Managing Director – An Overview
Definition of “Managing Director”
According to the definition given in Section 2(26) of the Companies Act, 1956:-
"Managing Director" means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called.
Provided that the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management.
Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of directors.
The above definition of the “Managing Director” may be analyzed as under:-
1) He must be a director of the company.
2) He must be entrusted with substantial powers of management, which would not otherwise be exercisable by him.
3) The general powers to do administrative acts of a routine nature are not to be deemed to be the substantial powers of management.
4) The powers of management may be entrusted with the managing director by an agreement or by a resolution passed at a general meeting by the members or a Board meeting or by the Memorandum or the Articles of Association of the company.
5) The powers of management given to a managing director must be exercised by him subject to the superintendence, control and directions of the Board of Directors.
6) A person who occupies the position of the managing director even without being designated as such would also be deemed to be a managing director.
Now question arises who will be deemed to be a Managing Director?
The test to determine whether a person is a managing director or not, is the position holds and not the designation or name. Therefore, a person may be deemed to be a managing director, although he is not so appointed and designated as such. It was held in the case of CIT v Sarabhai Sons Ltd. (1983) 1 Comp LJ 203 (Guj) that the Chairman of the board had exercised the powers of management and rendered his services to the company in managing its business, although he was not appointed as managing director was deemed to be the managing director.
Appointment of “Managing Director”
As per section 269(1), a public company or a private company which is a subsidiary of a public company, having a paid up share capital of rupees five crores or more shall have a managing or whole-time director or manager. Therefore, a private company is not statutorily required to have managing or whole-time director or manager.
A person cannot be appointed as a Managing or Whole-time Director unless he is already a director in the company. So Appointment of a non-director as a Managing or Whole-time Director cannot be made.
A person, who is proposed to be appointed as a managing director or whole-time director, unless he is already a director in the company, cannot be appointed as such. Holding of office of director is a prerequisite for holding of office of managing or whole-time director. Even if the approval of the Central Government has been obtained for appointment of a person as managing or whole-time director, the requirement of holding of office as a director cannot be dispensed with.
A managing director who is not a director is contradiction in terms. [Shirlaw v Southern Foundaries Ltd., (1940) 10 Comp Cas I I (CA) affirmed on appeal Southern Foundaries Ltd. v Shirlaw, (1940) 10 Comp Cas 255: (1940) 2 All ER 445 (HL); Balchand C v Devashola (Nilgiri) Tea Estates Co. Ltd. (1972) 42 Comp Cas 623 (Mad)]
So what’s the option?
If a company intends to appoint an individual, who is not a director of the company, as its managing or whole-time director then he shall have to be first appointed by the Board as an additional director. Further, if a person while he was the additional director of a company had been appointed as the managing or whole-time director, the later appointment also ceases simultaneously with the cessation of his directorship at the commencement of the annual general meeting. However, if such a person is re-elected as full-fledged director at the annual general meeting and thereby he continues as a director of the company, he shall continue as a managing or whole-time director also for the period for which he is so elected by the annual general meeting.
Certain persons not to be appointed Managing Directors:
Section 267 stipulates that no company shall appoint or employ, or continue the appointment or employment of, any person as its managing or whole time director who-
a) is an undischarged insolvent, or has at any time been adjudged an insolvent; or
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
c) is, or has at any time been, convicted by a Court in India 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 s 1000 shall not be appointed without the approval of the Central Government.
So section 267 not only prohibits appointment or employment after conviction but also expects discontinuance of appointment or employment already made prior to his conviction.
Appointment of an individual as a Managing Director who is already Managing Director or Manager of another company:
A public company or a private company which is a subsidiary of a public company may appoint or employ a person as its managing director, if he is already the managing director or manager of one, and of not more than one, other company (including a private company which is not a subsidiary of a public company). The condition for appointment is that the appointment or employment is made or approved by a resolution passed at a meeting of the Board with the unanimous consent of all the directors present at the meeting and of which meeting the resolution to be moved thereat, specific notice has been given to all the directors then in India. [Section 316(2)]
In such case the provisions of section 190 shall apply as regards to the giving of special notice of the meeting and of resolution to be moved thereat in case. The notice must specifically mention the business to be transacted at the meeting and contain proposed resolution to be passed at the meeting.
The Central Government may, by order, permit any person to be appointed as a managing director of more than two companies, if the Central 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 [Section 316(4)]
Further Section 316 does not apply to a private company. Hence, a person may be appointed as a managing director of more than two private companies and no permission of the Central Government is required to be obtained in this regard. [MCA Notification No. GSR 577(E), dated 16-7-1985]
Drawal of remuneration from more than one company by a Managing Director of those companies:
Part I of Schedule XIII of the Act, provides that a person can be managing director in more than one company, without the approval of the Central Government, provided he draws remuneration from one or more companies subject to the ceiling provided in Section III of Part II of Schedule XIII of the Act.
Accordingly, subject to the provisions of Sections I and II, a managerial person 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
Whole-time Director cannot be appointed in more than one company
Since whole-time director means a director of a company who is in whole-time employment with the company, therefore an individual cannot be appointed as a whole-time director of more than one company.
It has been held by the Bombay High Court that the expression "whole-time director'' must refer to a director who spends all his time in the management of the company in the same sense as a managing director does. [Ramaben A Thanawala v Jyoti Ltd (1957) 27 Comp Cas 105 (Bom)] though he may accept office of non-whole-time director in other companies subject to the limits imposed by section 275 read with sections 277 and 278.
Appointment of Managing Director in case of private limited companies:
The appointment of managing or whole-time director or manager is not mandatory in the case of independent private companies’ i.e, a private company which is not a subsidiary of a public limited company. However, an independent private company can appoint them in accordance with the provisions contained in the Articles of Association.
If Articles of the concerned independent private company do not provide for such office then the Articles will have to be first altered by following the procedure laid down under section 31 of the Companies Act, 1956.
Appointing authority for Managing Director, Whole-time Director or Manager in case of a public company or a private company which is a subsidiary of public company:
The appointment of managing or whole-time director or manager in a public company or a private limited company which is a subsidiary of a public company shall be made by the Board of directors subject to the approval of members at the general meeting by way of ordinary or special resolution as may be required subject to the conditions of Schedule XIII of the Act and/or with the approval of the Central Government.
Directors cannot appoint a managing director in the absence of provisions in the articles empowering them to do so. [Horn v Henery Faulder & Co (1908) 99 LT 914] Articles normally confer power on the directors to appoint "one or more of their number" as managing director(s). If the articles have given the power of appointing a managing director to the Board of directors, the company in general meeting cannot make the appointment. [Thomas Lagan Ltd. v Davies (1911) 104 LT 914] However, the remuneration of a managing director has to be approved at a general meeting.
Modes of appointment of Managing Directors in a public company or a private company, which is subsidiary of a public company
Section 269 discusses two modes of appointment of a managing director. These are:—
(i) Appointment without the approval of the Central Government (appointment in consonance with the provisions contained in Schedule XIII); or
(ii) Appointment with the approval of the Central Government.
Appointment of Managing or Whole-time Director or Manager of a public company without approval of the Central Government
Appointment of a person as a managing or whole-time director or manager in accordance with the provisions of Schedule XIII of the Companies Act, 1956 can be made without obtaining the approval of the Central Government. Also, a return in the prescribed e-Form 25C shall be filed electronically with the concerned Registrar of Companies within 90 (ninety) days from the date of appointment. So if such appointment or reappointment is not made in accordance with the provisions of Schedule XIII approval of Central Government has to be obtained.
Appointment of Managing or Whole-time Director or Manager of a public company with the approval of the Central Government
A public company or a private company, which is a subsidiary of a public company, shall obtain the approval of the Central Government in order to appoint a managing director or whole-time director or manager when the said company is not complying with the requirements of Schedule XIII of the Act.
Time limit for making an application to the Central Government for its approval
Every application seeking approval to the appointment of a managing director or whole-time director or manager shall be made to the Central Government within a period of ninety days from the date of such appointment. The application shall be made in e-Form 25A electronically as prescribed in the Companies (Central Government's) General Rules and Forms, 1956.
Consequences in case if the appointment is not approved by the Central Government
If the appointment of a person as a managing or whole-time director or a manager is not approved by the Central Government under section 269(4), the person so appointed shall vacate his office as managing or whole-time director or manager, on the date on which the decision of the Central Government is communicated to the company.
In case of omission or failure to do as above, the appointee shall be punishable with fine, which may extend to five thousand rupees for every day during which he omits or fails to vacate such office.
Validity of acts done by a person appointed in contravention of Schedule XIII of the Act
In such cases all acts done by a managing director 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 of the Act, shall, if the acts so done are valid otherwise, be valid notwithstanding any order made by the Company Law Board under section 269(9).
Some other Important Points:
Tenure of appointment of Managing Director
Section 317 provides that managing director is not to be appointed for more than five years at a time. Further section 317 is not applicable to a private company unless it is a subsidiary of a public company.
Again Section 317 does not apply to the appointment of a whole-time director. Therefore, there are no restrictions on any types of company for the tenure of the appointment of their whole-time director, they may be appointed for more than five years at a time without any restrictions.
Comparison of Managing Director with Whole-time Director
The basic difference between a managing director and a whole-time director is that, a managing director cannot be appointed for more than five years at a time, but this is not applicable to a whole-time director. Further, an individual can be a managing director of two companies, but an individual cannot be a whole-time director of more than one company.
Prohibition on appointment of both the Managing Director and Manager at the same time
A company shall not appoint or employ at the same time both a managing director and a manager. Section 197A makes prohibition on appointment or employment of certain different categories of managerial personnel at the same time. The prohibition is applied to both a public company and a private company.
Contravention of section 197A makes a company liable to penalty under section 629A and the appointment will be invalid.
Company may have more than one Managing Director but not more than one Manager
The managing director of a company may be entrusted with substantial power of management but not necessarily to give the whole or substantially the whole of the affairs of a company. A company, may, therefore, have more than one managing director such as the Managing Director (Finance), Managing Director (Administration), Joint Managing Director, etc.
A company can have more than one Managing Director but cannot have more than one manager. The logic behind this is that only one individual can have the management of the whole, or substantially the whole of the affairs of a company. So a company can have only one manager.
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