Pre-requisites, Appointment, and Disqualification of Managing Director

“As a leader, I am tough on myself and I raise the standard for everybody; however, I am very caring because I want people to excel at what they are doing so that they can aspire to be me in the future.”

Indra Nooyi

Introduction:

There are times when everyone finds a sense of leadership in themselves be it then even for a group project within friends or colleagues, but when we speak the language of law a leader can be called as a managing director where all the substantial powers are residing within him. The legal position of a managing director depends upon the memorandum of each company but the general appointments, pre-requisites, duties, qualifications, or disqualifications are similar and legally defined under the Companies Act 2013. In this article, we will understand the above-said traits of a managing director established by law.

Managing Director

As specified in Section 2(26) of the Companies Act 2013, a Managing Director refers to a director who is confined with considerable managerial powers that are otherwise not exercisable. The management’s “substantial powers” can be bestowed on employing an arrangement with the corporation or by the company’s decision or its articles and memorandum. The authority given to this organization may be altered. 

He is also removable, regardless of the Central Government’s recognition of his nomination. He is also removable. Yet, he retains the right to compensation if he has been prematurely disqualified from office.

Substantial powers for the operation of the companies are delegated to the managing director. The omission of the stipulation would not improve the managing director’s status, who continues to function under the terms and conditions laid down by the board. The committee also tops the MD. In managing the company’s operations, the Managing Director has an essential role and is recognized as KMP under Section 2 Clause (51).

In CIT v Sarabhai Sons Ltd[1], it was held that the Chairman of the Board had exercised the powers of management and rendered his services to the company in managing its business. However, he was not appointed as managing director was deemed to be managing director.

In Employees State Insurance Corporation. v. Apex Engineering P. Ltd.[2] the apex court, upon taking into consideration various decisions, among other things, held that a managing director of a company having limited liability would be an employee within the meaning of the said Act. In that case, the Apex Court held in the facts and circumstances thereof that all the requisite conditions for applicability of the term “employee” as defined by the Act stood satisfied in the case of the Managing Director, holding that a Managing Director of a company could not be treated at part with a partner of a partnership firm who has been given some remuneration for his extra work.

Whole-time director 

 As per Section 2, clause 54 of Companies Act, 2013. A director in the whole-time employment of the company. In other words, a director employed to devote the whole of his time and attention to the carrying on of the company’s affairs.[3]

Appointment of a Managing Director

The rules applicable for the appointment are:

1. The Appointment and Remuneration of Managerial Personnel Rules, 2014
2. Appointment and Qualifications of Directors) Rules, 2014
3. Meetings of Board and its Powers) Rules, 2014
4. Schedule V and section 196 of the Companies Act 2013 

The minimum age for the appointment of a managing director is 21 until 70 years of age (but it is subjected to the approval of the board of directors’ general meeting). 

The amendment of 1988 amended Section 269. For public corporations or their private affiliate businesses, the appointment of a managing director, a full-time director, or a manager is made obligatory by the work of a paid-up equity capital [Rs 5 crores or more]. The appointment shall conform with the terms and conditions of Parts I and II of Annex XIII, parts of which shall be subject to Section III. Appointment and reward shall need the shareholding consent of the general assembly. The auditor must certify that the criteria were met by the company or company secretary.

The government shall send a return of appointment in a prescribed form within 90 days. In such situations, it is not appropriate to sanction the Central Government. The consent is, however, mandatory if the appointment is not in line with the timetable. The permission request must be sent in 90 days.

The Central Government cannot issue approval if it is decided that he or she is not an adequate person for the role, and his appointment is in the public interest, and the terms of the position are not just. For a shorter duration than proposed, the government may approve.

If no consent exists, the appointee shall vacate the office from the date on which it was communicated to the company, failing which, per day after the usurpation of the office, it imposes a penalty of Rs 500.

Suppose the government is prima facie of the opinion or the knowledge obtained that an appointment has been made without a sanction, which contradicts the schedule’s provisions. In that case, the government shall have the authority to refer the matter to the Board of Company Law for a decision.

The board should offer the requisite opportunity and will then issue an order declaring that a breach has occurred. The declaration shall have the effect of: (1) the corporation is liable for a fine extending to Rs. 5,000; (2) an officer of the company who is in default is responsible for a fine of Rs 10,000; (3) the appointment shall be revoked, and the appointee is liable for a penalty in the amount of Rs. 10,000.

Any breach of the Board order or failure to comply is further punished in subparagraph (II). Any officer and manager in default shall be punished by incarceration for up to 3 years and by fine extending the limit of Rs 50 for every day of default. Each officer shall not be held liable. It is just time to make up that such a double punishment is a breach of the doctrine of double risk.

Sub-section (12) stipulates that the conduct taken by a person up to the date of his finding of nullity must be real if otherwise valid.

The government tests the competence and the correctness of the prospective applicant. If there is a prosecution pending against the individual involved, the government may refuse the proposal. Besides, under all conditions it deems necessary, the government can approve the nomination. The candidate is a promoter and had a hidden benefit of three lakh rupees in this capacity. The government accepted his appointment, given that the company is recovering its profit.

Re-appointment 

Re-appointment can be performed for the next term but not until one year before the current term’s expiration. In the last year of the present time, the Organization may re-appoint them for the next period.

Managing director as a servant to the company

In Moriarty v Regent’s Garage and Engineering Co Ltd, it was held that a director is not a servant of the company, but a controller of the affairs of a company.

Managing director as an agent to the company

In Ferguson v. Wilson, it was recognized that the directors are considered to be the agents of a company in the law’s eyes. The company is an artificial person, can act only through the directors. The relation between the directors and the company is merely like the ordinary relation of principal and agent.

Tenure

According to section 196(2) of the companies Act, the maximum tenure for the appointment of Managing Director, Whole Time Director, or Manager is 5 (Five) years at a time. Regarding the full assignment, there shall be no business appointing or re-appointing any person for a term extending five years to be its managing director, full-time director, or manager and no re-appointment before one year before the expiration of its name.

A special resolution can be appointed to an individual at the age of seventy, bypassing the explanatory statement annexed to that note. The descriptive information applies.

Essential pre-requisites or the appointment of a managing director

Whole-time key managerial personnel cannot hold office in more than any one company except in its subsidiary company at the same time. However, the key administrative personnel can be a director of any company with the permission of the board. The company is entitled to appoint or to hire an individual as their Executive Director, whether he is the Executive Director of one company and only one company subject to that, a motion passed at a Board meeting with the approval of all the Directors who were present at a conference was accepted by the Directors of the company.

A special resolution can be appointed to an individual at the age of seventy, bypassing the explanatory statement annexed to that note. The descriptive information applies.

Duties of a managing director

Should act as per the Articles of Association of the company pursue the best interests of the stakeholders of the company, in good faith and to promote the objects of the company.

Must use independent judgment to exercise his duties with due and reasonable care, skill, and diligence.

Should always be aware of the conflict of interest situations and avoid such disputes for the company’s interest.

To make sure adequate deliberations are held in connection with related party transactions, ensure the company’s vigil mechanism and the users are not prejudicially affected on account of such use.

Must always ensure the confidentiality of sensitive proprietary information, commercial secrets, technologies, and unpublished prices to be maintained and should not be disclosed unless approved by the Board or required by law.

Should not assign his office, and any assignment so made shall be void.

There are many other responsibilities and duties of the Managing Director. If he contravenes the provisions of the Companies Act, 2013, he shall be punishable with a fine, penalty, and, in some cases, the jail also.[4]

Disqualification of a managing director

1. A person who is an unloaded insolvent or who is insolvent at any point.
2. A person is suspending or delaying the payment to the creditors or rendering or writing the creditors at any time.
3. If the person at any time been convicted by a court of an offense and sentenced for more than six months.
4. If had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offense under various Acts as mentioned under section 196 (3) of the Companies Act, 2013.
5. A crime requiring moral turpitude is or was punished by a Judge. The first section of Schedule XIII gives the list of Laws that provides, without the Central Government’s permission, for anybody who is convicted of breach of them and is sentenced to jail or penalties of up to Rs 1000.

Conclusion

If an individual is still a managing director of another business, the board of directors may only be selected unanimously. Suppose the government is convinced that it is appropriate that companies operate as a single organization for the proper functioning and a joint Managing Director. In that case, an individual can be named Managing Director of more than two companies.[5]

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References:

[1] 1983 143 ITR 473 Guj

[2] 87 1998 (I) LLJ 274 

[3] Goyal, D., 2018. Managing/ Whole-time Director Under Companies Act, 2013. [online] TaxGuru. Available at: <https://taxguru.in/company-law/managing-time-director-companies-act-2013.html> [Accessed 19 February 2021].

[4] KHANEJA, R., n.d. Managing Director – Meaning | Role and Responsibilities | Duties. [online] Knovalt. Available at: <http://knovalt.com/company/managing-director-power-or-responsibility-who-is-managing-director/#:~:text=As%20per%20Section%202(54,of%20the%20affairs%20of%20the> [Accessed 19 February 2021].

[5] India, l., n.d. Legal Position of Managing Director. [online] Legalservicesindia.com. Available at: <http://www.legalservicesindia.com/articles/magd.htm> [Accessed 19 February 2021].