Introduction
The Managing Director of a company directs and controls the company’s operations. He gives strategic guidance and direction to the Board of Directors and other key managerial personnel (KMP) to ensure that the company achieves its objectives. He is also involved in the day-to-day affairs of the company. He directs and controls the resources of the company and supervises various functions or departments, like, manufacturing/production, sales, advertisement, legal, finance and accounting, administration, etc. The Companies Act, 2013 (“the Act”) defines “managing director” and “manager”. This article provides an analysis of relevant provisions of the Act and Rules made thereunder along with detailed checklist w.r.t. appointment of Managing Director or Manager in a company.
1. Director Identification Number (DIN).—Every individual intending to be appointed as Director of a company shall make an application for allotment of director identification number to the Central Government (under Section 153 of the Act).
2. Modes of Appointment of Managing Director.— Managing director means a director who, by virtue of the articles of association of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company. Therefore, there are four ways for a company to appoint a managing director. The articles of association of company may also provide for appointment in a particular manner.
3. Approval of Board of Directors.—W.r.t. the appointment of Managing Director or Manager by Board of Directors, the notice convening the meeting of Board of Directors shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.
4. Appointment Letter or Agreement.—As defined in the Act, the managing director includes a director occupying such position, by whatever name called. Therefore, any director who is entrusted with substantial powers of management of the company but not designated or appointed as Managing Director, then such director may be a managing director. The Act has not explicitly defined substantial powers of management. The terms of appointment shall specifically state the powers, functions, roles, responsibilities and duties of the appointee. According the provisions, “substantial powers of management” does not include the power to do administrative acts of a routine nature when so authorised by Board, which includes the power to affix company’s common seal to any document or to draw and endorse any cheque on company’s bank account or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of transfer of shares. Therefore, in order to elaborate and define substantial power of management, it is desirable that an appointment letter is issued by the Board of Directors or an agreement is executed that defines the terms and conditions of appointment. Generally “substantial powers of management” may include power to invest funds of the company, power to borrow on behalf of the company, power to appoint functional heads, power to sue on behalf of the company, power to negotiate and sign agreements on behalf of the company.
5. Appointment of Joint Managing Director.—A company may appoint two or more Managing Directors. There is no specific restriction under the Act. The appointee may be designated as the Joint Managing Director or Deputy Managing Director. In order to avoid conflict of duties, it is necessary to elaborate “substantial powers of management of the company” in the appointment letter or resolution or agreement. The provisions of the Act and the Rules made thereunder shall apply to all appointees.
6. Appointment of Managing Director and Manager at Same Time.—A private company or public company shall not appoint Managing Director or Manager at the same time. However, the company may appoint Managing Director after completion of the term of manager or vice-versa. The company may also appoint whole-time director along with appointed Managing Director or Manager.
7. Tenure.—A private company or public company shall appoint or reappoint any person as its Managing Director or Manager for a maximum term of 5 years. However, the reappointment shall not be made earlier than 1 year before the expiry of his term. According to the provisions of the articles of association of the company, such reappointment can be subject to the approval of the Board of Directors and/or shareholders of the company.
8. Age Criteria.—In case of private company or public company, a company shall not appoint or continue the employment of any person as Managing Director or Manager who is below the age of 21 years or has attained the age of 70 years. However, the appointment of a person who has attained the age of 70 years may be made by passing a special resolution. In such case, the explanatory statement annexed to the notice of general meeting shall indicate the justification for appointing such person.
9. Other Criterias and Qualifications (As Prescribed in Section 196 of the Act).— In case of private company or public company, the appointee shall not be an undischarged insolvent or has not at any time been adjudged as an insolvent. The appointee has not at any time suspended payment to his creditors or makes, or has at any time made, a composition with them. The appointee has not at any time been convicted by a court of an offence and sentenced for a period of more than 6 months. In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee.
10. Other Disqualifications under Section 164 of the Act.— The appointee shall not be disqualified to be a director under Section 164 of the Act (i.e. the appointee shall be of sound mind, solvent, not convicted for a particular offence, etc.). In order to ensure compliance of the said provisions, the company shall obtain a declaration from such appointee. With reference to certain provisions, the appointee shall inform to the company about his disqualification under sub-section (2) of Section 164, if any, in Form DIR-8 before he is appointed or reappointed.
11. Consent.—In case of private company or public company, the proposed appointee shall give his consent to hold the office as Managing Director or Manager of the Company.
12. Compliance of Criteria Specified in Part I to Schedule V of the Act.— In case of public companies only, the provisions of Part I to the Schedule V of the Act are applicable. Accordingly, a person shall be eligible for appointment as Managing Director or Manager, if he satisfies the following conditions: (i) he has not been sentenced to imprisonment for any period, or to a fine exceeding Rs 1000, for the conviction of an offence under 19 prescribed statutes; (ii) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; (iii) he has completed the age of 21 years and has not attained the age of 70 years; and (iv) he is resident of India. In order to ensure compliance of the said provisions, the company shall obtain a declaration from the managing director or manager.
13. Shareholders’ Approval.— In case of public companies, the terms and conditions of such appointment and remuneration payable to the managing director or manager shall be first approved by Board of Directors and then by the shareholders at the next general meeting of the company. The notice convening the general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any. Subject to the provisions of the Act, where an appointment of a managing director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid.
14. Central Government’s Approval, in Certain Cases.— The approval of the Central Government shall be obtained if there is a variance in the terms of appointment (i.e. criteria specified in Part I to Schedule V of the Act) of Managing Director or Manager.
15. Number of Directorships.— A person shall not hold office as a director in not more than 20 companies, including alternate directorship (under Section 165 of the Act). The appointee and the company in which he is appointed as Managing Director shall confirm the same.
16. Filing of E-Form and Returns.— (i) The company shall file e-Form DIR-12 for the appointment of Managing Director or Manager; (ii) the company shall file e-Form MGT-14 for the appointment of Managing Director. Filing of such e-form is required for any resolution relating to the appointment, reappointment or renewal of the appointment, or variation of the terms of appointment, of Managing Director; and (iii) in case of public companies, it shall file e-Form MR-1 within 60 days of such appointment of Managing Director or Manager.
17. Entry in the Register of Directors and KMP and their Shareholding.—The company shall make necessary entry of the requisite particulars in the register of directors and key managerial personnel and their shareholding (under Section 170 of the Act).
18. Disclosure of Concern or Interest.—The appointed director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in Form MBP-1 (under Section 184 of the Act). Such disclosure shall be made at the first board meeting in which he participates as a director and thereafter at the first board meeting in every financial year or whenever there is any change in the disclosures already made, then at the first board meeting held after such change. Such disclosure made by the Managing Director shall be noted in the minutes of the board meeting.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com
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Hello Ms. Mahima, With reference to your query, the company can freshly appoint the MD in accordance with the Act, Rules and the Articles of Association of the Co. Section 176 of the Act is also relevant in the present case.
Hello sir
In case of a private company the term of 5yrs of the MD expires in nov 2019 and the company fails to reappoint him and he still acts as MD inadvertently.
In such case how should the non compliance be made good.