CHAPTER XIII APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL! 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. (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 atime: Provided that no re-appointment shall be made earlier than one year before the expiry of his term. (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; (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 (d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months. (4) Subject to the provisions of section 197 and Schedule V, @ 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: 1 Refer Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. eeSec. 196 Appointment of managing director, whole-time director or manager 3409 eneral mecting for and conditions of ters including Provided that a notice convening Board or g' considering such appointment shall include the terms such appointment, remuneration payable and such other mat interest, of a director or directors in such appointments, if any: sribed form shall be filed Provided further that a return in the pi within sixty days of such appointment with the Registrar. (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. Corresponding Provisions in Companies Act, 1956 | certain different categories | | 497A. Company not to appoint or employ of managerial personnel at the same time.—Notwithstanding anything contained in this Act or any other law or any agreement or instrument, nO company shall, after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), appoint or employ at the same time, or after the expiry of six months from such commencement, continue the appointment or employment at the same time, of more than one of the following categories of managerial personnel, namely:— (a) managing director, (0) ** 71 zX(c) ** *]and (a) manager.] aot 267. Certain persons not to be appointed managing directors —No ‘Act, appoint or employ, or company shall, after the commencement of this continue the appointment or ‘employment of, any person as its managing or whole-time director who— (a) isan undischarged insolvent, or has at any insolvent; (b) suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, a composition with them; or is, or has at any time been, convicted by a Court °[* * *] of an offence offence involving moral turpitude. time been adjudged an (c) _ ee 1 Omitted by the Companies (Amendment) Act, 2000 as provisions relating to managing agents, «tc, had become redundant after abolition of system by Act 17 of 1969. Ibid. “The words "in India" omitted by Act 65 of 1960, section 90, w.e.f. 15-6-1988. wecompany Law , Company La Chapter x rwhole-time director or man, 3410 eae anaging ©! of : certain cases.—(1) On and f ~ emmmmnane ce ri [7 269. Appointmen oval only in fre Government Eanes (amendment) Act, 1988, every ri ‘which is a subsidiary of a public comment ment Cate company ora Lee capital of such sum as may be prescribed, shall have’, a SO ime director oF manager. e commencement of the Companies (Amendment | person as a managing or whole-time director or ¢| tr a private company which is a Subsidiary of de except with the approval of the Cane tment is made in accordance with ta Ager to ym th ointment of & inva public company y shall be mat ic an} | public comPetinless such appoi Gover ciied in Parts | and Il ‘of Schedule XIII (the said Parts bej conto the provisions of Part It of that Schedule) and a retum in the jes isi nuthin ninety days from the date of such appointment | presoribed form is fil 0 | (3) Every application seeking approval to the appointment of a managi time director or a manager shall be made to the Central Govern; oa ‘of ninety days from the date of such appointment. me (4) The Central Government shall not accord its approval to an application | mad under sub-section (3), ifitis satisfied that ~ (a) the managing or whole-time director or the manager appointed is, in its opinion, not a fit and proper person to be appointed as such or such appointment is not in the public interest; or (b) the terms and conditions of the appointment of managing or whole time director or the manager are not fair and reasonable. | (5) It shall be competent for the Central Government while according approval to an appointment under sub-section (3) to accord approval for @ period lesser than the period for which the appointment is proposed to be made. (6) If the appointment of a person as a managing ‘or whole-time director 0° a manager is not approved by the Central Government under sub-section (4) the person so appointed shall vacate his office as such managing oF time director or manager on the date on which the decision of the Cer! power is communicated to the company, and if he omits or fails to do 0, ne i punishable with fine which may extend to [five thousand rupees every day during which he omits or fails to vacate such office. yy_ information nde (7) Where the Central Governmé \ oane ent suo motu or on an reed it is, prima facie, of the opinion that any appointment made ul 4 pied (2) without the approval of the Central Government has been 0 (ot vention of the requirements of Schedule XIII, it shall be competent t c he Central Government to refer the matter to the *[Tribunal] for decisiONs_—~ Substituted by the C 5, ed by the Companies (Amendment) Act, 1988, section 46, #4 156% section 269 which was ea ‘ earlie 2 Substituted for "five meio ee by Act 65 of 1960, section 90. 2000. ee rupees" by the Companies (Amendment) AC 2002 3° Substituted for in ment) ACH J Amendme “ompany Li " pany Law Board" by the Companies (SeconSec. 196 / ; Appointment of managing director, whole-time director or manager 3411 | ; eaurne, Tintounell shall, on receipt of a reference under sub-section (7), an 0 the company, the managing or whole-time director or the | ager, as the case may be, and the director or other officer responsible for complying with the requirements ‘of Schedule Xill, to show cause as to why | such appointment shall not be terminated and the penalties provided under | sub-section (10) shall not be imposed. | (9) The [Tribunal] shall, if, after giving a reasonable opportunity to the | | company, the managing or whole-time director or the manager, or the officer | who is in default, as the case may be comes to the conclusion that the appointment has been made in contravention of the requirements of Schedule | XIll, make an order declaring that a contravention of the requirements of Schedule XiIll has taken place. | (10) On the making of an order by the *[Tribunal] under sub-section (9),— | (a) the company shall be liable to a fine which may extend to ‘ffifty thousand rupees]; (b) every officer of the company who is in default shall be liable to a fine of 5[one lakh rupees]; and (c) the appointment of the managing or whole-time director or manager, as the case may be, shall be deemed to have come to an end and the person so appointed shall, in addition to being liable to pay a fine of fone lakh rupees), refund to the company the entire amount of | salaries, commissions and perquisites received or enjoyed by him between the date of his appointment and the passing of such order. (11) If a company contravenes the provisions of sub-section (10) or any direction given by the “[Tribunal] under that sub-section, every officer of the | company who is in default and the managing or whole-time director or the manager, as the case may be, shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to a fine which may extend to ‘[five hundred rupees] for every day of default. (12) All acts done by a managing or whole-time director or a manager, aS the case may be, purporting to act in such capacity and whose appointment has been found to be in contravention of Schedule XIII, shall, if the acts so done are valid otherwise, be valid notwithstanding any order made by the [Tribunal] under sub-section (9),] eee iets ese "Company Law Board" by the Companies (Second Amendment) Act, 2002, 1 Substituted for 2 bid. 3 Substituted for “Company Law Board” by the Companies (Second Amendment) Act, 2002. 4 Substituted for "five thousand rupees" by the Companies (Amendment) Act, 2000, w.e-f. 13-12-2000. 5 Substituted for "ten thousand rupees”, ibid. 6 Ibid. + Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002. 8 Substituted for “fifty rupees" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000. 9 Substituted for “Company Law Board” by the Companies (Second Amendment) Act, 2002 i3412 Company Law 317. Managing director not to be appointed for more at a time.—(1) No company shall, after the commencement of or employ any individual as its managing director for a ter years at a time. (2) Any individual holding at the commencement of this Act the office managing director in a company shall unless his term expires earlier, fal deemed to have vacated his office immediately on the expiry of five youre ree the commencement of this Act mn Chapter xn than five ye al this Act, appoint ™ exceeding five (3) Nothing contained in sub-section (1) shall be deemed to prohibit the re. appointment, re-employment, or the extension of the term of Office, of any person by further periods not exceeding five years on each occasion: Provided that any such re-appointment, re-employment or extension shall not be sanctioned earlier than two years from the date on which it is to come into force. '((4) This section shall not apply to a private company unless it is a sub- sidiary of a public company.] 384. Firm or body corporate not to be appointed manager.— [No company] shall, after the commencement of this Act, appoint or employ, or after the expiry of six months from such commencement, continue the appointment or employment of, any firm, body corporate or association as its manager. 385. Certain persons not to be appointed managers.—(1) No company Shall, after the commencement of this Act, appoint or employ, or continue the appointment or employment of, any person as its manager who— (a) _ is an undischarged insolvent, or has at any time within the preceding five years been adjudged an insolvent; or (b) suspends, or has at any time within the preceding five years suspended, payment to his creditors; or makes, or has at any time within the preceding five years made, a composition with them; or (c) is, or has at any time within the preceding five years been, convicted by a Court in India of an offence involving moral turpitude. (2) The Central Government may, by notification in the Official Gazette, remove the disqualification incurred by any person in virtue of clause (a), (b) oF (c) of sub-section (1), either generally or in relation to any company or companies specified in the notification. 388. Application of sections °[269, 310], 311, 312 and 317 to managers.—The provisions of sections ‘[269, 310], 311 and 317 shall apply in | Inserted by Act 65 of 1960, section 119. Substituted by Act 65 of 1960, section 145, for certain words. Substituted by Act 65 of 1960, section 148, for "310", Substituted by Act 65 of 1960, section 148, for "310" seeSee. 196 Appointment of managing director, whole-time director or manager 3413 in relation to the manager of @ company as they apply in relation to a| managing director thereof, and those of section 312 shall apply in relation to the manager of a company, as they apply to a director thereof. ‘Synopsis Legislative history ‘Commentary 1. Accompany not to have two specified managerial persons ata time: Sub-section (1) 3417 2. Tenure of managing director 3417 3. Disqualifications 3418 3.4 Appointment of a person above 70 3418 3.2 Insolvency 3419 33 Conviction 3419 4. Appointment of managing director or whole-time director 3419 4.1 Mandatory appointment 3419 4.2 Appointing authority 3420 4.3 Members’ approval 3420 5, _ Retirement by rotation of managing/whole-time director as a director 3421 6. Cessation of office of managing/whole-time director 3422 7. Removal of managing/whole-time director 3423 7.1 Power of removal 3423 7.2 Remedy against removal 3425 73 Whether a suit or writ petition against removal can lie 3428 8 Conditions to be fulfilled under Part I of Schedule V 3429 8.1 Clause (a) 3429 8.2 Clause (b) 3429 83 Government approval required only for first appointment 3429 8.4 Clause (0) 3430 8.5 Clause (d) 3430 8.6 Clause (e) 3430 9. Compliance under Part III of Schedule V 3431 10. Exemption to Government Company 3431 11, Exemptions to Private Company 3431 3431 12. Rules and Forms LEGISLATIVE HISTORY 269, 317, 384, 385 and 388 of the ‘This section corresponds to sections 197A, 267, 2014 vide Notification No. Companies Act, 1956. It has been made effective from 1~ $0 902(E), dated 26-3-2014. Legislative History of section 197A.— 1960.—The Companies (Amendment) Act, 1960 inserted a new heading and a new section 197A 2000.—Sub-sections (b) and (c) were omitted by the Companies (Amendment) Act, 12000 as the system of managing agents, ete. had become redundant after the abolition of the same by Companies (Amendment) Act, 1969. Legislative History of section 267.— 1956.—This section was enacted by the Companies Act, 1956. In the Original Bill the proposal is related only to managers. The present section was enacted on the recommendation of the Joint Committee which had observed thus in para 95 of it's report:3414 Company Law "Clause 266 (New clause).—This is which applied to managers (vide cl should be stiffer in the case of the r ed on original clause 295 in thy jause 385). The Committe aging director than in t} 1S intr, © feel that the race have therefore omitted the provision found in pe ginal clause 295(2) f, he req et an the disqualification imposed by the clause. ‘The limitation of the isquatificgy eV of Period of five years has also been removed" ation ig 1960.—By the Companies Amendment Act, 1960 the words *in India” og, clause (c) after the word "court" were omitted The Notes on clauses Slated: Clay Te Conviction by a foreign court involving mort turpitude should debar erased working as managin, i same way as similar Conviction ‘as suggested by the Companies Amendment Act Commitieg fo the committee's opinion "A conviction by a foreign court involving mora turpitude s much a disqualification as conviction by an India Court". [para 109 of report] Ut? is as Legislative History of section 269, 1956—This section was enacted by the Companies Act, 1956 on thy recommendation of the Joint Commitice, Instead of the words "the appointment of a TLnaging or whole-time director for the first time after the commencement of this Act", the words the appointment Of a person ‘or the first time as managing or whole tira dire “dag ie aPPointment shall not have effect beyond a period less approved by the Central hould be amended as follows: "In uhe case of an existing ich i sidiary of a public company, the appointment of a managing or Whole-time director for the first time after the Commencement of this Act j Government and to such terms Company incorporated after the 1974.—By the Companies (Amendment) Act, 1974 the Explanation and sub-sections (3), (4) and (5) [corresponding to Sub-sections (4), (5) and (6) Tespectively of the present Section] were inserted. The Notes on Clauses explained the purpose of these provisions thus: "Clause 23 — The existing section 269 Fequires approval of the Central Government for the appointment of managing or whole-time directors for the first time. No such approval is, therefore, required for their re-appointment at any time thereafter, Provided there is no change in remuneration, Government has no control over these Subsequent appointments even though serious irregularities OF illegalities may have been committed by such director except to launch Prosecution OF apply to the court for disqualifying him from being appointed as director in the company. This is an unsatisfactory position. It is, therefore, proposed to amend this Provision so as to require aSec. 196 Appointment of managing director, whole-time director or manager 3415 approval of the Central Government for appointment as well as re-appointment and to take power to grant such approval for a period shorter than five years in approprlalé usal of such approval so cases. It is also proposed to provide guidelines for the grant or refu as to ensure the exercise of the power fairly and justly.” 1988.—The present section was substituted by the Companies (Amendment) Act, 1988 with a view to "dispensing with Government approval for managerial appointments {to the fulfillment of certain statutory guidelines". (Statement of stated and remuneration subj ‘Objects and Reasons). Further the Notes on Claus¢ “Clause 46 — Sub-clause (1) — This sub-clause provides for compulsory appointment of managing or whole-time director or manager by public compait® and private companies which are subsidiaries of public companies, having paid up capital of not less than rupees twenty-five lakhs. This sub-clause dispenses with the requirement of prior ‘0 long as the appointment and Sub-clause (2). approval for appointment of managerial personnel s\ Femuneration are in accordance with the norms, standards and procedure set o€t Schedule XIII proposed to be inserted by clause 64 of this Bill. Approval of the Government will, however, be necessary in the case of inadequacy or absence of profits during specified financial year(s). Sub-clauses (3 to 5)-—These sub-clauses contain provisions relating 1 appointment of managerial personnel where such appointment would require approval of Central Government. Sub-clauses (6 to 11).—These sub-clauses further clarify that failure to obtain r necessary, within specified period, and appointment made in 4 Schedule XIII shall table approval, wherever contravention of the conditions laid down in the propose conaute an offence, The proposed amendment also provides for sui eervention by the Company Law Board for termination of any appointment.” 2000.—Penalty under sub-section (6) was enhanced to 25,000 from %500; under sub- section (10)(a) to ¥50,000 from 25,000; under sub-section (10)(b) to %1,00,000 from 210,000; under sub-section (10)(c) to 1,00,000 from 710,000; and under sub-section i (11) to 8500 from %50 by the Companies (Amendment) Act, 2000. 2002,-Clause 24 of the Notes on Clauses states that this clause seeks to amend sections 247, 250, 251, 269, 284, 304 and 307 of the Companies Act, 1956. The existing provisions contained in the said sections, iter alia, relate to appointment of one or Moke Inspectors by the Central Government on the orders of the Company Law Board to investigate and report on the membership of the company, imposition of restriction upon ‘hares and debentures and prohibition of transfer of shares and debentures in certain Gases, saving for legal advisers and bankers from disclosing any information to the Company Law Board, reference to the Company Law Board in making order relating to appointment of managing director or whole time director or manager in contravention of the requirements of Schedule XIII, passing of orders by the Company Law Board relating to resolution for removal of directors and ordering the company for immediate inspection of the register kept under section 303 of the said Act and keeping of register of directors shareholdings, etc. The Company Law Board has been conferred certain powers under the said sections. It is proposed to confer these powers of the Company Law Board under these sections upon the Tribunal. These amendments are of consequential nature. eet i i3416 Company Law Chapter x er XI The powers are to be conferred on the Tribunal’ w.e.f. a date to be notified. s : amendment is yet to be notified powers continue to vest in Company wi comments would continue to be applicable except for the transfer of po authority from a date to be notified ICE the a Board, The WETS 10 the neve Legislative History of section 317.— 1956.—This section was enacted in pursuance ofthe following recommenda the Company Law Committee: "....... The tem of appointment for a mea” managing director should be limited to five years a atime, although an exception ery be made inthe case of technicians and consultants" [Paragraph I46(i) of weeny, Md 1960—Sub-section (4) was inserted by Companies (Amendment) Act, 1960 T™ intention was the same as in the case of the amendment to section 316. . Legislative history of section 384,— ion of 19356.—The observations of the Company Law Committee were as follows: ‘One of the principal lacunae in the Act of 1913 is the absence of any statuto Provision relating to the terms and conditions of appointment of managing director, and managers. This lacunae is all the more noticeable, in as much as, while the Powers and functions of managing directors and managers are in many respects similar to those of managing agents, unlike the latter, the conditions of appointimen of the former have not been brought under control and regulation. We suggest that there should be statutory provision for this purpose and recommend the insertion of a new section in the Act on this subject. We have attempted a draft of such a section, Our main proposals are as follows.— (@ no firm or body corporate should be appointed as a manager." 1960.—The section was made applicable to all companies, public or private by the Amendment Act of 1960 (65 of 1960). The recommendations of the Companies Amendment Committee were as follows.— "For the words "No public company, and no private company which is a subsidiary of a public company” occurring in section 384, the words "No company" might be substituted.” Legislative history of section 385.— 1956.—This section was based on the recommendation of the CL Committee. In the Notes on Clauses this was stated thus: "Clause 295 — This gives effect to the recommendation embodied in sub-clause (c) of new section 87/(1) at page 373 of the Company Law Committee's Report. A power has been given to the Central Government to remove the disqualification. The power is intended to be exercised where it will be unjust to apply the prohibition contained in sub-clause (1) of the clause, for instance, by reason of the lapse of @ number of years after the adjudication in insolvency or conviction of a criminal offence.” This section was enacted separately in relation to managers on the recommendation of the Joint Committee (refer to section 267).inne i Sec. 196 Appointment of managing director, whole-time director or manager 3417 Legislative history of section 388.— 1956.—This section has been inserted by the Joint Commitee with the following observation: "This clause provides for the application of clauses 311 and 316 to the case of managers, these clauses having been restricted to directors in accordance with the arrangement of Chapters adopted by the Committee [vide J.C.R., para 145]. But the Lok Sabha has replaced that section by the present one. 1960.—According to the Notes on Clauses: "This amendment seeks to make the appointment of a manager subject to Government approval in the same way as the appointment of a managing or whole-time director." [Clause 147]. COMMENTARY 1. A company not to have two specified managerial persons at a time: Sub-section a According to sub-section (1) of this section, a company cannot the same time a managing director and the manager. This applie: including private companies. However a company is free to appoint two or more persons as managing di managers. There is also no prohibition to designating a person as joint or deputy_or ditional managing director. In such cases, the provisions of the Act applicable to the managing directors would apply to all these persons. In other words, all these persons would be regarded as managing directors although it is possible to discard this contention by proving that the person designated as deputy, etc. is not a managing director within the meaning of the definition of ‘managing director’ in section 2(54) having regard to the powers entrusted with him. But in such a case, he would be regarded a whole-time director. ‘The definitions of both ‘managing director’ and ‘manager’ contain the peculiar phrase: occupying the position of... by whatever name called” which indicates that it_is the position and not_nomenclature that , and it is the powers which is the svrerminative factor. The employees designated as president, vice-president may be ‘officers’ within the meaning of section 2(59) but they cannot be ipso facto managers within the meaning of section 2(53). Likewise an employee who also holds the office of Girector may be a whole-time director but not a managing director within the meaning of section 2(54). 2. Tenure of managing director ‘According to sub-section (2), a company must not appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time, No re-appointment shall be made earlier than one year before the expiry of his term. This provision corresponds to section 317 of the 1956 Act. But the prohibition contained in sub-section (2) would not apply to the re- appointment, re-employment, or the extension of the term of office, for a further term of not more than five years at a time, provided that any such re-appointment, re-employment or extension shall not be sanctioned earlier than one year from the date on which it is to come into force. This section applies only in respect of the term of office of managing or whole-time director. It has nothing to do with the term of office of director, As such, a person who “TOMS the office of managing director may have been appointed as director for a longer Term Than five years, ¢.g_where he is not Tia [e fo retirement by rotation. 2h ———— appoint or employ at to all companies, rectors orsale Company Law Chapter xqy The Supreme Court has held, with regard to section 317 of the 1956 Act, that th section does not even impliedly indicate that there should be no perpetual management ‘The section forbids an appointment of a managing director for more than five years re time’, It permits the managing director to be re-appointed after a term is over. If he is a re-appointed, then there would be perpetual management by him. The Act, therefore, does not intend by section 317 to prevent that." ‘A person who holds the office of a managing director or whole-time director may have been appointed as a director for a longer term than five years, e.g. where he is not liable to retirement by rotation, Where he is liable to retirement by rotation. and, as result thereof, during the currency of his term of office as managing director ceases ‘a director, bis office of managing director would ipso facto come to an end. = In such a case, during the intervening period between his retirement and re. appointment, he_might be deemed as_not_occupying the office of director and in “Gonsequence, it would result in a break in his appointment as a managing director. If this were True, on his re-appointment a3 a director at that meeting he would have to be re- appointed as a managing director. To overcome this problem a clause may be added in the articles or in the initial resolution meant to appoint the person as a managing director on the following lines: "A managing director or a whole-time director, who is re-appointed as a director | immediately on retirement by rotation, shall continue to hold his office of managing | Aor oF whole time! dltésioe endl reteppoinfenf/aa\sach director shall not be deemed to constitute a break in his appointment as managing director or whole-time | director.” | 3. Disqualifications According to sub-section (3), a company must not appoint or continue the employment of any person as managing director, whole-time director or manager who attracts any of the following disqualifications: (a) he is below the age of twenty-one years or has attained the age of seventy years: (6) he is an undischarged insolvent or has at any time been adjudged as an insolvent; (c)_he has at any time suspended payment to his creditors or makes, or has at any’ time made, a composition with them; or (d) he has at any time been convicted by a court of an offence and sentenced for a period of more than six months. 3.1 Appointment of a person above 70.—As noted above, according to sub-section (3)(a), a company cannot appoint or continue the employment of any person as managing director, whole-time director or manager who is below the age of twenty-one years OF has attained the age of seventy years. However as per the proviso, the appointment of @ person who has attained the age of seventy years may be made by passing @ special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person. The board can appoint @ managing director or whole-time director but such appointment must be approved by 1 Oriental Metal Pressing Works Pvt Lid v Bhaskar Kashinath Thakoor (1961) 31 ComP a 143 (SC): AIR 1961 SC 573: (1961) 3 SCR 329. aSee. 196 Appointment of managing director, whole-time director or manager 3419 ordinary resolution at the next annual general meeting. But when a person who is 70 or above is appointed by the board as a managing director, such appointment must be approved by the members of the company by a special resolution passed at such annual general meeting. It should be noted that the requirement that the appointment of a person who has attained the age of seventy years may be made by passing a special resolution only means that such appointment made by the board of directors shall be subject to the approval of members by a special resolution; it does mean that the appointment itself must be made by the members. The appointing authority is the board, but the members’ post facto approval is necessary. The proviso to clause (a) of sub-section (3), does not use the word ‘previous’ or ‘prior’ nor does it imply that the approval of members must be previous or prior approval. In the case of Sridhar Sundararajan v Ultramarine & Pigments Limited', the Bombay High Court held that the word ‘continue’ used in the proviso to sub-section (3)(a) applies only to the fresh appointment or the reappointment of a person who has already attained the age of 70 years. It was held that ‘the only conclusion that one can draw is that the word ‘continue’ is correctly used in its strict sense in relation to clauses (b), (c) and (d) of Section 196(3), i.e., as a cessation eo instante on the occurrence of any of the events those sub-clauses contemplate, but in the context of Section 196(3)(a), it means, and can only mean ‘appointment’ and ‘reappointment’. In the same case it was held that— “Correctly read, therefore, Section 196(3) does not operate to interrupt the appointment of any Director made prior to the coming into force of the 2013 Act, even ina case where the Managing Director crosses the age of 70 years during the term of his appointment; and it also does not interrupt the appointment of a Managing Director appointed after 1st April 2014 where at the date of such appointment or re-appointment the Managing Director was below the age of 70 years but crossed that age during his tenure. There is no mid-tenure cessation of Managing Directorship as a result of Section 196(3)(a). All that Section 196(3)(a) does is to sound a note of caution in the public interest and to demand from the company a special resolution when a person who has already crossed the age of 70 at the date he is proposed to be appointed or reappointed. The word ‘continue’, therefore, must be read contextually.” 3.2 Insolvency.—Clause (b) of sub-section (3) disqualifies a person if he is an undischarged insolvent or has at any time been adjudged as an insolvent. 3.3 Conviction.—According to clause (d), a person who has at any time been convicted by a court of an offence and sentenced for a period of more than six months must not be appointed as managing director or whole-time director or manager of a company. Under section 267 of the Companies Act, 1956, conviction for an offence involving moral turpitude only disqualified a person. But under clause (d) of section 196 of new Act conviction for any offence under law will disqualify the person if the person has been sentenced for a period of more than six months. The words ‘at any time’ indicate that conviction and sentence at any time during the life of the person will result into permanent disqualification throughout the life of the person. 4, Appointment of managing director or whole-time director 4.1 Mandatory appointment.—Section 203 makes it mandatory for every company belonging to such class or classes of companies as may be prescribed shall have the* 1 (2015) 192 Comp Cas 255 (Bom).om Company Law Chapter xm following wholestime key managerial personnel, and the definition of key manageriy Renate e director and mange f Fonnel inclixles managing director, whole-time ¢ get. vAccute re tion 203 read with Rule as ‘company falling within the ambit of s of the Comput fppattiannt ac Remuneration of Managerial Personnel) Rules, 2014 must have sg weet one of the persons mentioned in that definition as a Key managerial person, Any company not falling within the ambit of section 203 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, need not have any of the key managerial personnel, but if any such company voluntarily wants to appoint a managing director or whole-time director or the manager, it must comply with the provisions of section 196 and Schedule V, Part L 42 Appointing authority—Sub-section (4) seeks to_empower, subject to the provisions of section 197 and Schedule V, the board of directors to appoint.a managipg director, whole-time director or manager and to determine the terms and conditions of his SJpporntment and the remuneration payable to him, which must be done by the board at a board meeting (and not by circular resolution). But the appointment and remuneration must be subsequently approved by a resolution of the members to be passed at a general meeting of the TA field after the aopoinimen by joint the board. Notice of the board meeting at whi proposed to appoint a managing director, whole-time director or the manager as well as notice of general meeting at which the appointment made by the board is to be approved, must include details of 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. ‘A return in the prescribed form must be filed with the Registrar within sixty days of such appointment. Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 reads as follows: "3, Filing of return of appointment—A company shall file a return of appointment of a Managing Director, Whole Time Director or Manager, Chief Executive Officer (CEO), Company Secretary and Chief Financial Officer (CFO) within sixty days of the appointment, with the Registrar in Form No. MR.1 along with such fee as may be specified for this purpose." [For text of the forms, refer Free CD being enclosed with Volume 2| 4.3 Members' approval.—The_appointment of a managing director or whole-time director will not require approval of the Central Government if such appointmentisn sccondanse WIN The cont one ‘specified in that Schedule, but if it is not in accordance “with those conditions, approval of the Central Government will be necessary. ointment can be made by the board but the same will have to be “act S a compan) the board is State Accordingly, later on got approved by the sharenorders, require that the managing director shall Government company provided that the director of the company shall be appointed (and removed) by the Governor of the Sta the court held that according to the company's articles of association Governor of a intmen State was the appointing authority, hence there was no need to place the appol before the eens board Tor its approval, 1 Mahamani (P) v Tamil Nadu Magnesite Lid (1994) 2 CLA 314 (Mad).| | Sec. 196 Appointment of managing director, whole-time director or manager 3421 The articles of companies invariably contain an express provision in this regard generally framed on the following lines: “Subject to the provisions of section 203 and other applicable provisions of the Act and these articles, the directors shall have power to appoint from time to time one or more of their body to be managing director or managing directors or whole- time director or whole-time directors of the company for such term not exceeding five years at a time as they may think fit to manage the affairs and business of the company and may from time to time (subject to the provisions of any contract between him and the company) remove or dismiss him or them from office and appoint another or others in his or their place or places." It was held in an old English case that where the articles do not contain any provision enabling the board to appoint any managing director, it is quite beyond the powers of the directors to appoint a third person (even if qualified to be a director) to be managing director of the company at a specified salary a year.’ However, this section read with section 2(54) expressly authorises the board to appoint a managing director without requiring to have a provision in the articles. If the articles vest this power in the shareholders, the appointment must be made by the shareholders. Sear The appointment of managing director under the articles is only one out of the five methods indicated in the Act. If, for instance, a managing director is appointed by a resolution of the board of directors, there is no need for the existence of any provision in the articles for such appointment. Further, a person who is not designated as ‘managing director’ may be deemed to be a managing director so-long as he ‘occupies’ the position of a managing director if he is “entrusted with substantial powers of management. It is presumably for the above Feasons that there is no specific provision in the Act for the appointment of managing director." _That thereis no specific provision in the 5, Retirement by rotation of managing/whole-time director as a director Section 152(6) of the Act states that unless the articles of association of a company provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall be liable to retirement by rotation. Articles of most companies contain an express provision excluding managing and whole-time directors from the rule of retirement by rotation; and provide that a person shall not be liable to retirement by rotation so long as he continues to hold the office of the managing or whole-time director. In case the managing director is liable to retirement as director by rotation but he is appointed as a managing director for a fixed term, say five years, and eventually may arise that at an annual general meeting he would retire by rotation but would be re- appointed at the same meeting, in such a case during the intervening period between his retirement and re-appointment, he might be deemed as not occupying the office of director and in consequence, it would result in a break in his appointment as a managing director. To overcome this problem a clause may be added in the articles or in the initial resolution meant to appoint the person as a managing director on the following lines: 1 Boschoek Proprietary Co Lid v Fuke (1906) 1 Ch 148.| | 3422 Company Law a * Chapter XI lew ‘A managing director or a whole-time director, who is re-appointed as | immediately on retirement by rotation, shall continue to hold his office of man | director or whole-time director and such re-appointment as such director shall 28? deemed to constitute a break in his appointment as managing director or whan hole-t | ime director. a director 6. Cessation of office of managing!whole-time director The definition ofthe expression ‘managing director’ given in section 2(54) of the makes it clear that @ person cannot hold the office of the managing director unless holds the office of director. And, therefore, if for any reason whatsoever, the pers ceases to be a director of the company, he ipso facto ceases to be a managing direcrs. whatever the articles or the contract made with him might provide. Therefore, if a person ceases as a director or vacates the office of director, his office of managing direcus automatically comes to an end.! Affirming the above decision the House of Lords held: ...There can be no doubt that the office of managing director could only be held by a director, and that upon the holder of the office of managing director ceasing for any cause to be a director, the office (of managing director) would be ipso facto vacated..." Articles of most companies adopt this principle by laying down the following rule: "... he shall ipso facto and immediately cease to be a managing director or whole-time director if he ceases to hold the office of director for any cause Ave Calcutta High Court has held that if the term of the managing director expires, he ceases to be managing director and cannot continue as director without being validly appointed by the company according to the relative provisions of Companies Act and the articles of association of the company. The Court held that as the managing directors have got special powers and obligations, they cannot occupy the dual capacity of both managing director and director. On their ceasing to be managing directors, they cease to be directors.? However, when a managing director or whole-time director ceases to hold that office, his office of director does not ipso facto come to an end unless the latter is ¢0- terminous with the former. The Bombay High Court has held that when a person ceases to be a managing director, he remained a director.* It is possible to bring to an end the office of director and of managing director at the same time by empowering the Board to do so under the company's articles or under # contract with the managing director. Sometimes articles contain a provision to the effect that the managing director shall cease to be a director if he ceases to be managins director. In some cases, a resolution for his appointment, passed at a general mecting, contains a clause to the effect that the managing director shall cease to hold the office © director, ipso facto, on his ceasing to hold the office of managing director for any re#s0P whatsoever. 1 Shirlaw v Southern Foundries (1926) Lid (1940) 10 Comp Cas 11 (CA). 2 Southern Foundries (1926) Ltd v Shirlaw (1940) 10 Comp Cas 255 (HL). 3. Sishu Ranjan Dutta v Bhola Nath Paper House Ltd (1983) 53 Comp Cas 883 (Cal). 4 Shamsher Jung Bahadur v Kamani Brothers P Lid (1959) 29 Comp Cas 501 (Bom).See. 196 Appointment of managing director, whole-time director or manager 3423 According to clause (h) of se . 283(1) of the 1956 aE office of ara nia ah eee SA ait fe aad eae ee are ne ceases (0 Hold such office or eter employment in the SE aged the company les of association or the terms of appointment of Last cr prov ide that the office of director he holds shall become vacant Fanearatl on tis Measing to hold his office as managing director, his managing beth and Girectorship run concurrently and are terminable concurrently; the latter is co-terminus with the former. Where an erstwhile managing director claimed that he had not ceased to be a director ofthe company on his ceasing to be a director, the Bombay High Court held, rejecting his Sraim, that he had been appointed as director by vitve of being an employce of the rerefore, ceased automatically to be a director on his employment coming company and, the to an end in terms of section 283(1)(1) of the Companies Act, 1956." 7, Removal of managing!whole-time director 71 Power of removal.—Where a managing director is appointed by the board, the board can remove him. Likewise, if a managing director is appointed by the company in general meeting, the general meeting cA remove him. The articles of most companies empower the board to remove oF ine wigs a managing or whole-time director from his fee as such. In that case, the person must be removed in accordance with the provisions of the articles; otherwise, sr ould amount to a wrongful dismissal, thereby Fiving the person the right to claim damage” In case articles do not lay down anything x pout the matter, a question would arise as fo whether the board can remove the person from managing directors thority given to the board. The Allahabad High Court held th hip in absence of any specific aut at no approval of the Central Government We required to remove a person from managing ‘tieetorship. It appears that in that ease the veiee of the company did not contain any provision empowering the board to remove the managing director. Approving the view taken By the lowe! ho was only an agent of t + court, that the board was at liberty to remove the managing director w! the board to carry at the duties assigned to him, the High Court held that the Companies Act provides for an approval of the Central Government only for the aj ppointment of a director as a managing director of the company. There js no corresponding provision for the removal of the managing director.” ‘This should equally apply to the case of appointment Scheie V_ which requires an ordinary resolution to. be passed to approve the appointment. In such a case, what Schedule V requires is the approval to the appointment, In other words, the approval of the shareholders is to be given to the appointment already made by the board of directors. No resolution of the shareholders wuill, therefore, be required for the termination of the appointment of the managing director. The board will be competent to do this. appointed falling within the purview of ‘The company's articles provided: “The directors may from time to time appoint any one or more of their body to be managing director for such period and upon ‘such terms as they think fit, and may vest in such managing director .. such of the powers hereby vested in the inia Industries Ltd (1993) 11 CLA 68 (Bom). 1 Sunil K Alagh v Britan rrwal (D P) (1983) 53 Comp Cas 586 (Al). 2 Pyare Lal Gupta v Aga’3an4 Company Law Chapter xm directors generally as they may think fit and such powers may be exercisable fq sich period or periods and upon such conditions and subject to such restrictions, ang generally upon such terms as to remuneration and otherwise as they may determine. ‘The court held that the directors had power not only to appoint a managing direct and to vest powers in him as mentioned in that article, but also to reverse the same, i.e, a evoke his appointment or withdraw all or some of the powers vested in him; even thou b ho specific power was granted to the directors for the removal of the managing diets uch a power was impliedly granted to them by that article; and that when the director, revoked the appointment of a person as a managing director he ceased to be a managing director but remained a director.! However if the articles do not provide so, a chairman does not have powers to remove a managing director if the Central Government has approved the appointment as | managing director of the company under the Act.* Where the articles empower the board of directors to terminate the office of managing/whole-time director, the board must observe the terms of the contract and the removal must be in accordance with the terms in that behalf as embodied in the contract, if any. For instance, if the contract provides for a notice of certain duration to be served by one party intending to terminate the contract on the other party to the contract, the board must, in case it intends to remove the managing director, serve a notice of the stipulated period. If the board fails, it will tantamount to a breach of contract and the managing director aggrieved by it would be entitled to claim damages for such a breach, ‘The removal of a managing/whole-time director in accordance with the provisions in the articles or in pursuance of the terms of contract, if any, between the company and the managing/whole-time director would not, as such, amount to an ‘amendment’ within the | meaning of section 268 of the Companies Act, 1956 requiring the approval of the Central Government under that section. ‘A managing director can be removed as a director pursuant to the provisions of section 169 of the Act, which would result in the termination of office of the managing director. Removal of the managing director is to be left to the wisdom of the shareholders and board of directors of the company and, therefore the Company Law Board not to intervene in the proceedings.* ‘A managing director removed according to the provisions in the articles of the ‘company is not entitled to a relief through writ petition under Article 226 of Constitution for enforcement of contract of service.* A managing director, like every other director, can be removed at any time from office by the general meeting by virtue of section 184 (of English Companies Act, 1948 corresponding to section 284 of Companies Act, 1956; section 169 of 2013 Act) whatever | terms his contract contains on the length of office.* However, this section preserves the 1 1 Major-General Shanta Shamsher Jung Bahadur Rana v Kamani Brothers (P) Lid (1959) 29 \} Comp Cas 501 (Bom). 2 | 2 Kapinipathi Rao (R) v Mysore Stoneware Pipes and Potteries Lid (2011) 165 Comp C*8 12 (CLB). 3. Raju Naidu (TV) v Tiruppur Karur Transport P Ltd (2010) 153 Comp Cas 12 (CLB). 4 Verma (B.M.) v State of UP (2005) 58 SCL 52 (All). 5 Palmer's Company Law, 23rd edn, p. 832. —gee. 196 Appointment of manaing director, whole-time director or manager — ¥425 right to claim compensation or damages if such removal results in a breach of contract of section 284 of the Companies Act, 1956] {sub-section (7) rticles or by any ng and has no A person appointed as a life director or permanent director by the nent is, nevertheless, removable by the company in general m in office. While the shareholders have no power, apart from that given he articles to intervene in the management of the company’s affairs, this Je them to control the directors by their removal. The only 1 Government under section 408 of the agree security of tenut inthe statute or t section was designed (0 ¢I he directors appointed by the Centra exception is U Companies Act, 1956 and life directors holding office on April 1, 1952." ‘A petition against the removal of a managing director can be filed at place where company's head office is situated.” s well settled that a contract of employment 7.2 Remedy against removal. —It nst_an employer. The remedy is to sue for cannot ordinarily be enforced by or agai damages.’ In Executive Committee ‘of Vaish Degree College v Lakshmi Narai) Court formulated the following principle: "The law relating to master and servant is clear. A contract for personal service will not be enforced by an order for specific performance nor will it be open for a servant to refuse to accept the repudiation of a contract of service by his master and say that the contract has never been terminated. The remedy of the employee is claim for damages for wrongful dismissal or for breach of contract. ... no declaration to enforce a contract of personal service ‘will be normally granted. But there are certain well-recognised exceptions to this rule and they are: To grant such a Geclaration in appropriate cases regarding (1) a public servant, who has been dismissed from service in contravention of Article 311. (2) Reinstatement of a dismissed worker under Industrial Law by Labour or Industrial Tribunals. (3) A statutory body when it has acted in breach of a mandatory obligation, imposed by statute.” ‘The above principle was reiterated in Nandgan) Sihori Sugar Co Ltd v Dixit (BN) in in the following words: "A contract of employment employer. The remedy is to sue for damage such as in the case of a public servant dismissed from service in contravention of aticle 311 of the Constitution, reinstatement of dismissed worker under the justia! Law; a statutory body acting in breach of statuiory obligations, and the like." in', the Supreme cannot ordinarily be enforced by or against an 's. There are certain exceptions to rule eee 1 Tarlok Chand Khanna ¥ Raj Kumar Kapoor (1983) 54 Comp Cas 12 (Del). 2. Chennimalai Yarns Pvt Lid v Chandraseker (S) (2006) 70 CLA 272 (Mad). 3. Nandganj Sihori Sugar Co Lid v Dixit (BN) 1991 AIR SCW 1280: (1991) 3 SCC 54: (1991) 2 Comp LJ 241 (SC). See section 14 read with section 41 of the Specific Relief Act. See also Coe we Commitee of Vaish Degree College v Lakshmi Narain AIR 1976 SC 888: (1976) 2 SEC SB, Tewari (§ R) v District Board AIR 1964 SC 1680: (1964) 3 SCR 55; UP. Stale Warehousing Corporation v Tyagi (CK) AIR 1970 SC 1224; Sunil K Alagh v Britannia Industries Ltd (1993) 11 CLA 68 (Bom). ‘AIR 1976 SC 888: (1976) 2 SCC 58. ‘AIR 1991 SC 1280: (1991) 3 SCC 54. we306 Company Law Chapter xin Since a managing director is an employce of the company, specific performance of his contract is generally ordered. In Sardar Harpreet Singh v CIT." the Lahore Hi 4 Court held that as the contract between the managing director and the company could aa be specifically enforced and as the breach of such contract could be adequate) compensated, an injunction should not be issued. - In Sardar Gulab Singh v Punjab Zamindara Bank Ltd? it was observed by the single judge: “it is well established that a Court will not give specific relief in the shape of an injunction when damages will be an adequate remedy (cf. Sections 21 and 56, Specific Relief Act). In the present instance, if the plaintiff has been deprived of hig lawful rights, it would be open to the plaintiff to claim damages from the Bank and | do not see why that should not give adequate relief to the plaintiff. Secondly, the status of the plaintiff as a Managing Director is that of an employee. The contract on which the plaintiff relies is dependent on personal services and volition of parties. In such cases, the contract cannot be specifically enforced (vide Section 21, Specific Relief Act) and a Court will also not grant an injunction: see Section 56 (f) of the same Act. This is also the rule observed by Courts were a servant sues his Master to restrain him from dismissing him during the contracted period of service: see Smith's Law of Master and Servant Edn. 8, p. 13." The Calcutta High Court treated the managing director as an employee and refused to grant an injunction against his removal, in as much as the court would not compel a company to keep one of its employees as the court does not enforce an agreement for employment specifically in case of personal service, and no court can compel an unwilling employer to keep a particular employee in whom the employer has lost confidence. In Sunil K. Alagh v Britannia Industries Ltd, regarding the question whether an employee managing director whose services are terminated by the company can claim declaratory relief under section 34 of the Specific Relief Act, the Bombay High Court answering the question in the negative held that since a contract of personal service cannot be specifically enforced and compensation in money would provide adequate relief for non-performance. In Mission Capital ple v Sinclair’, two executive directors’ employment was terminated by the company’s board. There was a claim made in the counterclaim for an injunction prohibiting the company and the non-executive directors from preventing them from attending the Company's premises and performing the duties required of them under their service agreements. The court rejected the claim and held that though framed in negative terms, the effect of such an injunction would be to grant a form of specific performance of their service contracts which would normally be refused in favour of an award of damages if breach of the service contracts was proved. (1991) 91 CTR (All) 43: (1991) 55 Taxman 97 (All) 2 (1940) 10 Comp Cas 188 (Lah): AIR 1940 Lah 243. This was affirmed in appeal vide Sardar Gulab Singh v Punjab Zamindara Bank Ltd (1941) 11 Comp Cas 301 (Lah). 3. Jogindar Singh Palta v Time Travels Pvt Ltd (1984) 56 Comp Cas 103 (Cal). See also Gobind Pritamdas Malkani y Amarendra Nath Sircar (1980) 50 Comp Cas 219 (Cal). 4 (1993) 11 CLA 68 (Bom). (2010) 1 BCLC 304 (Ch D). —Appointment of managing director, whole-time director or manager 3427 sec. 196 the plaintiff sold the share capital of the defendant company to L. Co In one case, r service it was agreed that the defendant company would enter into a ten- to employ the plaintiff as managing director, which agreement vad executed 1958. In August, 1958, L. Co., having offered the plaintiff alternative to which he appeared agreeable, sold the share capital in the defendant M. Co., who did not wish to retain the plaintiff's services. No concluded «iG the plaintiff's employment by L. Co. was ever reached and the plaintiff ‘At an extraordinary general for and agreement on April 8 employment company t0 ta || subsequent offers of employment by them. the defendant company on November 31, 1958, the plaintifi was removed ine girector. L. Co. made further offers to employ the plaintiff in Febriary 1959, which he refused. The plaintiff claimed damages against the defendant, ‘eful dismissa, The articles of the company contained the following agreemen! refused al and March, company for wrony provision The directors may from time to time appoint one or more of their body to the office of managing director or manager for such term and at such remuneration...... fs they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation is appointment shall be subject to determination ipso or retirement of directors; but his apr roto if he ceases from any cause to be a director, O if the company in general riceting resolve that his tenure of the office of managing director or manager be determined." it was held that, although article 68 of Table of Schedule I(1) was incorporated into the articles of the defendant company, nevertheless there was an implied term in the plaintiff's agreement: that the defendant eempany would do nothing of its own motion © put an end to the state of circumstance’ Phich enabled the plaintiff to continue as Franaging director and, accordingly, the “Tefendant company was in breach of its contract with the plaintiff. " ‘The court applied the following principle as laid down in Stirling v Maitland: "if a party enters into an arrangement "ern can only take effect by the continuaney of a aieain existing set of circumstances, there is an implied engagement on his part that he ‘hall do nothing of his own motion to put an vend to that state of circumstances under lying that respectable saath alone the arrangement can be operative,” ‘And held: Appl principle to this case, there is an Implied engagement on the part of the company that it Pril do nothing of its own motion to put a rend to the state of circumstances which wiles the plaintiff to continue as managing dirsc\or that is to say, an undertaking that it ao rt revoke his appointment as a director and ‘will not resolve that his tenure of office be determined. In another case, the articles of the company contained the following provisio directors may from time to time appoint one oF more of their body to the office of managing director ... for such term and at such remuneration ... as they may think fit, find a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation or retirement of directors; but his appointment shall be subject to determination ipso facto if he ceases from any cause to be a director, or if the company in general meeting resolve that his tenure of the 1 Shindler v Northern Raincoat Co Ltd (1960) 1 WLR 22: (1960) 2 All ER 239: (1961) 31 ‘Comp Cas 22 (Manchester Assizes). 2 (1865) 5 B&S 84.3428 Company Law Chapter Xi office of managing director ... be determined.” In January, 1939 the directors of the company it was resolved that the plaintiff appointed managing director of the company at a salary of £7 at the first meeti Ng of hereby be and he ig Per week as from M 1 February, 1932." Ata later date the salary was increased. Ata meeting of a tomy on 11 May, 1949, it was resolved that the plaintiff's "employment be terminate secretary was instructed to send him a months notice, but the company pari tle salary until, on 28 September 1949, an extraordinary general meeting of the ent His was held at which a resolution approving the action of the directors in remag Pat from his office was passed. In an action by the plaintiff claiming, inter alia dayne, wrongful dismissal and breach of contract on the ground that he had nox boete’3 reasonable notice. It was held that since the resolution of the directors appoini’ plaintiff as managing director contained no special terms beyond the fixing of be remuneration and neither amplified nor was inconsistent with the provisions plaintiff was appointed managing director on the terms of art 68, with ss office as was provided for by that article; in the absence of any contract partis independent of art 68 and the resolution there was no ground for implying « as to reasonable notice; and, therefore, the plaintiff had no special right to receive Particular notice of the termination of his employment when the company decided © determine it and did so by a resolution in general meeting, Of art 68, the ch tenure of between the But in Nelson v James Nelson & Sons Ltd', the articles of association of the defendant company provided that the board of directors might appoint of their number to be managing director for such period as they deemed fit, and might revoke the appointment. The board appointed the plaintiff to be managing director upon the terms of an agreement which provided that he should hold the office so long as he should remain a director of the company and retain his due qualification and efficiently perform the duties of the office. Subsequently, while the plaintiff was still fulfilling the conditions of the agreement, the board revoked the appointment. The plaintiff sued the company for damages for breach of agreement. It was held that the articles of association did not empower the board to revoke the appointment at will, or otherwise than in accordance with the terms of the agreement under which the plaintiff was appointed managing director, and that the plaintiff was entitled to recover damages against the company. 7.3 Whether a suit or writ petition against removal can lie —The Allahabad High Court has held that a writ petition by a person who has been removed as a managing director of a company cannot lie against the removal, where the petitioner was appointed as managing director in terms of the articles of association of the company. In the court's view, articles are not statutory document and the managing director's services were terminated by the company in exercise of its powers under provisions of the articles. The petitioner was not entitled to any relief through writ petition under Article 226 of Constitution for enforcement of contract of service.* In Rathnavelusami Chettiar (M. R. S) v Manickavelu Chettiar (M. R. S)° it was held, where the plaintiff had challenged his removal as the managing director at a general meeting convened and held pursuant to a requisition by some shareholder of the company, that since the plaintiff was suing in respect of an individual wrong and Was asking a declaration that he had not ceased to be the managing director the suit Wa 1 (1914) 2 KB 770. 2 Verma (B M) v State of UP (2005) 58 SCL 52 (All), 3 (1951) 21 Comp Cas 93 (Mad). aesec. 196 Appointment of managing director, whole-time director or mal 3 : ‘or oF manager 1 maintainable and the rule in Foss v Harbottle was not applicable. The learned judge observe I have considered the matter carefully and have come to the conclusion that what we are concemed with here is not really either the rule or any exception thereto The question which arises here is indeed a different matter and is governed not by the rule in Foss v Harbortle ... It is perfectly clear to my mind that in the case before me the plaintiff is suing in respect of an individual wrong and not a wrong in which tall the shareholders generally and as a body, only are interested. He is asking it to be declared — and that is principally a matter of concern for him - that he has not eased to be the managing director and that the first defendant has not become that in his place. The question of the maintainability of the suit must therefore be answered in favour of the appellant before me.” §. Conditions to be fulfilled under Part I of Schedule V Part I of Schedule V (corresponds to Part I of Schedule XIII) in its clauses (a) to («) contains five conditions which must be satisfied in order to avoid the approval of the Central Government under section 196 for the appointment of a managing or whole-time director. 4.1 Clause (a) —Under clause (a) of paragraph 1 of Part I of Schedule XIII of the Companies Act, 1956, the appointee should not have been convicted of an offence under any of the Acts mentioned therein, and upon such conviction, sentenced to imprisonment for any term, of to a fine of more than one thousand rupee. This condition would apply only if the appointee had been convicted and punished by a criminal court. Imposition of a penalty by an adjudicating authority under any of the specified statutes will not amount fo conviction. There is a difference between adjudication proceedings leading to imposition of a penalty by a statutory authority or quasi-judicial body which is not 2 Court, and prosecution leading to imposition of punishment by the court of law. Penalty proceedings cannot be equated to criminal proceedings attracting punishmest. The proceedings entailing a penalty under the Income-tax Act cannot be equated to the prosecution attracting the punishments, as no conviction for any offence is involved in the imposing of a penalty." This disqualification shall not therefore be attracted in case where a statutory authority or a Tribunal had imposed on the appointee a penalty under any of the statutes specified in that condition. It may be noted that Tribunals or such other quasi-judicial bodies are not court of law.? 8.2 Clause (b).—Under clause (b) of this paragraph, the appointee should not have been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. 83 Government approval required only for first appointment.—In regard to both tne cenions mention in clases) and (©) above i only the ist appotntent that will require approval of the Government: once the Central Government has given its approval to the appointment of a person convicted or detained, as the case may be, no further approval for subsequent appointment of that person shall be necessary, unless in the meantime, that person has once again been convicted or detained. However, the 4 TE ede Renee 107 ITR 832 (AP). v Western India Engg Co Lid (1970) 77 ITR 165 (Guj); Seshadri (R M) v Se nd A ITO (1954) 25 TTR 400 (Mad) and Satyanarayanamurthi v ITAT (1958) 33 ITR 123 (AP), “atz = 3430 Company Law Chapter Xin sary for the first | approval of the Government would be nec ae } notwithstanding the fact that the appointee had been convicted or detained at any tiem the past, however long ago it might have happened. in Clause (a) is silent on the question whether the disqualification mentioned there aie shall not apply if the person convicted has made an appeal against his conviction, and th same is admitted and pending. Going by the proposition that, conviction means fia conviction or confirmation of the conviction by the appellate court and not by the trial court when appeal is pending, it seems that, in such a case, disqualification shall not apply till the disposal of the appeal. (One more question that deserves consideration is as to whether this disqualification shall be attracted when the person is convicted of an offence committed by him in his personal capacity or whether it shall apply only if he is convicted of an offence committed by a company, where he has been convicted as a director thereof. The provision in the Schedule is silent on this point. It may, therefore, be inferred, by implication, that in whatever capacity the person may have been convicted, whether in his personal capacity or even in any other capacity, he shall be disqualified by virtue of the said condition laid down in Schedule V. 8.4 Clause (c).—According to this clause, the person who has completed the age of twenty-one years and has not attained the age of seventy years can be appointed as a managing director, whole-time director or manager of a company. However if a person who has attained the age of seventy years may be appoint¢d if his appointment is approved by a special resolution passed by the company in general meeting, In such a case, no approval of the Central Government shall be necessary for such appointment. If the age of retirement of the appointee as per the company rules or the terms of appointment is less than 70, such limit will apply. But there is no bar to changing the rules or the terms of appointment so as to prescribe the limit of 70. | 8.5 Clause (d).—According to clause (d), a person who is a managerial person (meaning managing director, whole-time director or manager) in more than one company, he may draw remuneration from one or more companies subject to the ceiling provided in section V of Part II. ‘According to Section’ V of Part II, Subject to the provisions of sections I to IV, @ managerial persoit shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person. 8.6 Clause (e)-—According to clause (e), a person to be appointed as managing director, whole-time director or manager without the Central Government approval must be a resident of India. Explanation I provides an inclusive definition of the expression ‘a person resident in not less | India’ includes a person who has been staying in India for a continuous period of not Ie ageri than twelve months immediately preceding the date of his appointment as a man: person and who has come to stay in India, z (i) for taking up employment in India; (ii) for carrying on a business or vacation in India. tt should be noted that the definition of ‘resident in India’ as given in th is an inclusive definition; it is not an exhaustive definition. As such, the definition _ .e Explanation givenSec. 197 Overall maximum managerial remuneration 343 in the Explanation may be said to be an additional definition, and therefore, th expression "resident in India" would also cover the cases of other individuals not fall Siukin the ambit of the Explanation. Accordingly, a person who is not covered by the Explanation could also be resident in India. Thus, the definition given in the Explanation could be considered to be the one in addition to that given in the Foreign Exchai Management Act, which seems to be the appropriate definition in this regard. 9. Compliance under Part III of Schedule V Part III of Schedule V stipulates, in its two paragraphs, two requirements, must be complied with in relation to the appointment of a managing/whole-time director. These are as follows: (1) The appointment and remuneration referred to in Parts I and II of this Schedule shall be subject to approval by a resolution of the shareholders in general meeting. (2) The auditor or the secretary of the company or where the company has not appointed a secretary, a secretary in whole-time practice shall certify that the requirements of this Sche ,dule have been complied with and such certificate shall be incorporated in the return filed with the Registrar under section 196(4). 10, Exemption to Government Company! Central Government, in exercise of the powers conferred by section 462 has notified that the provisions of sub-sections, 2), (4) gudJ5) of section 196 shall not apply to Government Companies. 11. Exemptions to Private Company” the powers conferred by section 462 has notified Central Government, in exercise of 1d (5) of section 196 shall not apply to Private that the provisions of sub-sections (4) an Companies. 12. Rules and Forms For the purpose of this section, Rule 3 of Companics (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides for filing of return of appointment and the same is already placed in the commentary. 197. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits (1) The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and ial year shall not exceed eleven per its manager in respect of any financi: cent of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits: Provided that the company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration phe acs rites) RE 1 Notification No. GSR 463(E), dated 5-6-2015. 2 Notification No. GSR 464(B), dated 5-6-2015. as ceil acinar rela ail ti