Legal Position of Managing Director

Managing Director [Clause (26)]

Managing or Wholetime Director or Manager
A managing director, as defined in Section 2(26), means a director who is encrusted with substantial powers of management which would not otherwise be exercisable by him. The "substantial powers" of management may be conferred upon him by virtue of an agreement with the company, or by a resolution of the company or the Board or by virtue of its memorandum and articles. The powers so conferred are alterable by the company. He is also removable the same way as he was appointed irrespective of the fact that his appointment has been approved by the Central Government. But if he is prematurely removed from office he is entitled to compensation. A managing director is an employee of the company, but not to the extent so as to be entitled to preferential payments. (News Papers Proprietary Syndicate Ltd,Re, [1990]2Ch349).

It is an essential requirement of his office as "managing director" that he should hold the office of a director. A managing director who is not a director is contradiction in terms. Shirlaw v. Southern Foundaries Ltd., (1940) 10 Com Cases I I (CA) affirmed on appeal Southern Foundaries Ltd. v. Shirlaw, (1940) 10 Com Cases 255 :(1940) 2 All ER 445 (HL); Balchand C v. Devashola (Nilgiri) Tea Estates Co. Ltd., (1972) 42 Com Cases 623 (Mad).

A managing director occupies the dual capacity of being a director as well as employee of the company. Thus for example, the Supreme Court observed that he can be regarded as a principal employer for the purposes of the ESI Act, 1948. Employees State Insurance Corpn. v. Appex Engineering P. Ltd., (1998) 1 Comp LJ 10: [19981 1 LLJ 274 (SC). He is not a mere servant, he is an agent of the company with capacity to bind the company within the sphere of management authorised to him. Happy Home Builders (Karnataka) P. Lid. v. Delite Enterprises, (1994) 13 Corpt LA 405 (Kar).

The day to day management is entrusted to the managing director who can exercise powers of management without referring to the Board. It is necessary that the articles must provide for such an appointment being made. Boschoek Proprietary Co. Ltd. v. Fuke, (1906) 1 Ch 148.

A managing director who was prosecuted for default under S. 220 contended that he was not liable as he had resigned before the last date for filing accounts. The court held that a managing director combines in himself two capacities, namely, manager and director. The capacity as manager cannot be terminated by merely sending up resignations. It becomes effective only when the company accepts the resignation and relieves him from his duties (on facts held that despite resignation, he continued to be managing director). Achutha Pai v. ROC, (1966) 36 Com Cases 598 (Ker). In our view the observation that a managing director holds two offices namely that of manager and of a director is not correct. The concept of a 'manager' as defined by the Act is different from that of managing director. A managing director as defined by the Act is a director who is entrusted with substantial powers of management. It is, however, true that a managing director may resign his office and continue! to be an ordinary director. His resignation as managing director becomes effective only when accepted by the company.

A managing director cannot be equated with an ordinary director. Section 2(26) and S. 2(13) show the intention of the legislature to treat the two as separate categories. Therefore, when the term of a managing director expires, he cannot continue as a managing director without being reappointed. Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd., (1983)

53 Com Cases 883, 898 (Cal). A person does not acquire the status of a manager or managing director only on being appointed as a director. Deen Deyalu, T. v. Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP).

The question whether a managing director, inasmuch as he is both a 'director' and 'employee' should in his capacity of employee be considered a 'servant' or agent of the company is unimportant for purposes of the Companies Act, though it may be relevant for determining whether his remuneration is salary or business income for purposes of theincome-tax Act. For a discussion of his position as 'servant or 'agent' see Rant Prasad v. CIT (1972) 42 Corn Cases 544 : AIR 1973 SC 637; CIT v. M.S.P. Rajes, (1993) 77 Com Cases 402 (Kar). See also Hindustan Vacuum Glass Lid. v. Union of India, 1981 Tax LR 2438 (Del); Southern Foundries (1926) Ltd. v. Shirlaw, (1940) 10 Corn Cases 255 : (1940) 2 All ER 445 (HL); Union India Sugar Mills Co. Ltd., Re, (1933) 3 Corn Cases 424 : AIR 1933 All 607, managing director regarded an agent and therefore his knowledge as the knowledge of the company; CIT v. L. Armstrong Smith, (1946) 16 Corn Cases 172 (Born), remuneration of managing director taxed! as salary and not as income from business. CIT v. B.P. Dalmia (1994) 3 Comp LJ 268 (Ca!) where also the managing director was viewed as a servant and his remuneration taxable as salary. CIT v. M.S.P. Rajes, (1993) 77 Com Cases 402 (Kant).

The Civil Court will not grant an injunction to restrain the company from interfering with a managing director carrying out the duties of managing director who is removed from his office. Joginder Singh Palta v.Time Travels (P.). Ltd., (1984) 56 Corn Cases 103 (Cal).

Where, for recovery of dues from the company, a decree was passed against the company as well as its managing director, it was held that the managing director was not the judgment-debtor in his individual capacity and, therefore, he was not liable to be arrested and detained in civil prison for enforcement of the decree. Maruti Lid. v. Pan India Plastic P, Ltd., (1995) 83 Com Cases 888 (P&H).

Managingr Wholetime Director, Link With Nature Of Duties, Not Designations

Department's Clarification.-Whether a director is to be regarded as a whole-time director or as a managing director of the company would depend on the nature and extent of the duties entrusted to him and that the designation under which the appointment is made would no! make any difference in this regard. Thus, if a director is entrusted with managerial functions, he would be in the position of a Managing Director notwithstanding the fact that he may be designated as a technical adviser or as a technical director of the company. [Fourth Annual Report Year ended 31 st March, 19601.

Company May Have More Than One Managing Director

Department's Clarification-"Section 2(26) defines "Managing director" as a director who is entrusted with substantial powers of management which term refers to the nature of the powers and not the quantum thereof. Section 2(24) of the Companies Act, 1956, on the other hand has defined the word manager' as an individual who has the management of the whole or substantially the whole of the affairs of a company. Thus the managing director of a company may be entrusted with substantial power of management but not necessarily of the whole or substantially the whole of the affairs of a company. A company may, therefore, have more than one managing director. [Department's Clarification F. No. 8/16/(1)/61-PR].

Other Statutory Provisions.-Section 269 makes it obligatory for a company having capital of a sum as may be prescribed (w.e.f. 18-9-1990 Rs. Five crores or more) to appoint a managing director or wholetime director or manager. Section 267 disqualifies certain persons from being appointed as managing director. Section 316 prescribes the number of companies in which a person can be appointed as managing director at the same time; section 317 restricts the maximum term of appointment to five years. The remuneration of a managing director is now governed by section 309 and Schedule XIII.

Procedure of Appointment [S. 269]

Section 269 has been recast by the amendment of 1988. In the case of public companies or their subsidiary private companies, Teaching a figure of paid-up share capital which may be prescribed [Rs 5 crores or more] the appointment of a managing director, whole-time director or manager has been made compulsory. The appointment has to correspond withthe conditions specified in Parts I and II of Schedule XIII, which parts are subject to the provisions of Part III. The appointment and remuneration require approval of shareholders in general meeting. The auditor of the company or company secretary has to certify that requirements have been complied with. A return of the appointment in a prescribed form must be filed with the Government within 90 days. Approval of the Central Government is not necessary in such cases. But if the appointment does not comply with the schedule, the approval becomes necessary. Application for approval must be made within 90 days.

The Central Government may not accord the approval if it is satisfied that the candidate is not a fit and proper person for the post and his appointment is not in public interest and the terms and conditions of the appointment are not fair. The Government may accord the approval for a shorter period than proposed.
If there is no approval, the appointee should vacate the office from the date of the communication of the refusal to the company, failing which he incurs a penalty of Rs 500 for every day of usurpation of the office.

Where the Government suo motu or on information received is prima facie of opinion that an appointment has been made without approval in contravention of the requirements of the schedule, the Government shall be competent to refer the matter to the Company Law Board for a decision.The Board has to give notice to the company, the appointee and any other officer of the company who was responsible for compliance of Schedule XIII to show cause why the appointment should not be terminated and the penalty of sub-section (10) imposed. The Board should give appropriate opportunity and then may make an order declaring that there has been a contravention. The declaration will have the following effects: (1) the company is liable to a fine extending upto Rs 5000 ; (2) every officer of the company who is in default is liable to a fine of Rs 10,000 ; (3) the appointment comes to an end and the appointee is liable to a fine of Rs 10,000 and is also liable to refund the entire amount of salaries, commissions and perquisites received by him upto the date of the order.

Any violation of the order of the Board or any default in meeting its consequences is further punishable under sub-section (II). Every officer of the company who is in default and the managing or whole-time director or the manager, shall be punishable with imprisonment extending upto three years and also fine extending upto Rs 50 for every day of default. Whether such a double penalty amounts to a violation of the doctrine of double jeopardy, only time will decide.
Sub-section (12) provides that the acts of such a person done by him upto the date of the finding that his appointment was void would be valid provided that they were otherwise valid.

The section concludes with an Explanation that the word "appointment" includes reappointment and "whole-time director" includes a director in the wholetime employment of the company.

The Government examines whether the proposed candidate is a fit and proper person. The Government may refuse the proposal where there is a pending prosecution against the person concerned. Further, the Government may sanction the appointment subject to any condition that it considers necessary. Thus where the person proposed to be appointed was a promoter of the company and had in that capacity made a secret profit of three lakh rupees, the Government approved his appointment subject to the condition that he restored the profit to the company.

Disqualifications [S. 267]
The following cannot be appointed managing or whole-time directors:
(1) A person who is an undischarged insolvent or has at any time been adjudged insolvent.
(2) A person who suspends or has at any time suspended, payment to his creditors or makes or has made a composition with them.
(3) A person who is or has been convicted by a court of an offence involving moral turpitude. The first Part of Schedule XIII gives the list of statutes and provides that any person convicted for violating them and sentenced to imprisonment or fine up to Rs 1000 shall not be appointed without the approval of the Central Government.

Where a person is already a managing director of another company he can be appointed only with the unanimous resolution of the board of directors. 16 The Central Government may permit Any person to be appointed managing director of more than two companies if the Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director [S 316(2), proviso]

The maximum term of appointment can be five years at a time and a new term cannot be sanctioned earlier than two years from the date on which it is to come into force. The terms of appointment can be changed, when they are to be different from those prescribed by Schedule XIII, only with the approval of the Central Government.

The remuneration of a managing director cannot exceed five per cent of the net profits and if there are more than one managing directors, ten per cent for all of them together, [S. 309] Where a managerial personnel is working in more than one company, he can 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 personnel.

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