Controls on appointment of Regular Directors/ Whole time Directors/Managing Directors Under the Companies Act, 2013

Section 152, 164, 165, 167, 196 and Schedule V read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 govern the appointment of Regular Directors, Whole time Director and Managing Directors. The qualifications to be appointed for these posts are well enumerated in the Act as well as in the rules.

The aforesaid provisions of the Act give a big negative list of things as to who does not qualify to be a director/who cannot be a Director/who has to vacate office of director/who cannot be appointed as Whole time Director/Managing Director without Central Government Approval.

For any appointments/reappointments/continuance of appointment of Director/Managing director/Whole time Director in future, one has to go through the List carefully so that they do not violate and pay heavy penalties and fines.

Company Law Experts who were involved in drafting could have merged these Sections into one and could have given a comprehensive negative list stating who cannot take the post of a Director / who cannot take the post of not only a director but also Managing Director/Whole time Director. Some of the provisos are repetitive and overlapping and some items are very exclusive to that Section.

The Practicing Company Secretary has the responsibility of creating awareness amongst his Clients /Directors fraternity so that they are knowledgeable in all these issues and do not violate those provisions.

I. FIRST NEGATIVE LIST CONCERNING APPOINTMENT AND REAPPOINTMENT OF DIRECTORS

i. First Negative List – Part A-Who cannot be appointed as a Director ?

Section 164 states if anybody falls under anyone of the following categories, he shall not be eligible for appointment as a director of a company

(a) he is of unsound mind and stands so declared by a competent court;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

(h) he has not complied with sub-section (3) of section 152; (that is to say that he should have got a DIN)

Under Section 165 (1), if he is already a Director in 20 Companies or he is already a Director in more than 10 Public Limited companies within the overall limit of 20 Companies as aforesaid, he cannot be a Director in any other Company breaching the above threshold limit.

ii. First Negative List Part B-Who cannot be appointed/reappointed as Director for a period of five years ?

Section 164 (2) states that an existing Director shall not be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the company in which he is a director has failed

(a) to file financial statements or annual returns for any continuous period of three financial years; or

(b) to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

iii. First Negative List-Part C

a.Restrictive clauses in Articles for appointment of Directors

i.Section 164(3) states that a Private Company may by its Articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2).

ii. Section 165 (2) states that the members by means of a special resolution may restrict the number of Directorship to be taken by their Company Director(s) lesser than the numbers specified under Section 165(1).

b.Disqualification when to take effect for the offences committed under Clause (d), (g) and (e) of Section 164(1)

The disqualification mentioned above in Clause (d), (e) and (g) of Section 164(1) shall not take effect
a. For thirty days from the date of conviction or order of disqualifications.
b. Where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order until expiry of seven days from the date on which such appeal or petition is preferred
c. Where any further appeal or petition is preferred against order within seven days until such further appeal or petition is disposed off. [Section 164(3)]

iv. First Negative List-Part D- Who cannot be a Director and immediately vacate Office if he falls in any one of the following categories

Section 167 states that the office of a director shall become vacant in case”

(a) he incurs any of the disqualifications specified in section 164;

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

Note: As per Clause (b) of Section 167, Companies cannot grant leave of absence to a Director for any number of times and allow him to continue as Director as was done earlier especially for foreign Directors. The maximum time limit is 12 months with or without Leave of Absence. Most of the Foreign Directors will be affected by this proviso. This Clause may force the Foreign Director to request the Board to appoint an Alternate Director in his place.

(c) he acts in contravention of the provisions of Section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;

(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;

(e) he becomes disqualified by an order of a court or the Tribunal;

(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;

Note: It is interesting to note that under Clause 164(3)(1), an opportunity is given to the aggrieved Director to go for an appeal within 30 days of conviction involving moral turpitude or other wise and sentenced to imprisonment for not less than six months and till such time he will not be disqualified till the appeal is disposed off under Section 164(1)(d). But he has to immediately vacate his office as Director under Section 167(1)(f). Both the Sections 164 and 167 do not go hand in hand as far as this matter is concerned.

(g) he is removed in pursuance of the provisions of this Act;

(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

Note: This is also an interesting provision. If a person is appointed as a Director in pursuance of an office or other employment in the Holding Company/Subsidiary/Associate Company, he shall cease to be a Director if he loses the office or other employment in the said Holding Company/ Subsidiary/ Associate Company. The Scope has been enhanced to cover all kinds of office including employment.

2. SECOND NEGATIVE LIST CONCERNING APPOINTMENT OF MANAGING DIRECTOR/WHOLE TIME DIRECTOR

i.Second Negative List Part A- Who cannot be appointed as Managing Director/Whole time Director ?

Section 196 states that no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who ”

(a) is below the age of twenty-one years or has attained the age of seventy years: (However the upper limit beyond seventy years is allowed provided a Special resolution is passed in the Extra Ordinary General Meeting. The Explanatory Statement prepared under Section 102 should spell out the justification for appointing such a Person and Form No.MGT.14 is filed with the Registrar of Companies registering the Special resolution passed.)

(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;

(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or

(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months:

ii.Second Negative List Part B- Appointment of Managing Director subject to the following restrictions.

Section 196 states that
1. No Company shall appoint a Managing Director or a Manager at the same time.
2. No Company shall appoint a Managing Director /Wholetime Director for more than five years at a time.
3. The reappointment of Managing Director/Whole time Director should not be considered earlier than one year before the expiry of the term.
Section 203 states
4. No Company shall appoint an individual as Managing Director and Chairman at the same time unless the Articles of Association provide otherwise.

3.THIRD NEGATIVE LIST CONCERNING THE APPOINTMENT OF MANAGING DIRECTOR/WHOLE TIME DIRECTOR

i. Third Negative List- Part A -Who shall not be appointed as Managing Director/Whole time Director subject to one time approval from the Central Government under Schedule V

Asper Section 196(4) read with Schedule V, no person shall be eligible for appointment as a managing or whole-time director or a manager (hereinafter referred to as managerial person) of a company unless he satisfies the following conditions, namely:”
(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under this Act or any of the following Acts, namely:”

(i) the Indian Stamp Act, 1899 (2 of 1899);
(ii) the Central Excise Act, 1944 (1 of 1944);
(iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951);
(iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954);
(v) the Essential Commodities Act, 1955 (10 of 1955);
(vi) the Companies Act, 2011;
(vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(viii) the Wealth-tax Act, 1957 (27 of 1957);
(ix) the Income-tax Act, 1961 (43 of 1961);
(x) the Customs Act, 1962 (52 of 1962);
(xi) the Competition Act, 2002 (12 of 2003);
(xii) the Foreign Exchange Management Act, 1999 (42 of 1999);
(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);
(xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(xv) the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922);
(xvi) the Prevention of Money- Laundering Act, 2002 (15 of 2003);

(b) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974):

Provided that where the Central Government has given its approval to the appointment of a person convicted or detained under sub-paragraph (a) or sub-paragraph (b), as the case may be, no further approval of the Central Government shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained subsequent to such approval.

ii. Third Negative List- Part B -Who shall not be appointed as Managing Director/Whole time Director under Schedule V without the approval of the Central Government

(a) he has completed the age of twenty-one years and has not attained the age of seventy years:
Provided that where he has attained the age of seventy years; and where his appointment is approved by a special resolution passed by the company in general meeting, no further approval of the Central Government shall be necessary for such appointment;
(b) where he is a managerial person in more than one company, he draws remuneration from one or more companies subject to the ceiling provided in section V of Part II;
(c) he is resident of India.
Explanation I.”For the purpose of this Schedule, resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,”
(i) for taking up employment in India; or
(ii) for carrying on a business or vacation in India.

Explanation II.”This condition shall not apply to the companies in Special Economic Zones as notified by Department of Commerce from time to time:
Provided that a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person™s appointment.

Note:
i.This restrictive Clause (c) stated above will have far reaching consequences. All individuals who aspire to be appointed/reappointed as Whole Time Directors /Managing Directors, they should better check their visa stampings. If they have gone abroad any day within a period of 12 months, they cannot be appointed as Whole time Directors/Managing Directors without the approval of the Central Government. People who go for business trips abroad during the year may not be in a position to fulfill this condition. In such cases, they have to seek approval from the Central Government if they have to get themselves reappointed. I hope the Government will issue clarification on this controversial clause.

ii. There is a one time approval required from the Central Government if any person falls under the category (a) and (b) of Schedule V. In all other cases the Company has to seek approval from the Central Government every time the concerned person gets reappointed if the said appointment is in variance to the said Schedule.

Tags: Companies Act 2013Director

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About K.S. Ramasubramanian

K.S. Ramasubramanian | Practicing Company Secretary

KSR is a Practicing Company Secretary with over 30 years of experience. He has been rendering professional services in the areas of Company Law, Company Secretarial Practice, Public Issues, Corporate Governance, Administration, Management, International Marketing etc.,

He has designed and developed Csmart - a Company Secretarial Software (http://csmart.co.in/) aimed at making the life of a Company Secretary much easier saving valuable time. Lot of secretarial work is automated using the software.

He could be contacted at ramks17@gmail.com

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