DIRECTOR OR WHOLE TIME DIRECTOR

The definition of a Managing Director and a Whole Time Director, making reference to a Director, it is interpreted in a manner that a non-director cannot be appointed as a Managing Director or Whole-Time Director.

In this light, the practice has developed to appoint a person to the Board as an Additional Director and then to re-designate such person as Managing Director or Whole-Time Director, subject to the regularisation of such person as Director at the ensuing Annual General Meeting. The practice is to appoint a person as an Additional Director pursuant to section 161(1) of the Companies Act, 2013 and then re-designate such person subject to Section 196 of the Companies Act.

It is submitted that a conjoint reading of sections 152(2), section 196 and section 203, accord the power to the Board of Directors to appoint a person not being a Director, as a Managing Director and it is not necessary to take the route of Additional Director.

A Person not being a Director, may be appointed to the Board as a Managing Director or Whole Time Director, as Section 196 and Section 203 are special provisions, and the general provision for appointment of a Director contained under Section 152(2) creates a harmonious interpretation by allowing for Section 196 and Section 203 to supersede the requirement contained under Section 152.

Appointment of Managing Director/ Whole-Time Director to a Public Company:

In a Public Company, a person not being a Director may be appointed as a Managing Director by the Board subject to the 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 that Schedule. Further the 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 and that a return in the form MR-1 shall be filed within sixty days of such appointment with the Registrar.

Section 203, although allows for the appointment of Managing Director/ Whole Time Director all be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration, the reference to the Members for the approval of appointment arises not by virtue of Section 152, albeit, by virtue of Section 196(4), and wherein it is specifically provided that such appointment shall be subject to the approval of the members.[6]

Appointment of Managing Director/ Whole-Time Director to a Private Company:

In a Private Company, a person not being a Director may be appointed as a Managing Director by the Board, and the same need not be referred to the Shareholders for their approval, as for the Board may appoint such person as a Managing Director/Whole-Time Director by virtue of a joint reading of sections 152, 196 and 203, and further 196(4) and (5) being exempt to a Private Company, the company may choose to appoint the Managing Director/ Whole Time Director by way of a single Board Resolution, and filing the return of appointment in e-form DIR-12 for the same.

CONCLUSION

It may be contended that a Director, being a representative of the Shareholders is required to be appointed by the Shareholders, and the Board cannot be vested of such power. However, it is to be noted that a Managing Director and Whole Time Director are more or less in the nature of an employee, as unlike other directors, their tenure remains fixed, and by virtue of holding such office are entitled to the office of Director.

Keeping in light all these factors, it is suggested that in case of a Private Company, any person may be appointed as a Managing Director, directly, without being routed as an Additional Director in the first instance by means of a Board Resolution; and further in case of a Private Company, such appointment of Managing Director or Whole Time Director, where made need not be referred to the shareholders for their approval at the ensuing general meeting.

[1] Sec. 2(54), Companies Act, 2013

[2] Sec. 2(54), Companies Act, 2013

[3] Section 2(51) “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; and (v) such other officer as may be prescribed.

[4] Sec. 2(34), Companies Act, 2013

[5] State of Gujarat v. Patel Ramjibhai Danabhai, AIR 1979 SC pp.1098, 1103; State of Bihar v. Yogendra Singh, AIR 1982 SC pp.882, 886 : (1982) 1 SCC 664; Maharashtra State Board of Secondary and Higher Secondary Education v. Paritosh Bhupesh Kumar Sheth (1984) 4 SCC pp.27, 47:AIR 1984 SC 1543; State of Rajasthan v. Gopikishan, Ibid, p. 1756

[6] Section 196(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 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 shall be filed within sixty days of such appointment with the Registrar.