Corporate Law-i.docx

CONTENTS TABLE OF AUTHORITIES ................................................................................................... 2 Cases ...................................................................................................................................... 2 INTRODUCTION .................................................................................................................... 6 Appointment of Managing Directors ...................................................................................... 8 Removal .............................................................................................................................. 15 Qualifications/Disqualifications ........................................................................................... 18 Remuneration .......................................................................................................................... 21 Applicability ....................................................................................................................... 25 By way of Stock options .................................................................................................... 26 Director’s Right to remuneration ...................................................................................... 28 Manager vis-à-vis a Managing Director .............................................................................. 31 List of Pay Structures in Leading Companies ..................................................................... 37 CONCLUSION ....................................................................................................................... 51 Bibliography ........................................................................................................................... 53

TABLE OF AUTHORITIES CASES 1. A.K. Khosla v. T.S. Venkatesan, (1992) 1 CALLT 77 HC (Calcutta High Court). 2. A.S. Gill v State of Punjab, (2006) 133 Comp Cas 759. 3. Achutha Pai v. Registrar of Companies, (1966) 36 Com Cases 598 (High Court of Kerala). 4. Anderson v. James Sutherland (Peterhead) Ltd., 1941 SC 203 (Scottish Court of Session). 5. Ashok Mittal v. Ram Parshotam Mittal, (2008) 149 Com Cases 11 (Delhi High Court). 6. Avnish Bajaj v State (2005) 3 CompLJ 364 Del. 7. Bank of Maharashtra v Racmann Auto P Ltd (1992) 74 Com Cases 752. 8. Bennet, Coleman and Co. Ltd. v. Union of India, (1993) 78 Com Cases 666 (Supreme Court of India). 9. Biggerstaff v Rowatt’s Warf Ltd. [1896] 2 Ch 93. 10. Bluett v Stutchberry’ Ltd (1908) 24 TLR 469 11. Boschoek Proprietory Co. Ltd., v. Fuke, (1906) 1 Ch 148 (Chancery Division). 12. CIT, Kerala v. Alagappa Textiles (Cochin) Ltd., (1979) 49 Com Cases 947 (Supreme Court of India). 13. CIT v M.S.P. Rajes, (1993) 77 Com Cases 402. 14. Chandigarh Tourist Syndicate Ltd. Re (1978) 48 Com Cases 267. 15. Craven Ellis v. Cannons Ltd., (1936) 2 KB 403 (King’s Bench Division). 16. Deen Dayalu v. Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP). 17. Dry v Pullinger Engineering Co., [1921] 1 KB 77. 18. Freeman and Lockyer v Buchurst Park Properties Ltd, [1964] 2 QB 480.Foster v. Foster, (1917) All ER Rep 856 (Chancery Division). 19. Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies, (1955) 1 All ER 725 (House of Lords). 20. Indian Molasses Co. Pvt. Ltd. v. CIT, AIR 1959 SC 1049 (Supreme Court of India). 21. Jayesh Ramniklal Doshi v. Carbon Corpn. Ltd., (1993) 76 Com Cases 748 (Bombay High Court).

22. John Shaw & Sons v Shaw, (1935) 2 KB 113. 23. Jyotirmoy Dey v. Dacca Picture Palace Ltd., MANU/WB/0304/1962 (Calcutta High Court). 24. K.K. Ahuja v V.K. Vora, AIR 2011 SC 2259. 25. K.S. Sundaram v. Union of India, (2004) 119 Comp Cas 69 (Madras High Court). 26. Kumar Krishna Rohatgi v State Bank of India, (1980) 50 Com Cases 722. 27. Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548 (Supreme Court of India). 28. M.R. Pratap v V.M. Muthukrishnan, ITO (1992) 74 Com Cases 400. 29. Major R.S. Murgai v. Ex Servicemen, Airlink Transport Services (P) Ltd. (2001). 30. Maksud Saiyed v State of Gujarat, (2008) 5 SCC 668 31. Meenakshi Mills v. V. Vishvanatha Sastri, AIR 1955 SC 13 (Supreme Court of India). 32. Montreal Public Service Co v Champagne, (1916) 33 DLR 49. 33. Morarji and Co. v. Sholapur and Co., (1944) 14 Com Cases 59 (Bombay High Court). 34. Morrell v. Oxford Portland Cement Co. Ltd., (1910) 26 TLR 682 (Chancery Division). 35. Motilal Shivlal v. Poona Cotton Mfg. Co. Ltd., AIR 1915 PC 69 (Bombay High Court). 36. Nelson v. James Nelson and Sons (1915) All ER Rep 433 (Court of Appeal). 37. Nell v. Atlanta, (1895) 11TLR 407 (Court of Appeal). 38. Neufeld v Secretary of State 2009 2 B.C.L.C 39. Newspaper Proprietary Syndicate Ltd., Re, (1900) 2 Ch 349 (Chancery Division). 40. Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. 41. Pyare Lal Gupta v. D.P. Agarwal [1983] 53 Comp. Cas. 586 (Allahabad High Court). 42. Rama Corporation Ltd v Proved Tin and General Investments, [1952] 2 QB 147. 43. Ram Pershad v The Commissioner of Income Tax, New Delhi, [1972] 42CompCas 544 (SC ).

44. Ramesh Narang v. Rama Narang, 1995 83 Com Cases 194 (Supreme Court of India). 45. Rampur Distillery and Chemical Co. Ltd. v. Company Law Board, (1970) 40 Com Cases 916 (Delhi High Court). 46. Raymon Engg. Works v. Union of India, AIR 1970 Delhi 5 (Delhi High Court). 47. Read v. Astoria Garage (Streatham) Ltd. (1952) 2 All ER 292 (Court of Appeal). 48. Reliance Jute and Industries Ltd., Re, (1983) 53 Com Cases 591 (Calcutta High Court). 49. Richmond Gate Property Co. Ltd., Re, (1964) 3 All ER 936 (Court of E ngland and Wales). 50. Risal Singh v. Chandgi Ram, AIR 1966 Punj 393 (Punjab-Haryana High Court). 51. S.S. Lakshmana Pillai v. Registrar of Companies, (1977) 47 Comp Cas 652 (Madras High Court). 52. Sardar Gulab Singh v. Punjab Zamindara Bank Ltd., (1941) 11 Com Cases 301 53. Saroj Kumar Poddar v. State (NCT) of Delhi and Anr, 2007 (2) SCC (Cri) 135 54. Schindler v Northern Raincoat CO [1960] 2 All ER 239. 55. Shuttleworth v Cox Bros & Co. Ltd. [1927] 2 KB 9. 56. Sinha Watches (India) P. Ltd v Gujurat State Finance Corporation (1985)58 Com Cases 489 (Guj) 57. Sishu Ranjan Dutta v Bhola Nath Paper House Ltd. (1983) 53 Com Cases 883 (Cal) 58. Southern Foundries Ltd v Shirlaw, [1940] AC 70. 59. Surve Kedarappa vs D.G. Bhimappa, AIR 1959 Kant 36 60. Sridhar Sundararajan v. Ultramarine & Pigments Limited, (2015) 192 Comp Cas 355 (Bombay High Court). 61. Subhash Chand Agarwal v. Associated Limestone Ltd., (1998) 92 Comp Cas 525 (Company Law Board). 62. Swabey v. Port Darwin Gold Mining Co., (1889) 1 Meg 385 (Court of Appeal). 63. Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Com Cases 562, 582 (Calcutta High Court). 64. T.R. Pratt (Bombay) Ltd. v E,D, Sasoon & Co. Ltd. (1936) 6 Com Cases 90 65. T. Murari v. State, (1976) 46 Comp Cas 613 (Madras High Court).

66. Thomas Logan Ltd. v. Davis, (1911) 104 LT 914 (Chancery Division). 67. Wasava

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MANU/KA/8543/2006 (High Court of Karnataka). 68. Woolf v. East Nigel Gold Mining Co. Ltd., (1905) 21 TLR 660 (Court of Appeal). 69. V. Ramaswami v Madras Times Printing & Publishsing, AIR 1917 Mad 485. 70. Varey Souriar v Keraleeya Banking CO., (1957) 27 Com Cases 591. 71. Vinod Kumar Mittal v, Kaveri Lime Industries Ltd., (2000) 2 Comp LJ 354 (Company Law Board).

STATUTES 1. Banking Regulations Act, 1949. 2. Specific Relief Act, 1963. 3. Code of Civil Procedure, 1908. 4. Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. 5. Companies (Meeting of Board and its Powers) Rules, 2014. 6. Companies Act, 1956. 7. Companies Act, 2013. 8. Companies Act (U.K.), 1948. 9. Companies Act (U.K.), 2006. 10. Companies (Share Capital and Debentures) Rules, 2014. 11. Income Tax Act, 1961. 12. Indian Penal Code, 1860. 13. Information Technology Act 14. SEBI Guidelines on Corporate Governance, 2005. 15. S ECURITIES DISCLOSURE

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INTRODUCTION Majority of the business activities are conducted by corporate bodies. The actions of these corporate bodies have a huge impact on the environment, the market, the society and affect almost everyone in one way or the other. Considering the fact that corporations have such a large reach and impact, it is pertinent to look at for whose benefit these corporations function and who controls these corporations. This is where the importance of corporate governance creeps in. The Cadbury Committee which considered the status and issues related to corporate governance in the UK defined it as “the system by which the companies are directed and controlled.”1 It was observed that the economy would depend upon the drive and efficiency of their companies. Corporate governance has become all the more important in this era sowing to the separation between ownership and control. 2 Considering the fact that ownership is scattered to a large extent in many companies, there is little accountability of the persons in charge of control of the company. 3 The interests of those who are managing the company need to be aligned with that of the shareholders to ensure efficiency The authors understand that a corporation is an abstraction and requires human actions to run it. This function is carried out by the management of the company which is the board of directors. The powers and functions of the board of directors are derived from the constitution of the company. These powers and functions can further be delegated to managers and managing directors. In this paper the authors also look at the powers, functions and duties of the managing director. In this paper the authors aim to look into an important figure in corporate governance: the Managing Director. The managing director has a very important role to play in the management of the company. The authors will address the important facets of the office of the managing director including the qualifications and disqualifications, appointment, the role played by the managing director in his office. This paper will also address the aspect of remuneration that a managing director receives and the rationale behind the method of calculation. 1

The Financial Aspects of Corporate Governance, 14, available at http://www.ecgi.org/codes/documents/cadbury.pdf, (Last visited December 6, 2016). 2 Pankaj Gupta and Singh Shallu, Evolving legal framework of corporate governance in India – issues and challenges, Vol. 4(2), JURIDICAL TRIBUNE, 240, 240, (2014). 3 Rajesh Chakrabarti, Corporate Governance in India – Evolution and Challenges, 5, available at, http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023826.pdf (Last visited on December 6, 2016).

In this paper we aim to identify the legal position of the managing director. Further, this paper aims at distinguishing between the directors, non executive directors, executive directors, managers and managing director. In this paper, the authors attempt to bring out the significance of the role played by the managing director.

CHAPTER I- APPOINTMENT OF MANAGING DIRECTORS Under the English Law, it has been held that if the articles do not contain any provisions that enable the Board to appoint a managing director, the directors would lack the sufficient power for such an appointment. 4 The said precedent is not applicable in the case of India since under both, the old and the new act, any express power required to appoint any specific director is stated in a provision. For instance, Sec. 161 5 of the Companies Act, 2013 requires articles to give powers to appoint additional directors. Sec. 2(54)6 clearly states that the entrustment of powers can take place through Articles of Association and other methods. Section 1967 contains provisions relevant to the appointment of a managing director. It is noted that this provision is analogous to Section 269 8 of the Companies Act, 1956 and amalgamates some other provisions of the same. As per the relevant provision, company is barred from appointing a managing director and a manager simultaneously. But there is no such legal prohibition for appointing both a whole-time director and a managing director at the same time. There is no bar in appointing two or more managing directors as well. The procedure of appointing a managing director has its roots in the English jurisprudence. It has been held as early as 1914 that the Board of Directors may be competent to appoint a managing director only when allowed by the articles to do so. 9 At the same time, the members are barred from exercising the power to appoint a managing director if the articles confer the same on the Board. 10 The directors have the power to strip him from the designation of a managing director but lack the power to remove him from directorship. 11 Second important direction is that the term of a managing director cannot exceed a period of five years. In order for a re-appointment to be made, it should be done one year prior the expiry of the term. 4

Boschoek Proprietory Co. Ltd., v. Fuke, (1906) 1 Ch 148 (Chancery Division). Sec. 161, Companies Act, 2013. 6 Sec. 2, Companies Act, 2013. 7 Sec. 196, Companies Act, 2013. 8 Sec. 269, Companies Act, 1956. 9 Nelson v. James Nelson and Sons, (1915) All ER Rep 433 (Court of Appeal). 10 Thomas Logan Ltd. v. Davis, (1911) 104 LT 914 (Chancery Division). 11 Foster v. Foster, (1917) All ER Rep 856 (Chancery Division). 5

Then, for a valid appointment to be made, qualifications under the same provision have to be strictly adhered to. Section 19012 deals with the appointment of a managing director but does not apply to that in a private company. This provision clearly contemplates that the managing director has a contractual relationship with the public company. It is also noted that such a provision was not present the 1956 act. In fact, there are various cases that hold the relationship purely contractual in nature.13 There may or may not be a formal contract between a managing director exemplifying the contractual relationship. But in case such a contract is absent, it could be established through an implied contract. 14 This will come into operation when a managing director has been appointed by duly complying with the company’s constitution and no express contract has been entered into.15 This will apply even if the constitution of the company does not contemplate a contract between the company and the managing director qua managing director. 16 The contract may be of a mixed nature as well, some terms implied by the acts of the parties or expressed in words or writing. 17 Furthermore, the appointment has to be made subject to the provisions of section 197 18 and Schedule V.19 For the appointment of managers, whole-time directors and managing directors, the terms of appointment and remuneration to be paid is to be approved by the Board in its meeting. Then, it has to be subsequently approved by an ordinary resolution at a general meeting held after the Board’s approval. If any of the conditions mentioned in Schedule V is deviated from, an approval from the central government would be necessary. The notice that specifies the convening of a General or a Board meeting must include terms of appointment and details such as remuneration, interests of a director/s.20 The provision mandates the filing of a return, in the prescribed form, within a period of sixty days from the date of such appointment. The date of such appointment 12

Sec. 190, Companies Act, 2013. Anderson v. James Sutherland (Peterhead) Ltd. 1941 SC 203 (Scottish Court of Session). 14 K.R. Chandratre, Relevant Provisions of the Companies Act, 2013 -Concerning Appointment and Remuneration of Mananging Director and Whole-time Director, 556(49) T AXMAN 2 (2014). 15 Id. 16 Id., at 3. 17 Sardar Gulab Singh v. Punjab Zamindara Bank Ltd., [1941] 11 Comp. Cas. 301 (High Court of Lahore). 18 Sec. 197, Companies Act, 2013. 19 Schedule V, Companies Act, 2013. 20 Chandratre, supra note 11, at 5. 13

implies the date of appointment on which the said appointment was made with the registrar.21 Just because the approval was not approved in a general meeting, the acts done prior to such a meeting will not be deemed to be invalid. This applies to a whole time director and a manager as well. There exist, certain practices most commonly followed while drafting the resolutions pertaining to the appointment of a managing director. Except for the definition of a whole-time director, those of managers and managing director contain a peculiar phrase “by whatever name called”. Hence it becomes a key issue sometimes when a whole time director is appointed as managing director in such resolutions. 22 Such an issue arises because the scope of conferment of powers and intention is very ambiguous. Such hazy drafting leads to legal complications, especially when the conferred powers do not fall in line with the designation of a managing director. 23 Earlier, Sec. 269 of the 1956 Act, read with Rule 10A of the Companies (Central Government’s) General Rules and Forms, 1956, used to provide that every public company possessing a paid up capital of at least Rs. 5 Crores shall have either a managing director or a whole-time director. 24 Now, after the enactment of the new Act, the mandatory requirement of appointing such personnel applies to a public company having a paid up capital of at least Rs. 10 Crores. 25 All listed companies have to have a managing director as well. 26 In the old act, like the new enactment, there was no express provision that required the appointment of a managing director only by the shareholders or the Board of Directors. Sub-section 2 of Sec. 269 of the old act was amended in 1988 and provided for two exigencies pertaining to appointment: one that needed approval from the central government and one that did not. 27 In the latter case, appointments had to be subject to Schedule XIII of the 1956 Act, (to which Schedule V of the new Act is mostly similar). ‘Subject to’ implies strict adherence to the requirements mentioned un der the schedule. 21

Id. Harshawardhan S. Chindhade, Concept of Managing Director - A Draftsman’s View, 96 T AXMAN 1 (2009). 23 Id., at 2. 24 S. Venugopalan, The Managing Director - His status, powers and duties, 38 T AXMAN 2 (2002). 25 Rule 8, Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. 26 Sec. 149, Companies Act, 2013. 27 K.R. Chandratre, Managing Director: Appointment, Reappointment, Cessation and Removal, 59 T AXMAN 1 (1991). 22

It is noted that Part III of the said Schedule did state one condition. It required the appointment to be approved by a resolution of shareholders. It is submitted that the requirement cannot be misconstrued so as to mean that the shareholders have to make the appointment itself. 28 It only means that the appointment has to be made by the Board of Directors which is to be later approved by the shareholders. Unless and until it is expressly stated by the articles of the company that the appointment has to be made by the shareholders, the Board of Directors remains competent to appoint managing directors of a company. 29 The rule of retirement by rotation is generally not applicable, unless circumstances justify the need for it. 30 For instance, Section 25531 of the old act required that twothirds of the total directors of a public company or a private company subsidiary to a public company shall be retired at every annual general meeting. In order to comply with this provision, companies, having provisions that make managing directors nonretirable before the expiry of their terms, make sure that the total number of directors not liable to retire never exceeds one-third the total number of directors. If the said number is in excess of the specified limit, the managing directors are subject to retirement. In English Law, it has been held that if a managing director has been appointed from one of the rotational directors and the directors do not re-elect him, he will cease to hold that office even if the appointment was purportedly for a fixed term. 32 A departmental clarification (Int. Cir. No. 3 (No. 8/16(1)61-PR), dated 9 th May, 1961) stated that a managing director’s office will not suffer any break if he retires (as a director) under Sec. 255 and is re-elected as the same, in the same meeting. 33 Corresponding/relevant provisions to Sec. 196 from the old act are Sec. 197 -A, 267, 269, 317, 384, 385 and 388. 34 One difference to be noted is that Sec. 317 (related to the tenure of only five years) of the old act applied only to managing directors and not

28

Id. Id. 30 Id., at 2. 31 Sec. 255, Companies Act, 1956. 32 Bluett v. Stuchbury’s Ltd., (1908) 24 TLR 469 (Court of Appeal). 33 A. Ramaiya, GUIDE TO C OMPANIES ACT, 3433 (18 th edn., 2015) 34 Sec. 197-A, 267, 269, 317, 384, 385, 388, Companies Act, 1956. 29

whole time directors. Furthermore, re-appointment in the old act had to be made two years prior to end of term, as opposed to one year. 35 The time limit of filing a return before the Registrar of Companies has been reduced to 60 days as compared to a period of 90 days in the old act. 36 The appointment of a managing/whole-time director and a manager has to be made only through a meet of the Board of Directors, merely a circular resolution cannot be passed.37 In case an appointment is made in violation of the conditions mentioned in Schedule V of the new Act, an approval from the Central Government will be required. 38 Rule 7(3)39 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, gives a period of 90 days for making an application to the Central Government in form No. MR 2. In case of a listed company, a combined reading of provisions under Sec. 196 and Sec. 201 of the new Act read with Rule 7 would require the company to pass a resolution before applying for such an approval from the government. For banking companies, Sec. 35-B40 of the Banking Regulations Act requires the approval of the Reserve Bank for appointing a manager or a managing director. Nothing in the relevant provision suggests that there has to be a ‘prior’ approval. An unlisted company that no/inadequate profits but has not defaulted on the payment of its debts does not require approval from the government, by virtue of Rule 7(2). Sec. 196(5) states that acts of managing director shall not be invalid by reason of subsequent non-approval by the shareholders. Like the old enactment, the acts of the managing/whole-time director and the manager are protected irrespective of subsequent approval at the general meeting.

35

Ramaiya, supra note 30, at 3420. Id. 37 Id., at 3421. 38 Id. 39 Rule 7, Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. 40 Sec. 35-B, Banking Regulations Act, 1949. 36

Rule 341 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, is relevant for the purposes of appointment. It requires the return for the appointment of managerial personnel has to be filed within 60 days of appointment in form MR1. In the old act, the Central Government wielded the power to grant a conditional approval for such appointments. 42 In doing so, it was entitled to lower the minimum age requirements, subject to conditions imposed by the government. If the said condit ions were not followed, the government had the power to withdraw its conditional approval.43 In certain cases, if the application for approval is neither accepted nor rejected within a reasonable period of time, it will be presumed that the approval has been granted and the government will be stopped from checking its validity later on. 44 The power of approval, to be exercised by the government under 1956 act which is relevant as well, had to be exercised on the basis of a statement of reasons. 45 In 1988, the amendment to the Companies Act, 1956, added the requirement of approval of appointments by shareholders through a special resolution so as to curb the practice of companies bypassing the governmental approval. 46 Rule 847 of the Companies (Meeting of Board and its Powers) Rules, 2014, specifies that powers of the Board regarding the appointment and removal of key managerial personnel have to be exercised through resolutions. The Companies Law Committee has suggested that the current restrictions under Schedule V of the act, that could be doubled through a special resolution, should be amended to be made an ordinary resolution only requiring the appointee to satisfy a certain criteria. An instance of this would be him not being a promoter, etc. 48

41

Rule 3, Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Sec. 637A, Companies Act, 1956. 43 Raymon Eng. Works v. Union of India, AIR 1970 Delhi 5 (Delhi High Court). 44 Reliance Jute and Industries Ltd., Re, (1983) 53 Com Cases 591 (Calcutta Hig h Court). 45 Bennet, Coleman and Co. Ltd. v. Union of India, (1993) 78 Com Cases 666 Del (Supreme Court of India). 46 Ramaiya, supra note 30, at 3435. 47 Rule 8, Companies (Meeting of Board and its Powers) Rules, 2014. 48 Ramaiya, supra note 30, at 3435. 42

E NABLING PROVISION I N ARTICLES O F ASSOCIATION In a 1906 English company law case 49 it was held that where the articles of a company do not contain any provision that would enable the board to appoint a managing director, it would be beyond the power of the board to appoint any person to be the managing director of the company. This decision will have no application in the context of India. The Companies Act 2013 and the Companies At 1956, both indicate that in the instance an express power is required for any action under the articles of a company 50, it has been stated so in the related section.51 Section 2(54), 52 additionally makes it clear that the entrustment of power need not necessarily be made by the articles of the company itself and could be made through other methods, i.e., by virtue of an agreement or through a resolution of the board.53 Such a provision allows for the interpretation that there is no absolute legal need for the inclusion within the articles the power to appoint a managing director. This argument is supported by the Table F of Schedule 1 in the New Act 54 which provides the model articles under the regime of the 2013 Act has no mention of the powers of the board to appoint a managing director. Regulation 77 does talk about the powers of the board to appoint a manager; it does not mention a managing director. A manager belongs to a different class of managing personnel and therefore cannot be analogous to the managing director. 55 There is a statutory compulsion under section 269(1)56 for public companies that have a paid-up share capital of more than ₹5 crore to appoint one of the managerial personnel as a managing director. In the New Act under section 20357 in respect of certain companies a similar compulsion is present. Therefore it can be inferred from these provisions that even in the absence of an express provision in the articles of a company; the board would have the implied authority to do so.

49

Boschoek Proprietory Co Ltd v Fuke, (1906) 1 Ch 148. L.V.V. Iyer, GUIDE TO COMPANY LAW, 613, (4th edn., 2016). 51 For an example of a provision that indicates that there needs to be express mention in the articles for the board to exercise the said power see section 161 of the Companies Act 2013. This section requires that the articles have to give power to appoint additional directors. 52 Section 2(54), Companies Act, 2013. 53 Iyer, Supra note 50 at 613. 54 Table F, Schedule 1, Companies Act, 2013. 55 Iyer, Supra note 50 at 613. 56 Section 269(1), Companies Act, 1956 57 Section 2013, Companies Act, 2013. 50

The 1956 Companies Act provided through section 268 58 that in the cases of public companies or private companies that were subsidiaries of such public company, if it is sought to bring an amendment to any provisions that is dealing with the appointment, or re-appointment of a managing director 59, then such a provision whether it is contained in the company’s articles or memorandum or in an resolution of passed by the Board or the general meeting, or in an agreement entered into by it, the amendment would have no effect. It would have effect if it receives the approval of the Central Government and this amendment would become void if it was disapproved by the Central Government. 60 It is interesting to note that such an analogous provision is absent in the 2013 Act .

REMOVAL It has correctly been decided that in case office of a director is vacated, his appointment as managing director automatically comes to an end but where he is remov ed from the office of managing director only, his appointment as a director remains intact. 61 In order to remove the managing director from his office, the trend is that the Articles of Association empower the Board of Directors to remove him as such. 62 A person removed will have the right to claim damages only when the removal has not been effectuated in accordance with the said provisions of the Articles. 63 It has been previously held that no approval from the Central government will be required while removing a person from the office of managing director. 64 According to Palmer, a managing director can be removed like any other director by virtue of Section 148 65 of the 1948 (UK) Act or on the expiry of the term as specified in the contract. 66

58

Section 268, Companies Act, 1956 The same position of law is applicable to the managing director, a whole time director and a director. 60 Iyer, Supra note 50 at 630. 61 Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Comp Cas 562 (Calcutta High Court ). 62 Chandratre, supra note 24, at 3. 63 Id. 64 Pyare Lal Gupta v. D.P. Agarwal [1983] 53 Comp. Cas. 586 (Allahabad High Court). 65 Sec. 148, Companies Act (U.K.), 1948. 66 Sir Francis Beaufort Palmer, and Clive Macmillan Schmitthoff, P ALMER ’S COMPANY LAW, 832 (23rd edn., 2016). 59

For a resignation submitted by the managing director to come into effect, it is necessary that the letter be accepted. 67 In this regard, Sec. 168 68 of the 2013 Act becomes relevant. The person acting as the managing director cannot claim the date of resignation t o be the one on which he sends his resignation. It will be effective from the date when such a resignation is accepted when the same is accepted by the company. 69 However, it has also been held to the contrary. In one such case, it was held that the Compani es Act is silent on vacancy by resignation of a director. In such a case, a resignation will come into effect immediately after the intention to do so is made manifest. 70 But if the principle under Sec. 168 is to be applied, the former precedent stands, sin ce this provision clearly lays down that the resignation of a director will be in effect from the day it was received by the company. It is pertinent to note that the managing director might be stripped of the said designation but can continue to act as a director on the conversion of public company to a private company. 71 It is submitted that a managing director, just like any other director, can be removed from the office of a director, through a general meeting under Sec. 169 72 of the new act. In order to give a justification for the removal of a managing director on allegations of misconduct, the relevant issue is whether the alleged misconduct was reasonably apprehended or conclusively proved, had direct consequences on the company or its business and whether it affected the capacity of the managing director to discharge his duties.73 The removal effected by a company that had taken over the appointee company and also altering the articles of associations in the process (that laid down the provisions for the appointment of a managing director) has been held to be wrongful. 74

67

Ramaiya, supra note 30, at 3439. Sec. 168, Companies Act, 2013. 69 Achutha Pai v. Registrar of Companies, (1966) 36 Com Cases 598 (High Court of Kerala). 70 T. Murari v. State, (1976) 46 Comp Cas 613 (Madras High Court); S.S. Lakshmana Pillai v. Registrar of Companies, (1977) 47 Comp Cas 652 (Madras High Court). 71 Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Com Cases 562, 582 (Calcutta High Court). 72 Sec. 169, Companies Act, 2013. 73 Morarji and Co. v. Sholapur and Co., (1944) 14 Com Cases 59 (Bombay High Cou rt). 74 Southern Foundries v. Ltd. v. Shirlaw, (1940) 2 All ER 445 (House of Lords). 68

If the removal of the managing director is fully justified even in violation of the contract, it has been held, that the removal shall remain valid. 75 Under certain circumstances, removal of a managing director has been held to be justified and not termed as oppression, when he was responsible for several complaints against the company in various government agencies. 76 The Company Law Board had proposed that removing a managing director employed in a family company under Sec. 397 and 39877 of the 1956 act. It has been held that such a managing director removed from a family company shall be discharged of all the guarantees he had given to financial institutions for the purposes of borrowing for the company. 78 A petition against the order of removal on grounds of oppression is liable to be dismissed if it is not made out that the winding up order was justifiable in given factual matrix of the case.79 There is no remedy that can be sought for by means of a writ petition for the removal of a managing director. The rationale behind this is that since the relationship between the managing director and the company is contractual in nature. 80

75

Major R.S. Murgai v. Ex Servicemen, Airlink Transport Services (P) Ltd., (2001) 103 Com Cases 177 (Delhi High Court). 76 L.V.V. Iyer, G UIDE TO C OMPANY D IRECTORS, 620 (4 th edn., 2016). 77 Sec. 397 and 398, Companies Act, 1956. 78 Vinod Kumar Mittal v, Kaveri Lime Industries Ltd., (2000) 2 Comp LJ 354 (Company Law Board). 79 Subhash Chand Agarwal v. Associated Limestone Ltd., (1998) 92 Comp Cas 525 (Company Law Board). 80 A.S. Gill v State of Punjab, (2006) 132 Comp Cas 759.

CHAPTER II- QUALIFICATIONS/DISQUALIFICATIONS Section 196 lists some requirements that are to be satisfied for a valid appointment of a managing director to be made. In a nutshell, these include an age bar, insolvency, dues to qa creditor and previous conviction. For the provisions under the old act, it has been said that Sec. 267 prescribed stricter qualifications for managing directors than those applicable to a manager. The qualifications prescribed related to age mandate that the appointee be at least 21 years of age, a reduction from the earlier requirement of 25 years (Schedule XIII Part I cl.(c), 1956 Act). Hence, provisions relating to maximum/minimum age have been made a part of Sec. 196, which were contained in Schedule XIII of the old act. It is also to be noted that Schedule V (Part I) of the new act provides certain instances where a Central government-approval cures/disregards disqualification. Except for the condition mentioned in Sec. 196(3), most other requirements can be relaxed by the government.81 Hence, condition regarding the minimum age is absolute, a case different when a person below the age of 25 was appointed to the said office under the old Act. For a person over 70 years, however, a special resolution is required accompanied by an explanatory statement containing the justification for the same. 82 It is pertinent to note that the U.K. Companies Act (2006) allows people over the age of 70 to become directors although it contains a minimum age requirement under Sec. 157 83. In India, the recent trend has been to enforce this disqualification leniently and in the event of a managing director crossing the age of 70, doesn’t necessarily have to vacate the office. 84 Also, the age requirement applies to private companies as well since the provision covers both public and private companies. 85 Sec. 196(1) is analogous to Sec. 197-A86 of the 1956 Act, barring the appointment of a manager and a managing director at the same time.

81

Ramaiya, supra note 30, at 3420. Id. 83 Sec. 157, Companies Act (U.K.), 2006. 84 Sridhar Sundararajan v. Ultramarine & Pigments Limited , (2015) 192 Comp Cas 355 (Bombay High Court). 82

85

Ramaiya, supra note 30, at 3420.

As per subsection 3 of Sec. 196, if the appointee suffers from any of the stated disqualifications, he/she cannot be appointed as a managing director or a whole time director. Sec. 196(3) (a) and (d) have been added as the two new additional disqualifications. The second of the new condition includes a disqualification of a previous conviction by a court, due to commission of some offence, and sentencing for a period of not less than six months. This terminology is inclusive of all kinds of offences, while the old Act required commission of an offence that had to ‘involve moral turpitude’ irrespective of the period of sentencing, was another disqualification. No power lies with the appellate court before which the conviction has been challenged to suspend the order of conviction itself. 87 No power to remove such a disqualification is available with respect to the appointment of a managing director. 88 Insolvency is a disqualification under Sec. 196(b) and has been previously held to be absolute in nature. 89 The disqualification is not attracted if there exists a ‘composition’ with the creditors. 90 A composition implies an agreement between an insolvent debtor and the creditor by virtue of which the latter accepts a part of debt from the former in satisfaction of the whole. 91 The same will have to discontinue from office in case of a conviction.92 Even if the case involves suspension of the sentence but not the order of conviction, such a person will remain barred from becoming a managing director. 93 It is submitted that the previous requirement was very narrow, where criminals could get appointment even after committing offences, 94 and the new act remedies this by expanding the ambit under which a appointee can be disqualified. Further, under Sec. 269(4) of the old act, the approval of the Central government was barred unless it was satisfied that the appointee was a fit and proper pe rson. It has been held that if the findings that the proposed person was not a fit and proper person for the

86

Sec. 197-A, Companies Act, 1956. Ramaiya, supra note 30, at 3427. 88 Id. 89 Jayesh Ramniklal Doshi v. Carbon Corpn. Ltd., (1993) 76 Com Cases 748 (Bombay High Court). 90 Ramaiya, supra note 30, at 3427. 91 A.S. Oppe, W HARTON ’S LAW LEXICON, 226 (14 th edn., 1993). 92 Ramaiya, supra note 30, at 3427. 93 Ramesh Narang v. Rama Narang, 1995 83 Com Cases 194 (Supreme Court of India). 94 Risal Singh v Chandgi Ram, AIR 1966 Punj 393. 87

job of managing director are sound, the disqualification will be justified. 95 This factor is inclusive of facts like the pendency of prosecution, if any. 96 An order quashing an appointment on the mere reliance of this ground shall be valid and has been previously upheld in law. 97 Other factors to be taken into account while considering the fitness of an appointee can be summarized as follows: 

Any misfeasance or breach of a duty, including that is fiduciary in nature.



Extent of a director’s responsibility pertaining to company’s transactions under provisions of debt avoidance



A retention or misapplication by the director, or any other conduct that gives rise to an obligation to account for any money or property of the company.



Extent of a director’s responsibility for any failure of the company in maintaining records, etc. 98

In various cases under the analogous provisions of the old act, it has been h eld that disqualification is attracted on the personal conduct of the director. 99 Hence, when the director acts in his individual capacity and is unable to pay debts of the creditors of another company, disqualification cannot be attracted.

95

K.S. Sundaram v. Union of India, (2004) 119 Comp Cas 69 (Madras H igh Court). Ramaiya, supra note 30, at 3435. 97 Rampur Distillery and Chemical Co. Ltd. v. Company Law Board, (1970) 40 Com Cases 916 (Delhi High Court). 98 Lord Hailsham of Marylebone, H ALSBURY ’S LAWS OF E NGLAND , 399 (4 th edn., Vol.7, 1989). 99 Ashok Mittal v. Ram Parshotam Mittal, (2009) 149 Com Cases 11 (Delhi High Court). 96

CHAPTER III REMUNERATION It has been an established practice that the remuneration of directors comes from either of the two sources, that is, benefits receivable under the service contract or, in case of executive directors, fees paid to them for acting as directors. 100 The former is the greater source of income, mostly for executive directors and remains the most controversial subject as regards regulation. 101 Managerial remuneration is governed by Section 197 102 of the 2013 Act. This, again, applies to public companies as well as private company, subsidiary of public companies. The phrase ‘managerial remuneration’ implies the inclusion of manager and all directors, including managing and whole-time directors. 103 The provisions set a limit to the remuneration to be paid to directors as a percentage from the total profits. They also put a ceiling of 5% of the net profits to be paid to a managing director and that of 10% to the managing directors as a whole. In any case, a director who deals with the company on the issue of remuneration is in a position of conflict of interest. Traditionally, the common law rule was a need of sanction from shareholders for the agreement between directors and the company. 104 However, such an arrangement inconvenienced directors and it was common to find the power to fix remuneration conferred upon the Board. 105 One form in which stricter regulation in this area manifested itself was the requirement of remuneration committee in the company. 106 This has been incorporated so as to exclude executive directors from the process of fixing remuneration. This is because not only the individual director if precluded from voting on the decision, but also that they are sidelined from the process itself.107

Paul Davies, and Sarah Worthington, G OWER AND D AVIES ’ P RINCIPLES OF MODERN COMPANY LAW, 400 (9 th edn., 2012). 101 Id. 102 Sec. 197, Companies Act, 2013. 103 Chandratre, supra note 11. 104 Worthington, supra note 84. 105 Id. 106 Id., at 401. 107 Id. 100

Under new enactment in India, Sec. 2(51) clearly indicates that the phrase ‘key managerial personnel’ is inclusive of a managing director. Hence the chapter 108 related to remuneration of managerial personnel applies in his case. Sec. 2(61) of the 2013 act defines ‘remuneration’ as something that is inclusive of perquisites as used under the Income Tax Act 109, 1961. The relevant provision in the said act clearly states that the entire component of perquisites shall not be taxable. Examples of the same will include medical reimbursements, superannuation funds, etc. Furthermore, it is submitted that clause (a) of Sec. IV, Part II of Schedule V shall be rendered meaningless if this interpretation is not followed. Hence, taxable value of perquisites has been clearly been included in calculating remuneration. Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, mandates the disclosures related to the remuneration of key managerial personnel in listed companies. A person who is in employment of more than one company can withdraw remunerati on from all of them, provided that the remuneration does not exceed ceiling from any of the companies he is employed. 110 Further, there is no bar against the appointment of more than one managing director in the company. 111 It has been notified by the Ministry of Corporate affairs that the loans disbursed to managing/whole-time directors are also subject to Sec. 186 112 and are not exempted. 113 The Irani Committee 114 recommended major policy related issues to be incorporated in the Companies Act. The remuneration of the managing directors should be compared to that of a non-executive director. There has to be no limit to be prescribed to sitting fees payable to such directors. The company may decide the fees after getting an approval from the shareholders. 115

108

Chapter XIII, Companies Act, 2013. Sec. 17, Income Tax Act, 1961. 110 Schedule V, Companies Act, 2013. 111 L.V.V. Iyer, GUIDE TO C OMPANY D IRECTORS, 617 (4 th edn., 2016). 112 Sec. 186, Companies Act, 2013. 113 http://mca.gov.in/Ministry/pdf/Circular_04_10032015.pdf (Last visited on December 1, 2016). 114 Ministry of Corporate Affairs, J.J. Irani Committee Report, (2004), available https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf. 115 Ramaiya, supra note 30, at 3461. 109

at

The remuneration to non-executive directors must be decided as well, including that of independent directors. This could be in form of sitting fees for the Board and committee meetings, either attended physically or electronically. This may include profit related commissions. 116 Under the new act, the term ‘remuneration’ is anything that includes money or its equivalent paid to a person for the services rendered. 117 Pension is not a payment for services rendered but a benefit given post-retirement. 118 When a managing director is removed from directorship, his former office shall come to an end as well. 119 Under the old act, the only remedy left with the aggrieved director shall be compensation for loss of office, if, the removal was in violation of the terms of contract and was not covered under Sec. 318 120. It has been repeatedly held by courts that they cannot compel the company to reinstate him nor grant an injunction again st the company so as to preclude his removal. 121 The compensation largely depends upon the terms of the appointment (contract) and the breach thereof. 122 Even if the director has the requisite power under the articles to confer a revocable appointment, the revocation will be a breach if the contract does not mention this power. 123 However, the contrary has also been held to be applicable in some cases. For instance, it has been held that if appointment was in terms of the articles and empowered the general meeting to determine the same, does not cause a breach.124 The new act requires the formation of a Nomination and Remuneration Committee under Sec. 178(1). 125 The remuneration disbursed to a director for any other service rendered will not be included if the committee opines so. 126

116

Ramaiya, supra note 30, at 3462. Iyer, supra note 95, at 726. 118 Id. 119 Ramaiya, supra note 30, at 3443. 120 Sec. 318, Companies Act, 1956. 121 Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548 (Supreme Court of India); Sardar Gulab Singh v. Punjab Zamindara Bank Ltd., (1941) 11 Com Cases 301 (High Court of Lahore). 122 Nelson v. James Nelson and Sons Ltd., (1914-15) All ER Rep 433 (Court of Appeal). 123 Nelson v. James Nelson and Sons Ltd., (1914-15) All ER Rep 433 (Court of Appeal). 124 Read v. Astoria Garage (Streatham) Ltd., (1952) 2 All ER 292 (Court of Appeal). 125 Sec. 178, Companies Act, 2013. 117

The old act permitted a company to pay remuneration to a director, managing director or a manager through monthly payment or it could be in the form of specified percentage of the net profits over a particular period of time. 127 Summarily, a director designated as managing/whole-time director or a manager will fall in one of the following categories: 1. An appointee proposed to be appointed not in compliance with Part I of Schedule V. 2. The profit making company and the appointee is in compliance with Part I and Part II, Sec. I of Schedule V. 3. A company with inadequate profits or a loss making company in compliance with Part I and Part II, Sec. II A of the Schedule V. 4. Where the proposed remuneration is in excess of the limits imposed by Schedule V. As per the given Schedule, the cases (2) and (3) require the mere approval of the shareholders for the appointment to be complete since they are covered in Part I and II read with Part III of Schedule V. It is submitted that the nature 128 of such a resolution has not been specified by the second proviso to Sec. 197(1) (for payment in of remuneration in excess of 5% or 10% or 1% or 3% of the net profits as the case may be). It is pertinent to note that such cases also attract Sec. 188. 129 As long as the limit of 11% of the net profits is not exceeded by the overall remuneration, the company will have flexibility in disbursing payments in excess of 5% or 10%, as the case may be, subject to the shareholders’ approval. No approval from the Central Government will be required if the proposed remuneration is in excess of the 5% ceiling but is in compliance with the overall ceiling on remuneration 11% of net profits. Also, the 2013 Act includes a new provision where the 11% is not a fixed percentage anymore but can be altered subject to approval by the government. 130 Cases (1) and (4) require Central Government’s approval.

126

Ramaiya, supra note 30, at 3463. Sec. 198(3), read with Sec. 198(3), Companies Act, 1956 Act. 128 Either ordinary or special. 129 Sec. 188, Companies Act, 2013. 130 Ramaiya, supra note 30, at 3463. 127

Sec. 197(2) is completely analogous to Sec. 198(2) of the 1956 Act, and reiterates the rule that sitting fees paid to the director shall not be counted under total remuneration. Sec. 197(3) introduces one deviation from the older version of the act insofar as the requirement of an approval from Central Government is concerned. Under Sec. 198(4) of the old act, the said approval was necessary for disbursement of remuneration in case of inadequate profits. Now, it only becomes a requirement when Schedule V is not complied with. In a situation where private companies convert into public companies or are deemed to be public companies and the managing directors employed in them are receiving remuneration in accordance with section 309 131 and 198132 of the Old Act, there would be no need for seeking the permission of the Central Government. The managing director may continue with the existing appointment. However section 268 133 and 317134 would become applicable as on the date of conversion or change of character. The Central Government’s approval would become necessary at this stage for the purpose of any amendment in the terms of appointment. It would also become necessary if reappointment under section 269(2) 135 since it would be needed for the payment of minimum remuneration as per section 198(4). 136

Hence, substantial powers have been conferred upon shareholders as regards remuneration of managerial personnel. APPLICABILITY A private company is subject to the requirements laid down by Sec. 196 pertainin g to the appointment of a managing director, manager and a whole-time director. But provisions under Sec. 197 are not applicable to a private company. 137

131

Section 309, Companies Act, 1956. Section 198, Companies Act, 1956. 133 Section 268, Companies Act, 1956. 134 Section 317, Companies Act, 1956. 135 Section 269(2), Companies Act, 1956. 136 Section 198(4), Companies Act, 1956. 137 Ramaiya, supra note 30, at 3464. 132

Hence, a private company is not barred by law to pay remuneration in excess of 11% percent of the net profits. Also, a private company is not required to have a Nomination and Remuneration Committee under Sec. 178(1). 138 Sec. 197(1) is clear as to the section’s applicability to public companies. While the following subsections refer to a ‘company’, applying ejusdem generis, legislative intention appears to refer to public companies only. 139 Hence provisions under Sec. 197 may not be applicable to a private company. B Y WAY OF STOCK OPTIONS The grant of stock options to all the employees of the company, especially directors, will be governed by Sec. 62(1)(b) 140.

This provision has to be read with the

relevant Regulations and Guidelines issued by SEBI (Securities Exchange Board of India). Other relevant rules being the SEBI (Share Based Employee Benefits) Regulations. 2014, and the Companies (Share Capital and Debentures) Rules, 2014, particularly Rule 12 141 of the latter. There are generally two methods through which remuneration by way of stock options can be granted to employees (including directors). These are: Direct Allotment: In this case, fresh allotment of equity shares is done by a company to the employees as and when the said options are exercised. Trust Route: Here the company issues shares to a trust for the administration of Employee Stock Ownership Plan (ESOP), that subsequently transfers the shares to the employees. 142 However, the directors can be allotted stock-related schemes only if all of the following conditions are satisfied: 

138

The said director does not belong to the promoter group. 143

Id. Id. 140 Sec. 62, Companies Act, 2013. 141 Rule 12, Companies (Share Capital and Debentures) Rules, 2014. 142 Ramaiya, supra note 30, at 3465. 143 Sec 62(1)(b), Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. 139



The director does not hold more than 10% of the outstanding equity shares in the company. 144



He should not be an independent director in the company. 145

Furthermore, the following persons will not be allowed to be the trustees for the purposes of administering ESOPs: 

Director/employee holding 10% or more in the paid-up share capital of the company, beneficially.



Promoter, Key Managerial Personnel or a director of the company itself or its Holding, Subsidiary or Associate Company. 146

The term ‘expenditure’ implies something that has been paid out or gone irretrievably. 147 Furthermore, the language employed in the Explanation to Sec. 198 of the 1956 Act is similar to the one used in Sec. 40-A(5)148 of the Income Tax Act. Hence stock options are valid remunerations. It has been clearly provided that shares under sweat equity, given to managerial personnel, will be included as a part of remuneration. 149 It is pertinent to note that in case of listed companies, Clause 49 150 of the Listing Agreement on Corporate Governance has been replaced by the Listing Obligations LODR. Clause 49(VIII)(C) (policy for disclosure on remuneration) has now been amended and the requirements include disclosing percentage increase in each directo r, CEO,CFO, manager’s salary, comparison of the remuneration of Key Managerial Personnel against the performance of the company and the average percentile increase in the salaries of non-managerial personnel as compared to the average percentile increase of managerial remuneration, citing justification for the same. 151 The U.K. 144

Sec. 62(1)(b), Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. 145 Sec. 197, Companies Act, 2013. 146 Ramaiya, supra note 30, at 3465. 147 Indian Molasses Co. Pvt. Ltd. v. CIT, AIR 1959 SC 1049 (Supreme Court of India). 148 Sec. 40-A, Income Tax Act, 1961. 149 Ramaiya, supra note 30, at 3476. 150

Clause 49, SEBI Guidelines on Corporate Governance, 2005. SECURITIES AND E XCHANGE B OARD OF INDIA (LISTING O BLIGATIONS AND D ISCLOSURE R EQUIREMENTS) R EGULATIONS , 2015 available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1441284401427.pdf (Last visited on December 2, 2016). 151

Corporate Governance Code also states that companies should have a transparent policy on executive remuneration. 152 In the old act the limits on remuneration in Sec. 197 were covered by Sec. 309153. The legislative intention was to control the cost of management. Hence, remuneration for any other purpose other than managerial is not excluded. 154 The difference between the two provisions is that earlier, the limits on remuneration could be imposed only by the articles or through a special resolution by passed by the general body. The directors could not, by themselves, impose ceilings. 155 The provisions of Sec. 309 were inapplicable when remuneration is paid to director for his abstinence from doing an act that did not form a part of his official duty. 156 An instance of this would be the compensation due to an ex-Managing Director under an agreement under which he was restrained from conducting a competing business for a reasonable period of time following a resignation. The subsection 5-A of Sec. 309 required all the illegally paid amounts to or received by a director to be refunded to the company and cannot be waived by the company without the approval of the Central Government. The provision remains the same under Sec 197(9). DIRECTOR ’S RIGHT T O REMUNERATION The reward for acting as a director in the company is fees and status. 157 But merely possessing the said designation does not per se entitle him to remuneration. 158 Director’s right to remuneration has been held to be contractual in nature in the English law. It has been held that a director is well within his rights to sue a company for the

Len Sealy, and Sarah Worthington, SEALY AND W ORTHINGTON ’S C ASES AND M ATERIALS IN C OMPANY LAW, 265 (10 th edn., 2013). 153 Sec. 309, Companies Act, 1956. 154 Ramaiya, supra note 30, at 3482. 155 Id. 156 Id. 157 Nicholas Grier, U.K. C OMPANY LAW, 347 (1998). 158 Id. 152

remuneration. 159 However, there is no right to sue if the articles provide for the Board to pay remuneration until a resolution is passed. 160 Further, it is not correct to say that a provision in the articles of a company will constitute an express contract between the director and the company. 161 Hence the result will be that a director cannot have a contractual claim just because the articles authorize him a fixed remuneration. But in cases where a director has been serving on the basis of the terms contained in the articles, the courts shall presume the existence of an implied contract for the remuneration in those terms.162 Assuming the existence of a valid contract, a director is not entitled anything beyond the specified terms. If he renders any services without any agreement on the remuneration of the same, no remuneration can be paid on a quantum meruit basis.163 However there have been instances where the same has been awarded in the absence of a contractual provision. Where a managing director was appointed by a group of directors who were no longer in office but had entered into a contract with him nevertheless, it was held that the appointment was improper. But it was held that remuneration for his working period was allowed as quantum meruit.164 Under the 1956 act, the position as regards to a director’s remuneration, retained under the new act, can be summarized as follows: 

The remuneration should be in compliance with Sec. 198 of the 1956 act. Basically, it should not exceed the 11% limit which is fixed for the managerial personnel as a whole. This is excluding the sitting fees payable for attending Committee and Board meeting.



Irrespective of the designation of the director (Whole-time/managing or any other director), the remuneration must be determined by the constitution or a special resolution in the absence thereof.



In cases where the remuneration is to be paid for professional services rendered, it is necessary to obtain the approval of the central government, recognizing his

159

Nell v. Atlanta, (1895) 11TLR 407 (Court of Appeal). Morrell v. Oxford Portland Cement Co. Ltd., (1910) 26 TLR 682 (Chancery Division). 161 Richmond Gate Property Co. Ltd., Re, (1964) 3 All ER 936 (Court of England and Wales). 162 Swabey v. Port Darwin Gold Mining Co., (1889) 1 Meg 385 (Court of Appeal). 163 Woolf v. East Nigel Gold Mining Co. Ltd., (1905) 21 TLR 660 (Court of Appeal). 164 Craven Ellis v. Cannons Ltd., (1936) 2 KB 403 (King’s Bench Division). 160

qualifications claimed to be possessed by the director for the particular profession. 

The remuneration to be paid to the director will be inclusive of the remuneration payable for the services rendered in that capacity or any other capacity.



An exception to the above rule is where services rendered by him will be separately remunerated, excluded from that under his services of a direc tor. In cases where services were rendered in the capacity of a lawyer, accountant or a consultant, extra remuneration can be paid for these services.



Under Sec. 291 165 of the 1956 act, the Board has the power to determine remuneration for such professional services.166

165 166

Sec. 291, Companies Act, 1956. Ramaiya, supra note 30, at 3482.

COMPARISON OF THE MANAGERIAL PERSONNEL MANAGING DIRECTORS AND E XECUTIVE DIRECTORS Companies can be of different sizes, and this affects the nature of its managements. In smaller and medium sized companies, the management which includes the dir ectors generally invest their whole time and attention to the company’s affairs. 167 In other companies some members of the Board of Directors do not devote their entire time for the company. The day to day activities are carried on by the full time directors who may divide the various parts of management amongst themselves. This would be done for the sake of efficiency and they would be collectively known as executive directors. Contrasted with those director that remain passive with regards the day to day ac tivities are known as the non executive directors. The inclusion of non-executive directors is a more prevalent practice in large public companies. These directors have their primary interests outside the company. 168 In many situations the day to day management is vested in the hands of one of the full time director or executive directors. Such an action is given formal effect by appointing that person a managing director and vesting in him the powers of management. These powers of management can be exercised by him without the interference or reference to the Board of Directors. 169 It is important however to note that a managing director ceases to hold that office when he ceases to be a director 170 subject to contrary provision in the Articles of Association.171 This would however not mean that the Managing director’s position could be protected by Articles of Association in the event he is disqualified by the legislation that regulates companies. In the case of England the relevant provision is the Companies Act, 2006. 172 And, in the case of India it is the Companies Act, 2013. 173

167

Robert R. Pennington, PENNINGTON'S COMPANY LAW, 775, (7th edn., 1995). Pennington, 775, The non executive directors may be directors of companies which have certain commercial relations with the company in question. These directors are can also be chosen for their skill and experience in the business. This expertise may be general or in particular fields which may prove to be important and significant to a company. This could include instances where directors who are experienced in finance, marketing advertising or exporting are appointed to provide guidance to the company in these fields. Though they may not involve in everyday decision making they provide an invaluable source of knowledge and expertise which could if utilized appropriately can benefit the company. 169 Pennington, Supra note 167, at 776. 170 Bluett v Stutchberry’ Ltd (1908) 24 TLR 469. 171 Pennington, Supra note 167, at 776. 172 The Companies Act, 2006. (United Kingdom) 173 The Companies Act, 2013. 168

The articles of a company empower the Board of Directors to vest in the managing director any of the powers that they can wield as it thinks fit. This vesting of power can be either parallel with that of the board or to the exclusion of the board. 174 They also have the authority to revoke or vary any of the powers conferred in the Managing Director. In such situations the Managing director is merely a delegate of the board. Even if he serves under a contract, the Board still reserves the power to alter his rights under a contract; the only remedy available would be to sue for damages. 175 A managing director can be perceived as an independent organ of a company only if his powers maybe derived from the memorandum or articles of association of a company. In such a situation he would be entitled to prevent his colleagues and other directors from interfering in his exercise of power. 176 MANAGER VIS -À-VIS A MANAGING DIRECTOR The definitions of a manager and a managing director reveal the most crucial point of differentiation between the two. The managing director has to be a director, whereas it not mandatory requirement to become a manager. In case of managers, the disqualifications mandated under the old act would have been attracted only when they occurred during the preceding 5 years. 177 No such provision is found in the new Act. Also, the power of the Central government to remedy the disqualification of manager (under Sec. 385(2) 178) has been done away with.179 This shows that the grip on the appointment to the post of a manager has been made tighter. The position of a managing director has been interpreted as to be inclusive of two positions.180 Such a designation-holder happens to be a manager who is simultaneously a director, and that the two designations involve distinct responsibilities and duties as well as distinct qualifications. 181

174

Pennington, Supra note 167, at 777. Pennington Supra note 167, at 778. See also, Harold Holdsworth & Co Ltd v Caddies, (1955) 1 All ER 725; Montreal Public Service Co v Champagne, (1916) 33 DLR 49. 176 John Shaw & Sons v Shaw, (1935) 2 KB 113. 177 Ramaiya, supra note 30, at 3422. 178 Sec. 385, Companies Act, 1956. 179 Ramaiya, supra note 30, at 3422. 180 Id., at 3437. 181 Newspaper Proprietary Syndicate Ltd., Re, (1900) 2 Ch 349 (Chancery Division); Southern Foundries Ltd. v. Shirlaw, (1940) 2 All ER 445 (House of Lords). 175

The most important factor that distinguishes between the two designations is the phrase ‘substantial powers’ conferred on the managing director. 182 It is more probable for a managing director to exercise more power than a manager since the law envisages the office of the former to be more important, given the prescribed qualifications. 183 The fact that the appointment of the former and its terms have to be intimated to the public through registration with the Registrar of Companies, indicates that he is directly responsible to the members. 184

But both of them are subject to the control of the

Board.185 This phrase has been interpreted to include powers and privileges of the managing director to conduct the business of the company in accordance with the constitution of the company. Instituting a suit on behalf of the company has been deemed to lie within the powers of a managing director since “they are incidental and imperative for managing the day-to-day affairs of the company”.186 The test applied by courts to construe a director to be a managing director has been to weigh the powers conferred on him are whether wholly or in part related to the management of the company. 187 It is sufficient to be showed that the appointee had been conferred powers to carry on business to constitute the designation of a managing director.188 The judicial decisions on Sec. 2(26) as to the interpretation of ‘substantial powers’ are also relevant in this regard and help differentiate between the two designations. It has been held by the Supreme Court that even if a person is designated as a manager, it does not matter if he is exercising substantial powers of management. 189 However, it also true that the term does not have a fixed meaning and would depend on the factual matrix of each case.190

182

E.D. Devadason, C OMPANY LAW P RECEDENTS IN I NDIA, 371 (3 rd edn., 1966). 183 Id. 184 Id., at 372. 185 Id. 186 Wasava Tyres Partnership Firm v. The (Printers) Mysore Ltd., MANU/KA/8543/2006 (High Court of Karnataka). 187 Jyotirmoy Dey v. Dacca Picture Palace Ltd., MANU/WB/0304/1962 (Calcutta High Court). 188 A.K. Khosla v. T.S. Venkatesan, (1992) 1 CALLT 77 HC (Calcutta High Court). 189 CIT, Kerala v. Alagappa Textiles (Cochin) Ltd., (1979) 49 Com Cases 947 (Supr eme Court of India). 190 Meenakshi Mills v. V. Vishvanatha Sastri, AIR 1955 SC 13 (Supreme Court of India).

The similarity between a manager and a managing director is that both of them de facto enjoy substantial powers of management but the difference arises by virtue of the source of their powers. In the former’s case, the source of his power arises due to his appointment but in the latter’s case it has to be entrusted by the Board of Directors or the articles of the company. 191 The Department of Company Affairs, as it was then called, had issued a clarification in 1960 regarding the interpretation of the definition clause.192 According to the clarification, the definition of a manager indicated a person possessing the management of, wholly or in part, the affairs of the company. On the other hand, a managing director may be conferred upon substantial powers but not necessarily whole or substantially the whole of the management of the company. Even if the managing director was confined to the affairs of a single subsidiary, it was held to be binding upon him as a part of his duty. 193 However, a person cannot qualify as a manager or a managing director if it is merely the power to purchase liabilities of a third person. 194 It is submitted that the departmental clarification F. No. 8/16(1)/61-PR195 is mistaken in its assumption that a manager who also happens to be a director vested with substantial powers of management will be a managing director, since Sec. 197-A of the old act clearly reflected the legislative intention of prohibiting the co-existence of a manager and a managing director. MANAGING DIRECTOR AND WTD In the Companies Act, 1956 there is no legal prohibition against having both a whole time director and a managing director. The bar is only against having both a managing director and a manager. There is no prohibition against having a whole time director and a manager either. For the purpose of section 269 196 or section 309 197 a whole time director would rendering his services for the whole of his time to the management of the company. In this regard he can be considered, virtually a managing director even tho ugh he is not given that designation explicitly. Further a director-in-charge would also hold 191

A. Ramaiya, GUIDE TO THE C OMPANIES ACT, 64 (17 th edn., 2010). Iyer, supra note 95, at 618. 193 Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies, (1955) 1 All ER 725 (House of Lords). 194 Motilal Shivlal v. Poona Cotton Mfg. Co. Ltd., AIR 1915 PC 69 (Bombay High Court). 195 Iyer, supra note 95, at 618. 196 Section 269, The Companies Act, 1956. 197 Section 309, The Companies Act, 1956. 192

a similar position even if he does not render the whole of his time to the management of the company.

NON-E XECUTIVE DIRECTOR A non-executive director does not undertake to devote his whole time working for the company. He receives a smaller amount of money as remuneration. In contrast, an executive director is in the nature of a Whole time Director and hence is deemed to have agreed to devote his whole time of working hours to the company. He has a significant personal interest in the company as his source of income. The underlying belief is that a non-executive director can act as a check mechanism so as to ensure that the board of a company acts in the interests of the company and not in the interest of a member or members of the board. The non- executive directors are expected to little or nothing other than to attend a reasonable number of board meetings and perhaps be a part of certain committees that the board might establish. 198 Their remuneration for their carrying out of functions would be modest at best which would be decided by the company in a general meeting.199 On the other hand, executive directors in addition to their roles as directors are vested with executive and/or managerial positions. They are appointed by the board which would determine their emoluments and perks. 200 Between the company and them there are in most cases contract which in the case of public companies maybe no more formal than a mere board resolution that are communicated to the director or by way of an exchange of letters. 201 Generally the top executive directors adorn the role of managing directors. The practice in England has been to call one of the top executive directors as Chief Ex ecutive.202 The practice in USA has been to name these directors Presidents and Vice-Presidents.203 Their powers are nevertheless the same as that of a managing director and have similar powers and functions. The similarity can be discerned by a perusal of the articles of the company which general describes the distribution of powers among the managerial 198

COMPANY DIRECTORS: DUTIES, LIABILITIES AND REMEDIES, 76, (Simon Mortimore QC ed., 2009). L.C.B. Gower, GOWER’S PRINCIPLES OF MODERN COMPANY LAW, 156, (5th edn., 1992). 200 Gower, Supra note 199 at, 156. 201 Gower, Supra note 199 at,157. 202 Gower, Supra note 199 at,157 203 Iyer, Supra note 50 at 635; Gower, Supra note 199 at,156. 199

personnel. Professor Gower describes such differences in nomenclature by arguing that “the assumption is that a managing director includes the power to call him or her a chief executive instead”204 Section 250 of the Companies Act, 2006 205 uses the phrase ‘by whatever name called’ covers the alternative descriptions in a company constitution of the office of the director. 206 There can be no reason to object the companies adopting the American nomenclature to address their managerial personnel as Presidents and Vice-presidents. However, it would have to be made clear what these terms meant in the Articles of Association. A clear description of the powers and duties of the candidate would be sufficient. 207 It would also be beneficial if the company made it clear to its prospective investors and the public what this nomenclature means in conventional terms like managing director or executive director as ordinarily used. As a matter of practice Public companies have both executive and non executive directors. Professor Gower suggests that it is encouraged to have a reasonable proportion of non-executive directors. 208

204

Gower, Supra note 199 at,158. Section 250, Companies Act, 2006. (United Kingdom). The provision reads: “Director- In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.” 206 COMPANY DIRECTORS: DUTIES, LIABILITIES AND REMEDIES, 65, (Simon Mortimore QC ed., 2009). The other descriptions of managing directors or persons managing the affairs of the company which are occasionally found in the constitution of companies are ‘council’, ‘managing committee’ or ‘managers’. These descriptions are not commonly used to address managing personal now. 207 Iyer, Supra note 50 at, 635. 208 Gower, Supra note 199 at, 157. 205

LIST OF PAY STRUCTURES IN LEADING COMPANIES The average pay of a managing director in the United States is $145,947 (approximately Rs. 9926577.91) per annum.209 The following figure gives the details of the pay structure on an average of the data of some leading companies.

Figure 1.210 Salary

$80,029 - $232,249

$2,416 - $106,324 Bonus

$29,359 Profit Sharing

$50,500 Commission

$64,480 - $270,476 Total Pay

In India, the average annual salary of managing director is estimated to be around Rs 2,958,420.211 The following data shows the prevailing pay structure for people occupying the said designation in the country.

209

Managing Director Salary (United States), available at http://www.payscale.com/research/US/Job=Managing_Director/Salary (Last visited on December 3, 2016). 210 Id. 211 Chief Executive Officer (CEO) Salary (India), available at http://www.payscale.com/research/IN/Job=Chief_Executive_Officer_(CEO)/Salary (Last visited on December 4, 2016).

Figure 2.212 Salary

Rs 436,584 - Rs 9,687,582

Bonus

Rs 8,515 - Rs 3,072,478

Rs 0.00 - Rs 2,030,992

Profit Sharing

Rs 200,000

Commission

Total Pay

Rs 499,432 - Rs 11,134,296

The average pay structure of a managing structure in an American Investment Bank is fairly high, leading to fewer and fewer of the expensive staff at the top. 213

Figure 3.214

Total Type of

Base

financial

salary,

institution

low

Bonus,

Bonus,

low

high

Total

compensation,

compensation,

high (all in

low

thousands of US$)

Boutique investment

350

650

1,900

1,000

banks 212

Id. Dan Butcher, Here’s how much managing directors in M & A make on Wall Street (February 25, 2016), available at http://news.efinancialcareers.com/us-en/237168/how-much-ibd-managing-directorsmake-on-wall-street (Last visited on November 30, 2016). 214 Id. 213

2,250

Total Type of

Base

financial

salary,

institution

low

Bonus,

Bonus,

low

high

Total

compensation,

compensation,

high (all in

low

thousands of US$)

Large investment

350

700

2,000

1,050

2,350

banks

The salary of the top executive has been subject to debate in context of widening of gap in incomes. The CEO pay packages are structured in a way so as to maximize executive remuneration. More than one-third of a managing director’s salary comes from cash. The rest originates from stock options, surplus, pensions, etc. 215 Hence the percentages for both are contingent on market conditions. The companies added to the stock options of managing directors after the 2008 financial crisis, when prices of stocks dro pped and to avoid giving them excess equity. 216 As far as the relation between the salary and performance is concerned, it has been found that the variance in the pay structure does not exceed 5% and that the biggest variable is the corporation’s size. 217

215

Tim Mullaney, Why CEO pay is so high, and going higher (May 18, 2015), http://www.cnbc.com/2015/05/18/why-corporate-ceo-pay-is-so-high-and-going-higher.html on December 1, 2016). 216 Tim Mullaney, Why CEO pay is so high, and going higher (May 18, 2015), http://www.cnbc.com/2015/05/18/why-corporate-ceo-pay-is-so-high-and-going-higher.html on December 1, 2016). 217 Id.

available at (Last visited available at (Last visited

ROLE OF MANAGING DIRECTOR MANAGING DIRECTOR AS PRINCIPLE O FFICER FOR TAX PURPOSES In the case of M.R. Pratap v V.M. Muthukrishnan, ITO

218

where a verification for

income tax-purposes was signed by the company’s Managing Director on its behalf. The court held that the Managing Director is a principle officer for tax purposes and hence he could be proceeded against. The reasoning given was that the word “person” used in Section 277 of Income Tax Act 219 is not restricted to the assesse only. STATUS O F A MANAGING DIRECTOR A Managing Director cannot be equated with an ordinary director. Sections 2(26) and 2(13) of the 1956 Act are indications of the intention of the legislature to treat the, i.e., ordinary directors and Managing Directors, two as separate categori es. Therefore, when the term of a Managing Director expires, he cannot continue as a Managing Director without being reappointed. This was explained in the case of Sishu Ranjan Dutta v Bhola Nath Paper House Ltd. 220 Further a person does not acquire the role and the status of a Manager or a Managing Director on being appointed only as a Director. 221 It must also be noted that merely by conferring upon a director the power of attorney with substantial powers of management, will not necessarily make him the managing director.222 English Courts and common law courts have consistently held that managing director would be an employee of a company. 223 In the Scottish Court of Sessions where Lord Normand224 said that qua Managing Director he is a party to the contract with the employer and this contract is that of employment. He further went on to observe that it was a contract of service and not a contract for service. He further asserted that it was common in the eyes of law for an individual to have multiple capacities, ea ch including special rights and obligations in relation to the same person or same thing or matter. A 218

M.R. Pratap v V.M. Muthukrishnan, ITO (1992) 74 Com Cases 400. Section 277, Income Tax Act, 1961. 220 Sishu Ranjan DUtta v Bhola Nath Paper House Ltd. (1983) 53 Com Cases 883 (Cal) 221 Deen Dayalu v Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP). 222 Iyer, Supra note 50 at, 614. 223 Iyer, Supra note 50 at 617. 224 Anderson v James Sutherland (Peterhead) Ltd., 1941 Scottish Cases 203. 219

similar position was held in an English case. Upjohn LJ made the observation that though it was true that director were not employees of a company, he ass erted that without doubt the Managing Director would for many purposes properly be regarded as an employee. 225 In Palmer’s Company Law 226 this position of the managing director is described succinctly. The authors state that “in modern company practice a managing director, in the great majority of cases combines the position of director and of employee. ”227 They further go on to say that the validity of his appointment and scope of duties would be determined from the provisions of the articles and the terms of his agreement with the company. This proposition that a managing director can also be an employee has been discussed and supported in many cases. 228 As per section 197-A of the 1956 Act, a company cannot have both a manager and a Managing Director. Hence the question whether a Managing Director is an employee or a director becomes relevant. A similar view was espoused in The Supreme Court of India observed that he qua Managing Director has a dual capacity. 229 It is therefore evident that “in the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee or an agent” depending upon the nature of his work and the terms of his employment. 230 Thus, the relationship between the Managing Director and the company maybe one of a person employed as a servant or as an agent. This is so since the term employment is flexible enough to cover both these roles. This question further leads to the question of whether he is a ‘servant’ or an ‘agent’ of the company. This distinction has no significant importance in the context of the Companies Act. The relevance of this question may, however, take an important position as regards the remuneration of the Managing Director is concerned for the purposes of the Income Tax Act. 231

225

Boulting v Association of Cinematograph, Television & Allied Technicians, (1963) 1 All ER 716. Palmer, et al, PALMER’S COMPANY LAW, (25th edn., 1992). 227 Palmer, Supra note 226 at, 8065. 228 See, Lee v Lee’s Air Farmign, (1960) 3 All ER 420; Boulting v Assn. of Cinematography etc., technicians, (1963) QB 600 (CA). 229 Ram Pershad v The Commissioner of Income Tax, New Delhi, [1972 ] 42 CompCas 544 (SC ). 230 Ram Pershad v The Commissioner of Income Tax, New Delhi, [1972 ] 42 CompCas 544 (SC ). 231 Income Tax Act, 1961. 226

In the case of Ram Pershad v The Commissioner of Income Tax, New Delhi 232 the apex court observed after considering a number of cases and authoritative text books, that it could not arrive at a test for determining whether the person employed by a company is a servant or agent based only upon the extent of supervision and control exercised on him. It was further observed that the real test would one of the construction of the Articles of Association and the agreement between the employee and the company. In a case where the company itself is carrying on its business and the employee is employed to manage his affairs on the basis of the Articles of Association and he could be terminated from employment or be dismissed if his work is not satisfactory, then it would be wrong to not consider him a servant of the company. This proposition was further discussed and affirmed in a Karnataka High Court Judgement where the court held that the remuneration of a Managing Director however paid would be taxable as a salary. 233 The same position was taken in the case of Neufeld v Secretary of State. 234 A Managing Director is a director who has the powers of management delegated to him. This power is delegated to him by the board of Directors and this is an essential requirement of his office as “Managing Director” that he should hold the office of a director prior to this delegation and appointment. 235 The idea that a Managing Director who is not a director is contradiction in terms has stood ground for ove r half a century. 236 REPRESENTATIVE CAPACITY O F MANAGING DIRECTOR - AGENCY The position of the Manager in a representative cases have been discussed at length in many cases under the Companies Act, 1956. Nevertheless they still are relevant under the Companies Act, 2013. The Courts have allowed the Managing Director to appear in court and make representations on behalf of the company. This was subject to him not having conflicting interests with the interests of the company. Such a position was adopted by the courts notwithstanding the fact that he does not hold the power of attorney as 232

Ram Pershad v The Commissioner of Income Tax, New Delhi, [1972 ] 42 CompCas 544 (SC ). CIT v M.S.P. Rajes, (1993) 77 Com Cases 402. 234 Neufeld v Secretary of State 2009 2 B.C.L.C. 235 A R AMAIYA G UIDE TO COMPANIES ACT. 3439, (Arvind P. Datar, et al, eds., 18 th edn., 2015) 236 This proposition was first laid out in the case of Shirlaw v Southern Foundaries Ltd. (1940) 10 Com Cases 11 (CA) and was further affirmed on appeal in the case of Southern Foundaries Ltd v Shirlaw (1940 10 Com Cases 255. More recently this view was expressed in the case of Balchand C. v Devashala (Nilgiri Tea Estates Co. Ltd. (1972) 42 Com Cases 623 (Madras High Court). 233

required under Order 3 of the Code of Civil Procedure. 237 Though correctness of this decision is criticized it does not take away the fact that the Managing Director is vested with the representative capacity and third parties who are dealing with him in the ordinary course of business are entitled to assume he had the necessary authority. 238 In The case of a company that has borrowing capacity, its Managing Director, by virtue of his position as the person in charge of substantially all the management, he would have the authority to authenticate promissory notes on behalf of the company. 239 A Managing Director is said to be the natural custodian of the company’s records and property. By virtue of this position, he would have the right to sue the formere Managing Director in whose place he was appointed and who was refusing to handover the charge to compel him to do so. 240 The MD of a company entrusted with the charge of management of company’s affairs has the power to vary the duties of employees within permissible limits. 241 Once a Managing Director has ceased to hold the office he will no longer be authorized to exercise any of the powers he enjoyed qua MD. It would be an irregular exercise of power. In addition it would also be the exercise of power by a person who has no power whatsoever.242 Further the Civil Court will not be included to give an injunction in respect of the company interfering with the exercise of the functions of a Managing Director once he is removed from office. 243 Though he has a representative capacity the principle of the separate legal personality still persists. The loan documents of the company that were signed by the Managing Director on behalf of the company will not automatically make him a party to an action for recovery against the company. It was held that he was not a necessary party in su ch suits.244

237

Order 3, Code of Civil Procedure, 1908. Ramaiya, Supra note 33 at,3440. 239 Kumar Krishna Rohatgi v State Bank of India, (1980 50 Com Cases 722. 240 Chandigarh Tourist Syndicate Ltd. Re (1978) 48 Com Cases 267. 241 V. Ramaswami v Madras Times Printing & ublishsing, AIR 1917 Mad 485. 242 Varey Souriar v Keraleeya Banking CO., (1957) 27 Com Cases 591. 243 Joginder Singh Pa;ta v Time Travels (Pvt) Ltd., (1984) 56 Com Case 103. 244 Bank of Maharashtra v Racmann Auto P Ltd (1992)m74) Com Cases 752. 238

KNOWLEDGE O F MANAGING DIRECTOR AS KNOWLEDGE O F COMPANY In the case of Sinha Watches (India) P. Ltd v Gujurat State Finance Corporation 245 it was held that where the registered office of the company was not traceable and no one was there to receive any communication addressed to the company, it was held that the Managing Director who came to know of the fact of the proceeding and the ex parte order, was the proper person to act on behalf of the company to oppose the winding up petition though no notice had been served on him. Even in the context of the 1913 Act, it was the duty of the Managing Director to communicate to the company any material fact about certain other companies which he came to know while acting as a director of those companies. The position was granted to him for the protection for the interest of the company of which he was the Managing Director T.R. Pratt (Bombay) Ltd. v E,D, Sasoon & Co. Ltd.

246

A Managing Director’s

knowledge is imputed to the company. 247 APPARENT AUTHORITY- T HE PIVOTAL ROLE O F T HE MANAGING DIRECTOR A managing director by virtue of his position as the managing director is invested with apparent or ostensible authority to carry on the company’s affairs in its usual course. He may therefore, sign cheques and bills of exchange on behalf of the company. 248 This proposition was followed in the Karnataka High court decision. 249 He also would have the authority to borrow money on the company’s account and place the company’s property as collateral for that loan, 250 receive the repayment of the debts owed to the company. In Biggerstaff v Rowatt’s Warf Ltd 251 Lindley L.J. said “The persons dealing with him must look to the articles, and see that the managing director might have power to do what he purports to do, and that is enough for a person dealing with him bona fide.” This apparent authority of the managing director is however limited to commercial affairs and thus he would have no apparent or ostensible authority to authorize the transfer of shares in the company or to make changes in the register of members.252 At this stage it becomes obvious that he would no authority to sell the wole

245

Sinha Watches (India) P. Ltd v Gujurat State Finance Corporation (1985) 58 Com Cases 489 (Guj) T.R. Pratt (Bombay) Ltd. v E,D, Sasoon & Co. Ltd (1936) 6 Com Cases 90. 247 United India Sugar Mills CO Limited, Re, (1933) 3 Com Cases 424 . 248 Dry v Pullinger Engineering Co., [1921] 1 KB 77. 249 Surve Kedarappa vs D.G. Bhimappa, AIR 1959 Kant 36 250 Biggerstaff v Rowatt’s Warf Ltd. [1896] 2 Ch 93. 251 Biggerstaff v Rowatt’s Warf Ltd. [1896] 2 Ch 93 252 George Witechurch Ltd v Cavanagh, [1902] AC 117. 246

or any part of the company’s business either as a going concern or on a break -up basis.253 Contrastingly a non-manaigng or non-executive director and the secretary will have no power to act as agents of the company by virtue of their designations. This is apart from the limited authority of the secretary to negotiate contracts based upon the instructions of the board’s and to do the acts necessary for administration of the company’s organisation consistently with the board’s direction. 254 Hence the directors and secretaries of the company will not have apparent authority as the managing director will have on the company’s behalf. Which means that if person negotiates a commercial contract with a director or a secretary, he would be doing so at his own risk unless this authority has been delegated by the Board to enter into contract. The only other way such a contract negotiated by a director or the secretary would be binding on the company is if the company had held out as having delegated powers. 255 In such situations the company will not be bound by a contract made without actual delegation of powers by non-managing directors. 256 The statutes that are legislated to protect parties who interact with the Board of Directors would not apply to them and they would not be protected since the provisions extend only to transactions that were authorised by the board. It would also extend to those transactions under the power delegated by the board and not to transactions or acts done by individual directors or secretaries on his own initiative without delegated powers. It is pertinent in this juncture to note the stark contrast between the authorities of the managing director as compared with a normal director or a secretary. Deviating from this distinction in power, a company would be affected by notice of all matters known to any of its directors (managing, executive or non executive directors) unless this information is acquired by him in breach of his duties to the company.

253

Pennington, Supra note 167 at, 156. Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. 255 See, Pennington, Supra note 167 at,156. Holding out would mean creating an impression in the minds of the third party that the agent had the authority. For example if the company had appointed him to be an executive director or a director with certain function which would have the effect of causing the third party to think he had the authority. 256 Rama Corporation Ltd v Proved Tin and General Investments, [1952] 2 QB 147; Freeman and Lockyer v Buchurst Park Properties Ltd, [1964] 2 QB 480. 254

CONTROL The legal authority to control, run and direct the company affairs are vested in the board of Directors. 257 In India section 179 258 of the Companies Act, 2013 and section 291 of the Companies Act, 1956. 259 The boards generally delegate their legal powers to the managerial personnel in substantial measure. The Managing Director is an example of such managerial personnel. He would have the responsibility for deciding upon the long term corporate objectives and co-ordinating important business actions. It is important to note that along with control there is a large amount of discretion that is granted to the MD. It is inclusive of discretion to act without external influence or interference. A company’s executive will in most cases have a contractual relationship with the company. The duration for which the executive is expected to continue in office is defined in this agreement. It is standard practice to have a clause specifically dealing with the duration of office. 260 In the absence of a specific agreement to this effect, both the parties are expected to give sufficient and reasonable notice before the termination of the relationship. The reasonability of this period is subjective and will be dependant on the circumstances. One way to overcome this subjectivity is to specify the duration with a clause dedicated to this. Another option would be that of a fixed period contract.261 Companies quite often set up ‘rolling’ or ‘evergreen’ contracts wherein the contracts essentially renew themselves. Which means that a three year rolling contract would be always be three years from expiry; thus negating the problem of renewal.

257

Brian Cheffins, C OMPANY LAW, T HEORY, S TRUCTURE & O PERATION ,117,(1997). section 179, the Companies Act, 2013. The section reads: “The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do” and has certain exceptions. This means that the power of the Board of Directors is essentially co-extensive with that of the company. The company being an abstraction needs human action to function and this human action is provided by the board of directors collectively. It is important to note that however that it is the Board colle ctively and not any individual director who has this power. Therefore any action the company takes is taken through the board of directors. 259 Section 291, the Companies Act, 1956. “GENERAL POWERS OF BOARD (1) Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do : Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting : Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provisions contained in that behalf in this or any other Act, or in the memorandum or articles of the company, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the compa ny in general meeting. (2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made. ” 260 Cheffins, Supra note 257 at,109. 261 Pennington, Supra note 167 at, 157 258

In many situations top managerial personnel are pressured into leaving the company during the pendency of his service. He may either leave office or be removed from service, this does not mean that the duration clause will end up being redundant. 262 The contract between the managing director would be a contract of personal service. It would be at the volition of the party. In India, it would not be possible to specifically enforce this contract under section 21 263 or get an injunction under section 56(i) 264 against his removal from service. It would nevertheless be an option for him to sue for damages.265 In case the terminated executive decides to sue for damages his compensation will largely depend on how long the agreement still has to run. 266 When an executive still has substantial period left in his contract, he will be in a good position to negotiate a generous severance payment. Such lucrative ‘golden handshakes’ have been a matter of controversy since underperforming managers, and executives were potentially being rewarded. Thus there was a campaign for having shorter contract durations. In support of this campaign the Greenbury Committee on executive pay recommended that having a one-year contract term would be the best practice. 267 When a company enters into an agreement with a managing director for service under which he is to hold the office for a period specified therein, and the Articles provide that under certain circumstances the directors shall cease to hold the office, then such provisions are deemed to have been including in the service contract itself. 268 The effect is of having impliedly incorporated those provisions in the service contract. This is additionally so since the board would have no power to exclude those items from a contract. Further the managing director will have no cause to complain against the company for having breached his service contract if he, by the happening of any of those events, ceases to hold office. 269 Nevertheless, if the managing director is terminated from service by virtue of power granted to the Board by anything contained in the Articles, this would give him cause to sue for breach of service contract since the power of termination is subordinate to the

262

Cheffins, Supra note 257 110. Section 21, Specific Relief Act, 1963. 264 Section 56(i), Specific Relief Act, 1963. 265 Iyer, Supra note 50, 617. 266 Iyer, 619. 267 Cheffins, Supra note 257 at 110. 268 Pennignton, Supra note 167 at 776. 269 Shindler v Northern Raincoat CO [1960] 2 All ER 239. 263

board’s power under the articles to appoint a managing director for such period as it thinks fit. Therefore it is excluded when it appoints a managing director without including in the contract an express power for the board to terminate it. 270 In a situation where the company’s articles are modified after the appointment of the managing director, with the aim of creating a new ground for his dismissal, or that which will cause him to lose his position as a director, then such provision will not impliedly become a part of the contract. And, on these grounds if his employment is terminated then he can sue the company for damages. 271 If the managing director is employed without a fixed time period being set for his tenure in office then the board will be empowered to terminate his appointment at any time whether or not the Articles expressly provide for it.272 On the other hand the company maybe sued if reasonable notice of dismissal is not given. 273 When a managing director is appointed under a contract, his rights are contained in the contract itself. However, in cases where the managing director is appoint ed without a contract, he impliedly agrees to serve on the terms of the articles of the company. These articles would be applicable to both directors and managing directors. Therefore, by causing variations in the articles the rights of the Managing Director can be changed, however this would not affect the rights that have already accrued. 274

OVERALL I NCHARGE OF T HE COMPANY A company is represented by the board of directors who are vested the powers of the company. The Supreme Court tackled an important facet of corporate governance in the case of K.K. Ahuja v V.K. Vora.275 It took on the task of describing the question of who was in charge of a company. In the context of section 141 276 of the Negotiable Instruments Act, to hold a person liable, it would be necessary to prove two things: (a) that person must be responsible to the company for the conduct of the business of the company under the provision of the then Companies Act, 1956 and would have to also

270

Pennington, Supra note 167 at 777. Southern Foundries Ltd v Shirlaw, [1940] AC 70. 272 Pennington, Supra note 167 at 777. 273 James v Thomas H Kent [1951] 1 KB 551. 274 Shuttleworth v Cox Bros & Co. Ltd. [1927] 2 KB 9. 275 K.K. Ahuja v V.K. Vora, AIR 2011 SC 2259. 276 Section 141, Negotiable Instrument Act, 1881 271

“in fact” be a person in charge of the business of the company. 277 The first prong could be satisfied only certain persons listed by the Supreme Court. 278 This list includes the managing director. The second element would be satisfied by identifying and making specific averments to the effect that the person was in fact the “person in charge of the business of the company”.279 This phrase would refer to a person who controls the dayto-day business of the company. The Apex Court decided that the question as to who is “overall control” is a very subjective test that would depend on the facts and circumstance of each case. It further observed that such a test would not need to be addressed if the person is designated as the managing director of the company. The rationale behind such a finding is that the very word ‘managing’ which is prefixed to Director makes it sufficiently clear that he was in charge and responsible to the company for the business of the company. 280 L IABILITY O F MANAGING DIRECTOR FOR O FFENCES O F COMPANIES The managing director who acts in a representative capacity binds the company as an agent. Would the managing director be held responsible and liable for the offences of the company? The case of Maksud Saiyed v State of Gujarat 281 decided by the Supreme Court addressed this question. The criminal responsibility of directors for offences was considered. In this case allegations were raised against a bank and the identities of the people who ran the bank were not disclosed. It was held that though the actions gave rise to statutory violation, it would not mean that its directors could be held personally 277

K.K. Ahuja v V.K. Vora, AIR 2011 SC 2259. The Court placed reliance on Sections 5 and 291 read with clauses (24), (26), (30), (31) and (45) of section 2 of the Companies Act, 1956, listed the categories of person who under the Companies Act could be considerd as persons who are supposed to be responsible to the company for the purpose of business. “These persons were: a) the managing director/s; (b) the whole-time director/s; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act; (f) any person charged by the Board with the responsibility of complying with that provision (and who has given his consent in that behalf to the Board); and (g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors.” 279 The authors of this paper have strong reservations against such a holding. It is difficult for an outsider affected to successfully make arguments to prove that the person was in charge of the business of the company. In the case of the Managing director and the Secretary it might be obvious, but other with regard to other directors this would become very difficult. It is submitted that it would be easier for a director to prove that he was actually not in charge at the time of the incident. See, Avirup Bose, Director and Officer Liability for Dishonour of Cheque, (July 31, 2009), available at http://indiacorplaw.blogspot.in/2012/04/implied-authorityof-managing-director.html, (Last visited on Dcember 4, 2016). 280 K.K. Ahuja v V.K. Vora, AIR 2011 SC 2259. 281 Maksud Saiyed v State of Gujarat, (2008) 5 SCC 668. 278

liable. It cited a case 282 wherein it was held that the director of a company could not be shown to responsible for the conduct of the business of the company. It further went on to observe that the IPC 283 had no provisions that enable holding the managing director of a company vicariously liable for its faults. Therefore to hold him liable it must be shown that he was personally liable for the offence in question. This case however must be understood in light of Avnish Bajaj v State.284 The relevant question in this case was if the managing director could be held liable for the presence of pornographic material being displayed on the company’s website. It was decided the MD could be tried under section 85 of the Information Technology Act.285 It is important to note that on this case the relevant statute itself contained provisions that allowed making the persons who were in charge liable. Therefore the ration of Maksud286 is limited to the extent that managing director could be held responsible only if the governing provisions themselves allow it. 287 In the context of Scandinavian countries, the question of liability of a managing director is distinct. He is supposed to be active on a full-time basis. Under Section 25 of Chapter 8 of the Swedish Companies Act, he is given the responsibility of the day-to-day management of the company. 288 If the company were to institute any other provision which would affect this position of responsibility, then the managing director would have the risk of becoming liable for loss caused by the holder of that position.

282

Saroj Kumar Poddar v. State (NCT) of Delhi and Anr, 2007 (2) SCC (Cri) 135; Indian Penal Code, 1860. 284 Avnish Bajaj v State (2005) 3 CompLJ 364 Del 285 Section 85(2), Information Technology Act clearly states that “where a contravention… has been committed by a company, and it has been proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of any director… such director shall also be deemed guilty of the contravention and shall be liable to be proceeded against and punished accordingly.” 286 Maksud Saiyed v State of Gujarat, (2008) 5 SCC 668. 287 See, Everest Advertising Pvt. Ltd. v. State and S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, both of which are Supreme Court judgements in the year 2007. In both these cases the managing director was held liable only under the express provision which allowed for the directors to be held liable. 288 Rolf Dotevall, Liability of Memebers of the Board of Directors and Managing Director – A Scandinavian Perspective, Vol. 37(1), THE INTERNATIONAL LAWYER, 7, 13, (2003). 283

CONCLUSION

In this paper the authors have analysed the specific position of the managing director in the ever changing and important field of corporate governance. A company is distinct from the persons who manage it. The Companies Act provides that all the powers of the company would be vested in the board of directors of the company. This in turn makes the board of directors an organ of the company that runs it. In this context the position managing director with special powers, procedures of appointment, qualifications and disqualifications is emerging as a very important entity.

A managing director is appointed to the company by entering into a contract, or in the case of small companies by a simple board resolution. But in most cases it is by way of a contract. The Supreme Court of India considered his position in the company on multiple occasions and came to the conclusion that he would have a dual capacity. He would be both a director to the company and an employee of the company. His income could be assessed as income from salary would be assessed. However, he isn’t an employee like everyone else. He adorns the very important role of an agent of the company. The designation of managing director along with the powers generally invested in him, he also gets the ostensible authority which would be binding on the company. This shows the significance of the position of the managing director. Therefore, it is submitted that the choice of a managing director must be made after due consideration. The managing director by virtue of his position has vested in him substantially all the powers of management of the company. This puts him on a special pedestal as compared to other managers, directors, secretaries and the board itself. While, it is true that he receives his power from the board of directors itself, while he holds office, he has powers that cannot be interfered with easily. He becomes the principal officer for the company in the context of tax purposes. He has the authority to execute bills of exchanges by virtue of his position. The

Supreme Court of India has interpreted his authority to extend to the extent of him being the overall in charge of the company. Considering the fact that the managing director has been vested with and authorized to wield so much power, it is surprising to note that the liability of the directors is very limited. It has been observed that the companies offences could be attributed to the managing director only on very few and particular cases where the statute itself permits such attribution of liability. This means that unless the statute provides that the MD can be proceeded against, it would be very hard to impute any liability on the part of the managing director.

BIBLIOGRAPHY WEBSITES 1. Chief Executive Officer (CEO) Salary (India), available at http://www.payscale.com/research/IN/Job=Chief_Executive_Officer_(CEO)/Sala ry (Last visited on December 4, 2016). 2. Dan Butcher, Here’s how much managing directors in M & A make on Wall Street (February 25, 2016), available at http://news.efinancialcareers.com/usen/237168/how-much-ibd-managing-directors-make-on-wall-street (Last visited on November 30, 2016). 3. http://mca.gov.in/Ministry/pdf/Circular_04_10032015.pdf

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ARTICLES 1. Harshawardhan S. Chindhade, Concept of Managing Director - A Draftsman’s View, 96 TAXMAN (2009). This article attempts to summarize the prevailing practices while drafting a resolution that leads to the appointment of a managing director. It also analyzes the problems of equivocal drafting. The author also mentions the differences between a managing director on the one hand and a whole-time director and a manager on the other. It ends by giving suggestions as to how attain unambiguous drafting and a hassle-free appointment of a managing director.

2. K.R. Chandratre, Managing Director: Appointment, Reappointment, Cessation and Removal, 59 TAXMAN (1991). In this article, the author dwells upon some of the relevant legal aspects that govern the appointment or reappointment of a person holding that designation, his removal therefrom, and the cessation of his appointment under certain circumstances. In this context, the author highlights the interplay among the Board of Directors of the company, the powers of its shareholders, its and the Central Government as envisaged by the relevant provisions of the Companies Act, 1956.

3. K.R. Chandratre, Relevant Provisions of the Companies Act, 2013 -Concerning Appointment and Remuneration of Managing Director and Whole-time Director, 556(49) TAXMAN (2014). This article deals with the relevant provisions pertaining to the appointment, and remuneration of two kinds of directors, namely, managing and whole-time directors. In the process of describing the relevant provisions, it takes the readers through landmark English precedents and the corresponding/ deviating position in the Indian statute. It also summarizes the analogous provisions of the new act and the old and cites the differences in the same.

4. Pankaj Gupta and Singh Shallu, Evolving legal framework of corporate governance in India – issues and challenges, Vol. 4(2), J URIDICAL TRIBUNE, 240, 240, (2014). Corporate governance has begun to gain the attention of all stakeholders specially the investors. Corporate governance essentially refers to the management of a company. It is assumed that good corporate governance can strengthen inspire and maintain the investor’s confidence. This is done by assuring the company’s commitment to higher growth and profits. This area, corporate governance has become a very important concern for global economics and is considered to be extremely important in the developing and transitioning countries for efficiency and the creation of key sectors. This paper seeks to explore how the legal framework for

corporate governance has evolved in India. It also seeks to address the issues and challenges faced by corporate governance.

5. Rajesh Chakrabarti, Corporate Governance in India – Evolution and Challenges, available

at,

http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023826.pdf (Last visited on December 6, 2016). This paper was written in light of the corporate governance failures in developed countries that have gained media attention. The author argues that this issue has always been very important for finance and economics. He further goes on to argue that the issue of corporate governance is particularly relevant for developing countries. The author suggests that financial development is largely dependent on investor protection in country. He describes the Indian corporate landscape as being characterized by a concentrated ownership of shares and a pyramiding and tunnelling of founds among group companies. He goes on to observe how the board of directors having become nothing more than silent spectators with nominee directors paying little to no attention to their monitoring functions. He finally argues that the corporate governance in India is moving towards a more market based governance.

6. Rolf Dotevall, Liability of Members of the Board of Directors and Managing Director – A Scandinavian Perspective, Vol. 37(1), THE INTERNATIONAL LAWYER, 7, 13, (2003). The authors have used this article to provide a comparative perspective on the liability of the managing directors with that of India.

7. S. Venugopalan, The Managing Director - His status, powers and duties, 38 TAXMAN (2002). The author looks at the role, importance and legal position of a managing director in a company. According to him, the board has the most significant responsibility of monitoring the company’s affairs. He goes on to say that a board generally appoints one of the directors as the managing director in furtherance of the same and so as to ensure smooth conduct of the company’s affairs. Hence, the author puts forward the

status, significance and roles of the managing director of a company in accordance with the provisions of the Companies Act, 1956.

CASES

1. A.K. Khosla v. T.S. Venkatesan, (1992) 1 CALLT 77 HC (Calcutta High Court). Directors misrepresented to the complainants about the status of the company’s affairs so as to persuade them to buy shares. Complainants found out the status later and sought to prosecute the directors on the said ground. It was held that since th e complainants were experts in their field, stating untrue amount cannot be equated to misrepresentation.

It

was

noted,

however,

that

in

order

to

constitute

misrepresentation, the director in his personal capacity can be assumed to have sufficient powers on behalf of the company. 2. A.S. Gill v State of Punjab, (2006) 133 Comp Cas 759. The petitioner filed a writ petition to quash the order of the company in which his terms of employment had been changed and he had subsequently been terminated. It was held that there is no remedy that can be sought for by means of a writ petition for the removal of a managing director. The rationale behind this is that since the relationship between the managing director and the company is contractual in nature. Both the appointment and termination would be based absolutely on contract therefore it would not be possible to issue a writ to enforce a contract of personal service.

3. Achutha Pai v. Registrar of Companies, (1966) 36 Com Cases 598 (High Court of Kerala). The capacity of managing director cannot be brought to an end merely submitting two resignations. The resignation comes into effect when the resignation is accepted by the company and relieves him from his duties (However, factually, it was held that despite resignation, he could continue to act as the Managing Director).

4. Anderson v. James Sutherland (Peterhead) Ltd., 1941 SC 203 (Scottish Court of Session).

The articles conferred powers on the directors to appoint a managing director. They also stated in case of misconduct, they shall remove him as director as well. The managing director fired with a revolver during a board meeting. The directors removed him from the said designation but also wanted to remove him as a member, for which it had to be proved that he was an employee. The court held that a managing director acted in two different capacities due to which he was an employee and could be removed.

5. Ashok Mittal v. Ram Parshotam Mittal, (2008) 149 Com Cases 11 (Delhi High Court). One of the directors sought an injunction against the reappointment of a managing director on the completion of latter’s 5 years tenure. He had relied on the director’s previous misconduct in certain dealings in order to establish a prima facie case. The court did not accept the contention stating that the misconduct was not in his personal capacity but due to non-payment to creditors of the company, which does not attract the disqualification provision. 6. Avnish Bajaj v State (2005) 3 CompLJ 364 Del. In this case an IIT student placed on the company website an obsecene MMS video clip for sale. It was listed around 8:30 in the night and removed by 10 in the morning two days later. The question was whether the owner of the website could be held liable. Court held that since the IPC does not recognize automatically holding the director of the company liable for such an offence where the company is the accused, the director should be discharged.

7. Bank of Maharashtra v Racmann Auto P Ltd (1992) 74 Com Cases 752. The suit was for a recovery of 3,29,193,61p. The managing director executed documents that were necessary to obtain the Cash Credit on behalf of the company. Though he has a representative capacity the principle of the separate legal personality still persists. The loan documents of the company that were signed by the Managing Director on behalf of the company will not automatically make him a party to an action for recovery against the company. It was held that he was not a necessary party in such suits.

8. Bennet, Coleman and Co. Ltd. v. Union of India, (1993) 78 Com Cases 666 (Supreme Court of India). Here the government approved the appointment on the terms proposed. Later, it made an alteration in the terms stating that retirement benefits such as fund, gratituity etc. would be taken on the basis of the salary and not commission earned. No reasons were given for the same, on ground of which the court set it aside. 9. Biggerstaff v Rowatt’s Warf Ltd. [1896] 2 Ch 93. In this case the question that was sought to be answered was whether an assignment of debt by the company was valid. The assignment was executed by the managing director, one Davy. By the articles of the company the directors were authorized to appoint a managing director and to delegate to him such of the power of the board as they thought fit. The company had power to assign the debts but there was no minute shewing what powers had been delegated to the managing director, nor his powers as such, although he had acted in that capacity. It was held that the assignment was valid. Lindley L.J. said “The persons dealing with him must look to the articles, and see that the managing director might have power to do what he purports to do, and that is enough for a person dealing with him bona fide.” 10. Bluett v Stutchberry’ Ltd (1908) 24 TLR 469 The question was whether a decision of the directors to re-appoint a managing director was valid. It was held that the directors would not be empowered to bind the company by appointing a man as managing director for four years so as to deprive the company of their power and duty of considering and deciding at the General Meeting whether the person sought to be appointed would have been a person who was fit or proper. It was also necessary to consider whether the person was eligible for re-election as per the articles of the company and also if he was removable under the articles. The court in this instance held that it was completely ultra vires the power of the directors and their competence to enter into any agreement which would entirely deprive the company of its right under the articles of association. It was held in this case that the directors derive their power from the articles of association. They could only act in accordance of the articles of the company

11. Boschoek Proprietory Co. Ltd., v. Fuke, (1906) 1 Ch 148 (Chancery Division). The appointee lacked the requisite qualifications prescribed by the company’s articles. In addition to that, the directors fixed his annual remuneration as 700 pounds as against the ceiling of 500 pounds stated in the articles. The court held that unless the articles were amended, the directors had no authority to make such an appointment.

12. CIT, Kerala v. Alagappa Textiles (Cochin) Ltd., (1979) 49 Com Cases 947 (Supreme Court of India). Under the relevant provisions of the Income Tax Act, the manager of a company was sought by the authorities to be taxed as an assessee. The company argued that the remuneration was in the nature of a managing agent and should not be taxed. The court held that the appointment of the managing agent was not barred Sec. 384 and Sec. 2(24) of the 1956 Act, and should be treated as a manger for assessment purposes. 13. CIT v M.S.P. Rajes, (1993) 77 Com Cases 402. The questions referred to in this case under section 256(1) of the Income Tax Act, 1961 were whether having consideration to the facts and circumstances of the case, the tribunal was right in holding that the remuneration received by the managing director was assessable under the Income from salary or Income from other sources. For this they considered what the nature of employment was of the managing director. By following the decision in Ram Pershad v CIT it held that the managing director would have a dual capacity and would be an employee and could be taxed under the income under salary.

14. Chandigarh Tourist Syndicate Ltd. Re (1978) 48 Com Cases 267. This case was an application under section 151 of the CPC read with rule 9 of the Companies (Court) Rules, 1959. The application was for the former managing director of the company to hand over the records relating to the company and other items including cash. The former managing director asserted that the applicant had no locus standi to make such an application. A Managing Director is said to be the natural custodian of the company’s records and property. By virtue of this position,

he would have the right to sue the formere Managing Director in whose place he was appointed and who was refusing to handover the charge to compel him to do so. 15. Craven Ellis v. Cannons Ltd., (1936) 2 KB 403 (King’s Bench Division). The plaintiff was appointed a managing director of a company. The directors who appointed him, however, did not obtain the requisite shareholders’ qualificat ion for the appointment and hence the contract was void. However, the court stated that he was entitled to remuneration based on quantum meruit since there was an implied contract in place. Where it is implied that the appointee would be paid for his services, there exists an obligation to pay him for the same in absence of an express contract. 16. Deen Dayalu v. Sri Bezwada Papi Reddy, (1984) 2 Comp LJ 396 (AP). It was held in this case that a person does not acquire the position of or become the managing director merely on being appointed the director of the company.

17. Dry v Pullinger Engineering Co., [1921] 1 KB 77. The facts of that case were that the articles of the company empowered Directors a member of the board of directors as the managing director. He would be so appointed to draw the bills of exchange on behalf of the company. The managing director in question drew a bill of exchange without the company actually being vested with the authority by the directors to draw the bills. An action against th e bill was taken against the company. It was held that the managing director would have been entitled to draw the bill of exchange. A person taking such a bill would be entitled to assume that the person in question by virtue of his designation as the managing director would have the authority to draw that bill and hence would be valid.

18. Freeman and Lockyer v Buchurst Park Properties Ltd, [1964] 2 QB 480. Foster v. Foster, (1917) All ER Rep 856 (Chancery Division). One of the two joint managing directors was stripped of his designation and the other was appointed as the sole managing director of the company. It was argued that the new appointee was barred from voting as per the articles of the company,

since she was interest in the outcome. It was held that it was an irregularity that could be ratified by the shareholders, subsequently.

19. Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies, (1955) 1 All ER 725 (House of Lords). The plaintiff was appointed as a managing director of a company emerging as a result of a buyout. But then the holding company sought to move him to a subsidiary. It was argued that it would in breach of contract to do so. The court held that the said designation had no special meaning attached to it and when he is appointed as a director of a subsidiary company, there was no breach of contract.

20. Indian Molasses Co. Pvt. Ltd. v. CIT, AIR 1959 SC 1049 (Supreme Court of India). The company entered into an agreement with the retired managing director according to which it established a trust, where money will be placed in the hands of trustees who will have to buy annuities. Sec. 10 of the Income Tax Act implies liability that actually exists at the time of the agreement, but the court found that in this case the liability was based on a contingency (trustees buying annuities). Hence, the amount claimed by the managing director cannot be termed as expenditure.

21. Jayesh Ramniklal Doshi v. Carbon Corpn. Ltd., (1993) 76 Com Cases 748 (Bombay High Court). Court came to the conclusion that once a person was adjudged insolvent by a court of competent jurisdiction (in this case the adjudication was by a Judge of the Bombay High Court) he would become disqualified. Even if the debtor paid off the creditor the same does not wipe out the adjudication with retrospective and proceedings cannot be said to be non-existent form the inception.

22. John Shaw & Sons v Shaw, (1935) 2 KB 113. In this case the governing directors resigned and promised that they wouldn not take part in financial affairs. The independent directors resolved ot bring a claim against the and before the hearing a general meeting was called where the majority

shareholders got a resolution to discontinue the litigation. A managing director can be perceived as an independent organ of a company only if his powers maybe derived from the memorandum or articles of association of a company. They cannot usurp the powers vested in the general body of shareholders and conversely the general body of shareholders cannot usurp the powers of the board of dir ectors and managing director. In such a situation he would be entitled to prevent his colleagues and other directors from interfering in his exercise of power.

23. Jyotirmoy Dey v. Dacca Picture Palace Ltd., MANU/WB/0304/1962 (Calcutta High Court). A resolution authorising a Director-in-Charge to operate banking accounts and a general power of attorney in his favour do not confer on him management of the whole or substantially the whole of the affairs of the company' and do not 'entrust him with substantial powers of management’, and, as such, he is neither a manager nor a managing director within the meaning of the Companies Act, 1956. 24. K.K. Ahuja v V.K. Vora, AIR 2011 SC 2259. The question in this case was; who can be said to be the persons “in charge of” and responsible to the company for the business of the company for the purpose of section 141 of the Negotiable Instruments Act, 1881. It was held in the case that the person must be responsible to the company for the conduct of the business of the company under the provision of the then Companies Act, 1956 and would have to also “in fact” be a person in charge of the business of the company. Court decided that the question as to who is “overall control” is a very subjective test that would depend on the facts and circumstance of each case. It further observed that such a test would not need to be addressed if the person is designated as the managing director of the company. The rationale behind such a finding is that the very word ‘managing’ which is prefixed to Director makes it sufficiently clear that he was in charge and responsible to the company for the business of the company.

25. K.S. Sundaram v. Union of India, (2004) 119 Comp Cas 69 (Madras High Court). The Central Government had scrutinized the eligibility of the appointee for the post of managing directorship. It had listed six minute details for his rejection, issued a

show cause notice to the appointee and the company. The notice also suggested that the grounds for fit and proper person have been carefully looked into. Hence, it was held that the disqualification was fully justified. 26. Kumar Krishna Rohatgi v State Bank of India, (1980) 50 Com Cases 722. This case was an appeal from a money suit. The company executed a promissory note in favour of the bank. Mr. Rohatgi executed a guarantee for that amount which was not paid and the suit was instituted. The question was whether the managing director had the authority to execute the promissory note on behalf of the company. It was held that in the case of a company that has borrowing capacity, its Managing Director, by virtue of his position as the person in charge of substantially all the management, he would have the authority to authenticate promissory notes on behalf of the company.

27. Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548 (Supreme Court of India). In this case, the permission given by R.B.I. to the appellant company for chaning the composition of the board was challenged. It was held that in the present case, the company whose shares were bought by a non-resident company cannot refuse to register the same because the permission taken by the appellants was valid. The fault was committed by a bank responsible for the transaction while the R.B.I had no malafides. (It was held that the appellants had full power to change the composition of the board by removing the directors and replacing them with new ones, and that no injunction could be granted to the aggrieved directors) 28. M.R. Pratap v V.M. Muthukrishnan, ITO (1992) 74 Com Cases 400. The appellant who was the managing director of the company filed a return of the income of the company to be assessed which was verified and signed by him. The question was whether he would be a principal officer and thus have the authority to sign the return. The court held that the Managing Director is a principle officer for tax purposes and hence he could be proceeded against. The reasoning given was that the word “person” used in Section 277 of Income Tax Act is not restricted to the assesse only.

29. Major R.S. Murgai v. Ex Servicemen, Airlink Transport Services (P) Ltd. (2001)

103 Com Cases 177 (Delhi High Court). Where a managing director was dismissed and an administrator was appointed in his place, a suit by the managing director for salary and emoluments was held to be not maintainable. It was found by the company Judge that his removal was fully justified on merits and he had not challenged the findings. The same was upheld in the High Court.

30. Maksud Saiyed v State of Gujarat, (2008) 5 SCC 668 Managing Director who was the appellant was the principle officer. There is a statutory obligation on the principal officer to sign the tax returns. In a verification for income tax-purposes was signed by the company’s Managing Director on its behalf. The court held that the Managing Director is a principle officer for tax purposes and hence he could be proceeded against. The reasoning given was that the word “person” used in Section 277 of Income Tax Act is not restricted to the assesse only.

31. Meenakshi Mills v. V. Vishvanatha Sastri, AIR 1955 SC 13 (Supreme Court of India). The case involved the application of pre-Constitutional tax statute. The court, while deciding upon the question as whether proceedings started before the Constitution came into force can continue, it also looked at the applicability of the statute to ‘substantial’ tax evaders and said that it would depend on the facts of that case. It was held that the proceedings cannot continue. 32. Montreal Public Service Co v Champagne, (1916) 33 DLR 49. It was observed in this case that companies general were allowed to appoint a manager or managing director who would be invested with powers that could either be narrow or wide as regards the management over the company and its affairs. It would be ultra vires of the company to delegate all the administration of the business of the company only to such direction and control as it is the duty of the directors to exercise. A managing director in his capacity as a director would not have any individual power to represent and bind the company as the directors are vested with powers as a whole.

33. Morarji and Co. v. Sholapur and Co., (1944) 14 Com Cases 59 (Bombay High Court). A joint stock company entered into an agreement with a firm, holding the partners in the latter to be its agents. In the agreement, it was stated that on any change in composition in the firm, a new agreement has to be entered into. When the last of the original firm partner assigned his share to the plaintiff, the company prevented the same on the ground that previous changes in composition were not followed by corresponding novations. The court upheld its actions.

34. Morrell v. Oxford Portland Cement Co. Ltd., (1910) 26 TLR 682 (Chancery Division). In case the articles leave it to the Board to distribute the remuneration, the directors do not get an entitlement to the same until and unless a resolution is passed.

35. Motilal Shivlal v. Poona Cotton Mfg. Co. Ltd., AIR 1915 PC 69 (Bombay High Court). A company went into liquidation. It was argued that the assets of the company could be mortgaged and that a certain amount could be raised for the purposes of economic security of the liquidators. The court said held that a lower court’s order that the assets could be utilized for the said purpose was not executable but only a solution to exigencies. (The company said that the initial consent of letting the assets being used for the purposes of mortgage was not valid since they could not deal with third parties. The court accepted this contention)

36. Nelson v. James Nelson and Sons (1915) All ER Rep 433 (Court of Appeal). In this case, the articles of the company conferred powers of appointing managing directors on directors. They appointed a person X who held the office as per the terms of appointment and performed all his duties. He was then dismissed by the directors. It was held that as long as X fulfilled the conditions of appointment, he cannot be dismissed, violation of which would entitle him to damages.

37. Nell v. Atlanta, (1895) 11TLR 407 (Court of Appeal). If the remuneration of directors is not provided in the articles of the company, they cannot claim it as an entitlement. When the company agrees to the remuneration o f directors, they are entitled to get paid from the company’s funds.

38. Neufeld v Secretary of State 2009 2 B.C.L.C In this case the question as whether or not the governing director who owned 90% shares in a company could be an employee in the same company. It was held that : if the contract is not a sham, it is likely that the tribunal may, whether or not the contract is labelled a employment contract, consider if it gives rise to an employer/employee relationship. The factors that may be considered: the d egree of control exercised by the company over the shareholder employee, however this is not the same as whether or not there is controlling shareholding. The court may also look into whether there are directors other than or in addition to the shareholder employee and whether the constitution of the company gives that shareholder rights such that he is in reality answerable to himself and incapable of being dismissed . 39. Newspaper Proprietary Syndicate Ltd., Re, (1900) 2 Ch 349 (Chancery Division). A managing director is nothing but an ordinary director with additional responsibilities. If a managing director is not a director, the designation is contradictory since he cannot be taken an employee in the first instance. In any case, even if he were an employee, he would not be entitled to preferential payments.

40. Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. The company secretary hired expensive cars for the business while the managing director of the company was away. He used the cars for himself, he was the prosecuted and imprisoned. The company claimed it was not bound to the contracts since Bayne had no authority to enter into the said contracts. It was observed that the managing director would have had the authority to enter into contracts, but the

question was whether the secretary had the authority to enter into this contract. The secretary will have no power to act as agents of the company by virtue of their designations. This is apart from the limited authority of the secretary to negotiate contracts based upon the instructions of the board’s and to do the acts necessary for administration of the company’s organisation consistently with the board’s direction.

41. Pyare Lal Gupta v. D.P. Agarwal [1983] 53 Comp. Cas. 586 (Allahabad High Court). In this particular case, the Allahabad High Court held that no approval of the Central Government was required to remove a person from managing directorship. It appears that in that case the articles of the company did not contain a ny provision empowering the Board of Directors to remove the managing director. Approving the view taken by the lower court, that the Board was at liberty to remove the managing director who was only an agent of the Board to carry out the duties assigned t o him, the High Court observed:

42. Rama Corporation Ltd v Proved Tin and General Investments, [1952] 2 QB 147. A director purporting to act on the behalf of a company enters into a contract and receives a cheque from the plaintiff. The plaintiff was not acquainted with the AoA. The board in this case had not delegated the authority to the directors. It was held that companies would not be bound by actions of non-managing directors who were no delegated these powers.

43. Ram Pershad v The Commissioner of Income Tax, New Delhi, [1972] 42CompCas 544 (SC ). The relevant question in this case was whether the Managing Director, the assesse in this case, had to paid remuneration as a salary. It was held that the nature of employment could be gathered from a construction of the Articles of Association and a perusal of the agreement between the assesse and the company. It held that in the present case, he would be employed as a servant of the company and hence his remuneration would be of the nature of a salary.

44. Ramesh Narang v. Rama Narang, 1995 83 Com Cases 194 (Supreme Court of India). Here a person was convicted for an offence involving moral turpitude and the High Court, on appeal, suspended the sentence but not the conviction. It was held that he remained disqualified for the appointment and his appointment as managing director was therefore void. SC dismissed the appeal challenging this order.

45. Rampur Distillery and Chemical Co. Ltd. v. Company Law Board, (1970) 40 Com Cases 916 (Delhi High Court). In this case, two of the managing directors were facing prosecution against whom the proceedings were pending. The company had contended in the application before the application to the central government that these were sufficient grounds to allow reappointment. The court said that it is not possible to say that the pendency of prosecution cannot lead any reasonable person to the conclusion that the person who is being prosecuted is fit and proper and the order can be justified on this ground alone. Further, Sec. 326 289 requires application of mind by the central government and in its absence the approval shall be quashed.

46. Raymon Engg. Works v. Union of India, AIR 1970 Delhi 5 (Delhi High Court). This case involved a challenge to the Central government’s order upon the filing of application for the appointment of a managing director. It was submitted that the concerned officials had malafide intentions in imposing certain conditions on the appointment. The court held that the government had the power to impose the s aid conditions under Sec. 269(1) and 637-A of the 1956 Act and that there was no question of malafide intentions.

47. Read v. Astoria Garage (Streatham) Ltd. (1952) 2 All ER 292 (Court of Appeal). The managing director was appointed on the basis of contract that was silent on the term and notice period before the removal. Hence, when he was removed summarily from the office, it was held there has been no breach of the contract since the relevant contractual provision was absent.

289

Sec. 326, Companies Act, 1956.

48. Reliance Jute and Industries Ltd., Re, (1983) 53 Com Cases 591 (Calcutta High Court). This was a matter under the Monopolies and Restrictive Trade Practices, Act which provided a time-limit within which the government had to accord approval. On facts of the case, it was held that a failure on the part of the Government to do so would amount to an automatic approval.

49. Richmond Gate Property Co. Ltd., Re, (1964) 3 All ER 936 (Court of England and Wales). The managing director filed for recovering his remuneration when the appointing company went into liquidation. It was argued that in the absence of a contract specifying terms of remuneration, he should be given the same on a quantum meruit basis. The court held that since the articles specified terms of his appointment, he cannot be rewarded remuneration on such basis. But at the same time, the articles clearly stated that he had to stay at the mercy of the directors and cannot claim remuneration if they choose to opt for it.

50. Risal Singh v. Chandgi Ram, AIR 1966 Punj 393 (Punjab-Haryana High Court). Held that offence of possessing an unlicensed revolver committed under the Indian Arms Act implied no such depravity so as to constitute ‘moral turpitude’ for the purposes of the Companies Act, 1956.

51. S.S. Lakshmana Pillai v. Registrar of Companies, (1977) 47 Comp Cas 652 (Madras High Court). The petitioner was the managing director when criminal proceedings were initiated against him. He sought resignation which would absolve him of all liabilities. It was held that the resignation was effective from the date of submission and the company could not proceed against him.

52. Sardar Gulab Singh v. Punjab Zamindara Bank Ltd., (1941) 11 Com Cases 301 (High Court of Lahore).

The relevant provisions of the Specific Reliefs Act 290 can be enforced since the managing director is an employee of the company. The terminated director had no right to an injunction against his removal in the case because no agent can be forced to be employed by a principal.

53. Saroj Kumar Poddar v. State (NCT) of Delhi and Anr, 2007 (2) SCC (Cri) 135 The appellant in this case was a director of a public limited company. The company had issued three cheques in favour of the complainant. The managing director and the directors of the company were arrayed as accused. It was held that the director of a company could not be shown to responsible for the conduct of the business of the company. It further went on to observe that the IPC 291 had no provisions that enable holding the managing director of a company vicariously liable for its faults. Therefore to hold him liable it must be shown that he was personally liable for the offence in question.

54. Schindler v Northern Raincoat CO [1960] 2 All ER 239. The facts of the case are the share capital of the defendant company were sold by the plaintiff and entered into an agreement to serve as the managing director of the company. The company was sold and the plaintiff lost employment and he sued for wrongful dismissal. It was held that the managing director will have no cause to complain against the company for having breached his service contract if he, by the happening of any of those events, ceases to hold office

55. Shuttleworth v Cox Bros & Co. Ltd. [1927] 2 KB 9. Cox Bros had appointed a board of directors and fixed under its articles of association that they would hold office for life. It was then proposed to amend articles such that the director would lose his position if other directors requ ested him to resign. It was held that in cases where the managing director is appointed without a contract, he impliedly agrees to serve on the terms of the articles of the company. These articles would be applicable to both directors and managing directors.

290 291

Indian Penal Code, 1860.

Therefore, by causing variations in the articles the rights of the Managing Director can be changed, however this would not affect the rights that have already accrued.

56. Sinha Watches (India) P. Ltd v Gujurat State Finance Corporation (1985)58 Com Cases 489 (Guj) The petitioners, Sinha Watches and its managing directors challenging order of winding up. The managing director was in Tihar jail. It was held that where the registered office of the company was not traceable and no one was there to receive any communication addressed to the company, it was held that the Managing Director who came to know of the fact of the proceeding and the ex parte order, was the proper person to act on behalf of the company to oppose the winding up petition though no notice had been served on him.

57. Sishu Ranjan Dutta v Bhola Nath Paper House Ltd. (1983) 53 Com Cases 883 (Cal) It was held in this case that a Managing Director cannot be equated with an ordinary director. They considered section 2(26) and Section 2(13) of the companies Act, 1956 and observed that the two were clearly defined and had separate and specific provisions. Therefore they could not be treated the alike and mixed up. Therefore it was held that if the as per the provisions a managing director ceases to hold office then they cannot continue as directors without being validly appointed by the company as opposed to a director. Therefore they would not be able to continue as directors of the company after termination of their employment as managing director.

58. Southern Foundries Ltd v Shirlaw, [1940] AC 70. Mr Shirlaw was the managing director of Southern Foundries. Another company took over the business. The new owners altered the articles empowering two directors and the secretary to remove any director. Mr Shirlaw was thus fired. It was held in this case that a managing director who is not a director is a contradiction. It was further observed that the contract of the managing director was breached and he was awarded compensation.

59. Surve Kedarappa vs D.G. Bhimappa, AIR 1959 Kant 36 This case applied the finding in the case of Dey v Pullinger. The question in this case was whether the promissory note executed by the defendant was valid or not. There was no delegation of power in respect of drawing of bill of exchanges in fact. It was held that the persons dealing with the company could assume the authority of the managing director of his authority and hence the company would be held liable.

60. Sridhar Sundararajan v. Ultramarine & Pigments Limited, (2015) 192 Comp Cas 355 (Bombay High Court). The managing director was appointed before the relevant provision for the new act was notified. Upon notification, he still had his 2 years of tenure left but he had crossed the age of 70. The court applied contextual rule of interpretation and said that in such cases ‘continue’ implies appointment/reappointment and not necessarily cessation of managing directorship.

61. Subhash Chand Agarwal v. Associated Limestone Ltd., (1998) 92 Comp Cas 525 (Company Law Board). The company was a limited company and therefore, partnership principles could not have been applied to order its winding up. More than half the capital of the company was held by a State Government undertaking so that the company was in the category of a Government company. An order for winding up of a Government company on the just and equitable ground would be something for which there was no precedent. The CLB also found that the company was turning the corner and the accumulated losses were being wiped out. A petition filed by a member on the ground that the managing director of a public company has been removed would not find much respect unless it could be shown that the interest of the company would be prejudiced by the removal.

62. Swabey v. Port Darwin Gold Mining Co., (1889) 1 Meg 385 (Court of Appeal). In this case, the articles provided that “the directors shall each receive by way of remuneration each year the sum 200 pounds, and the chairman in addition 100

pounds per annum.” A director resigned in the course of a current year, and he was held entitled to an apportioned part of the remuneration for that year. 63.

Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Com Cases 562, 582 (Calcutta High Court).

An additional director was appointed as pet the terms of the articles. The said articles were silent on the duration of the appointment. He was removed from office by the directors. It was held that in absence of relevant provisions it will assumed that the appointment is indefinite but for removal by way of removal in annual general meeting.

64. T.R. Pratt (Bombay) Ltd. v E,D, Sasoon & Co. Ltd. (1936) 6 Com Cases 90 The question that arose was as to the power of the company and its directors to borrow money. The managing director was given delegated all the powers of the directors through the articles. It was the duty of the Managing Director to communicate to the company any material fact about certain other companies which he came to know while acting as a director of those companies. The position was granted to him for the protection for the interest of the company of which he was the Managing Director.

65. T. Murari v. State, (1976) 46 Comp Cas 613 (Madras High Court). The person acting as managing director was to face proceedings against him, brought by the company. He sought to resign in order to escape the same. It was held that in absence of provisions and articles, resignation will come into effect on the date on which it was tendered. 66. Thomas Logan Ltd. v. Davis, (1911) 104 LT 914 (Chancery Division). An express provision that gave members powers to give directions by way of an ordinary resolution was challenged. The court held that if directors act under a specific article and not in general exercise of their powers of management, their decision cannot be altered through an ordinary resolution by the members.

67. Wasava

Tyres

Partnership

Firm

v.

The

(Printers)

Mysore

Ltd.,

MANU/KA/8543/2006 (High Court of Karnataka). Held that, in the instant case the facts stand on a different footing. There is no material to show that there is dis-agreement amongst the directors for filing of the suit in question. On the other hand the suit is obviously filed for the benefit of the company. That apart, the provisions of Section 2(26) of the Companies Act defines the word managing director. The words “substantial powers of anagement" specifically excludes certain acts from its purview. Therefore except the excluded acts the managing director has power and privilege of conducting the business of company in accordance with the Memorandum and Articles of Association of the company.

68. Woolf v. East Nigel Gold Mining Co. Ltd., (1905) 21 TLR 660 (Court of Appeal). In case the company doesn’t specify provisions for the appointment of a managing director, it should be presumed in law that the directors have the power to do so.

69. V. Ramaswami v Madras Times Printing & Publishsing, AIR 1917 Mad 485. The plaintiff was appointed as the managing director of the company to carry on the business. Two directors were appointed at the same time. After the managing director ceased to hold office one of the directors took up that position and in exercise of his power directed the plaintiff to carry out certain actions in his new position as a co-editor. The MD of a company entrusted with the charge of management of company’s affairs has the power to vary the duties of employees within permissible limits.

70. Varey Souriar v Keraleeya Banking CO., (1957) 27 Com Cases 591. The question in this case was regarding the authority of the managing director to execute the bond in favour of plaintiff. It was observed that the managing director was in fact without the authority to carry on this function. However, it was held that since it was the managing director who is invested with the powers by virtue of the provisions of the articles of association, it would be unfair to expect the outsider to enquire regarding the internal functioning of the company. All that was necessary

for a third party to do was to ensure that the managing director might have the power to do what he purported to do.

71. Vinod Kumar Mittal v, Kaveri Lime Industries Ltd., (2000) 2 Comp LJ 354 (Company Law Board). The director made several complaints against the company in various fora. The concerned authorities found all of them to be misleading. The company removed him for on the said ground, which was upheld by the Board. Reports 1. Ministry of Corporate Affairs, J.J. Irani Committee Report, (2004), available at https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_0102 2016.pdf.

Miscellaneous 1. Avirup Bose, Director and Officer Liability for Dishonour of Cheque, (July 31, 2009), available at http://indiacorplaw.blogspot.in/2012/04/implied-authority-ofmanaging-director.html, (Last visited on December 4, 2016).