Managing Directors, Whole-Time Directors and Managers

Three elements, and an answer should separate them.

He must be a director. A person who is not on the Board cannot be a managing director, whatever his title.

He must be entrusted with substantial powers of management, and the entrustment may come from four sources: the articles, an agreement with the company, a resolution in general meeting, or the Board.

Substance prevails over name. The definition includes a director occupying the position of managing director, by whatever name called.

The Explanation says what "substantial powers" are not. The power to do administrative acts of a routine nature when so authorised by the Board, such as affixing the common seal, drawing and endorsing cheques on the company's bank account, drawing and endorsing any negotiable instrument, signing any share certificate, or directing registration of transfer of any share, shall not be deemed to be included within the substantial powers of management.

That Explanation is the answer to the standard problem question. A director authorised to sign cheques and share certificates is not, by that alone, a managing director.

Manager: section 2(53)

"Manager" means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not.

Compare the two definitions and the differences fall out.

• A managing director must be a director; a manager may be a director or any other person.
• A managing director has substantial powers of management; a manager has the management of the whole or substantially the whole of the affairs.
• A manager is expressly subject to the superintendence, control and direction of the Board.
• A manager may hold the position whether under a contract of service or not.

Both definitions are inclusive as to name, so a title such as "chief executive" or "general manager" decides nothing by itself.

Whole-time director: section 2(94)

"Whole-time director" includes a director in the whole-time employment of the company.

An inclusive definition, and a short one. The test is whole-time employment, not the extent of the powers. So a whole-time director may have no more authority than any other director, but he is on the payroll full time.

And two offices that are not directors

Section 2(18): a Chief Executive Officer means an officer of a company who has been designated as such by it.

Section 2(19): a Chief Financial Officer means a person appointed as the Chief Financial Officer of a company.

Neither definition requires a directorship, and both are key managerial personnel under section 2(51).

No managing director and manager together: section 196(1)

No company shall appoint or employ at the same time a managing director and a manager.

The reason is in the two definitions. Each is given the running of the company, one by entrustment of substantial powers, the other by having the management of the whole of its affairs. Two people cannot both hold that, and a company that tried would create a conflict of authority the Act does not intend.

Note that the bar is on the pair. A company may have a managing director and several whole-time directors, or a manager and several whole-time directors.

Five years at a time: section 196(2)

No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time.

The proviso: no re-appointment shall be made earlier than one year before the expiry of his term.

Two rules, and both are commonly examined. The term may not exceed five years, though there is no limit on the number of terms; and a re-appointment may not be made more than one year before the current term expires, so a Board cannot entrench a favourite by renewing him four years in advance.

Who cannot be appointed: section 196(3)

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;
• (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.

Note the words "or continue the employment". These are not merely conditions of appointment; a person who incurs one of them must cease to hold the office.

Note also how far back three of them look. Clauses (b), (c) and (d) each say "at any time", so an insolvency, a composition or a sentence long since served still disqualifies.

Only the age bar can be lifted, and by two routes.

First proviso: a special resolution. A person who has attained the age of seventy may be appointed by passing a special resolution, in which case the explanatory statement annexed to the notice shall indicate the justification for appointing him.

Second proviso, inserted by the Companies (Amendment) Act, 2017: where no such special resolution is passed but the votes cast in favour exceed the votes cast against, and the Central Government is satisfied on an application made by the Board that the appointment is most beneficial to the company, the appointment may be made.

So the second proviso rescues an appointment that got an ordinary majority but fell short of three fourths, at the price of an application to the Central Government.

How the appointment is made: section 196(4)

Subject to section 197 and Schedule V, a managing director, whole-time director or manager shall be appointed, and the terms and conditions of the appointment and the remuneration payable approved:

• by the Board of Directors at a meeting;
• subject to approval by a resolution at the next general meeting; and
• by the Central Government where the appointment is at variance with the conditions specified in Part I of Schedule V.

Three approvals, and the third only where the appointment departs from Schedule V Part I.

First proviso: what the notice must contain. A notice convening the Board or general meeting for considering the appointment shall include the terms and conditions, the remuneration payable, and such other matters including the interest of a director or directors in the appointment.

Second proviso: a return in the prescribed form shall be filed within sixty days of the appointment with the Registrar.

If the members do not approve: section 196(5)

Where an appointment of a managing director, whole-time 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.

This is the same idea as section 176, applied to a different failure. The appointment falls, but what he did in the meantime stands, so that outsiders who dealt with him are not prejudiced.

Compensation for loss of office: section 202

Section 202(1): who may be paid. A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement.

The words "but not to any other director" are the heart of the section. A non-executive or independent director cannot be paid compensation for loss of office at all.

Section 202(2): six cases in which no payment shall be made.

• (a) where the director resigns as a result of the reconstruction of the company or its amalgamation with any other body corporate, and is appointed as managing or whole-time director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
• (b) where the director resigns otherwise than on such reconstruction or amalgamation;
• (c) where the office is vacated under section 167(1);
• (d) where the company is being wound up, whether by order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;
• (e) where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or of any subsidiary or holding company; and
• (f) where the director has instigated, or taken part directly or indirectly in bringing about, the termination of his office.

The organising idea is that compensation is for loss, not for choice or fault. Clauses (a) and (b) exclude those who resigned; clauses (c), (e) and (f) exclude those whose office ended through their own default or contrivance; clause (d) excludes the man whose own negligence sank the company.

Notice the qualification in clause (d). A winding up alone does not bar the payment; it must have been due to the negligence or default of the director.

Section 202(3): the cap, and it is a two-part calculation. The payment shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term, or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during the three years immediately preceding the date on which he ceased to hold office, or, where he held office for a lesser period than three years, during that period.

So: the shorter of the unexpired term and three years, priced at his average pay over the last three years.

The proviso: nothing where the company cannot repay its capital. No such payment shall be made in the event of the commencement of the winding up of the company, whether before, or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses, are not sufficient to repay to the shareholders the share capital including the premiums contributed by them.

Section 202(4). Nothing in the section prohibits payment to a managing or whole-time director or manager of any remuneration for services rendered to the company in any other capacity.

And remember section 191. Where the payment is connected with a transfer of the undertaking, property or shares, section 191 requires disclosure to the members and approval in general meeting, and section 191(2) puts the ordinary company-to-managing-director payment outside that requirement, leaving it to section 202.

A worked example

Dombivli Forgings Limited proposes to appoint Mr Patwardhan, a director, as its managing director for seven years from 1 April, and separately to employ Mr Sheikh as its manager.

Two objections at once. Section 196(1) forbids appointing a managing director and a manager at the same time, so one or the other must go. And section 196(2) forbids a term exceeding five years at a time, so the seven year term is bad; five years, renewable, is the most the company may give.

Age. Mr Patwardhan is seventy-two. Section 196(3)(a) bars a person who has attained the age of seventy, but the first proviso permits the appointment by special resolution, the explanatory statement indicating the justification. At the meeting the resolution gets sixty-eight per cent in favour, short of three fourths. It has therefore failed as a special resolution, but the votes in favour exceed the votes against, so under the second proviso the Board may apply to the Central Government, and if the Government is satisfied the appointment is most beneficial to the company, the appointment may be made.

A different candidate. Mr Joshi was adjudged insolvent in 2009 and discharged in 2012. Clause (b) bars a person who is an undischarged insolvent or has at any time been adjudged as an insolvent. The discharge does not help him; the words are "at any time". He is disqualified, and there is no special resolution route, because only the age bar has one.

Another. Ms Dsouza was convicted of an offence and sentenced to eight months' imprisonment in 2015. Clause (d) bars a person sentenced for a period of more than six months at any time. She is disqualified.

Another still. Mr Rane is a director whom the Board has authorised to affix the common seal, sign share certificates and endorse cheques. He is described in the company's letters as its "chief executive". Is he a managing director? No. By the Explanation to section 2(54) those administrative acts of a routine nature are not substantial powers of management, and the title decides nothing, because the definition looks at whether he is entrusted with substantial powers, by whatever name called.

The procedure for Mr Patwardhan's appointment. The Board approves it at a meeting, together with the terms and conditions and remuneration; the notice convening that meeting and the general meeting includes the terms, the remuneration and the interest of any director in the appointment; the next general meeting approves it by resolution; and, the remuneration being at variance with Part I of Schedule V, the Central Government's approval is obtained. A return in the prescribed form is filed with the Registrar within sixty days.

If the members refuse. Suppose the general meeting declines to approve. The appointment fails, but under section 196(5) any act done by him before that approval is not deemed invalid, so the contracts he signed in the meantime bind the company.

Compensation on his exit. Three years into a five year term the company terminates the appointment. He may be paid compensation for loss of office under section 202(1), being a managing director. The unexpired term is two years, which is shorter than three years, so the cap is two years' remuneration, priced at his average remuneration over the three years immediately preceding the date he ceased to hold office.

A non-executive director's claim. An independent director who leaves at the same time asks for a similar payment. Section 202(1) forbids it: the payment may be made to a managing or whole-time director or manager, but not to any other director.

A payment that cannot be made. Suppose instead Mr Patwardhan had resigned to take the same office in the company resulting from an amalgamation. Clause (a) of section 202(2) bars the payment. Had he simply resigned for his own reasons, clause (b) would bar it. Had his office been vacated under section 167(1), clause (c) would bar it. Had he been found guilty of gross negligence in the conduct of the company's affairs, clause (e) would bar it. And had he engineered his own removal in order to claim the money, clause (f) would bar it.

And if the company goes into liquidation. If winding up commences before, or within twelve months after, the date he ceased to hold office, and the assets after expenses are not sufficient to repay the shareholders their capital including premiums, no payment may be made at all: proviso to section 202(3).

A payment that is not caught. He is separately engaged by the company as a technical consultant after his exit. Section 202(4) preserves remuneration for services rendered in any other capacity.

And a payment on a takeover. Had the payment been offered by a transferee acquiring the company's shares, section 191 would require disclosure of the prescribed particulars to the members and approval in general meeting, quite apart from section 202.

Distinctions that carry marks

What this does NOT mean

It does not mean a managing director may serve only five years. The term may not exceed five years at a time; there is no limit on renewals, except that a re-appointment may not be made earlier than one year before the expiry of the current term.

It does not mean a person authorised to sign cheques is a managing director. The Explanation to section 2(54) excludes routine administrative acts from substantial powers of management.

It does not mean age seventy is an absolute bar. It may be crossed by special resolution, or, failing that, on the Central Government's satisfaction where the votes in favour exceeded those against.

It does not mean an unapproved appointment invalidates what was done. Section 196(5) saves acts done before the general meeting's refusal.

It does not mean every managing director who leaves is entitled to compensation. Six cases in section 202(2) bar it, and the amount is capped by section 202(3).

It does not mean section 202 covers takeover payments. Where the payment is connected with a transfer of the undertaking, property or shares, section 191 applies as well.

Quick revision

• 2(54): a managing director is a director entrusted, by the articles, an agreement, a resolution in general meeting or the Board, with substantial powers of management, including a director occupying that position by whatever name called; routine administrative acts, such as affixing the seal, endorsing cheques or negotiable instruments, signing share certificates, or directing registration of transfers, are not substantial powers.
• 2(53): a manager is an individual who, subject to the superintendence, control and direction of the Board, has the management of the whole or substantially the whole of the affairs, including any person occupying that position by whatever name called, whether under a contract of service or not.
• 2(94): a whole-time director includes a director in the whole-time employment of the company. 2(18): a Chief Executive Officer is an officer designated as such. 2(19): a Chief Financial Officer is a person appointed as such.
• 196(1): no company shall appoint or employ a managing director and a manager at the same time.
• 196(2): no term exceeding five years at a time; no re-appointment earlier than one year before expiry.
• 196(3): no appointment or continuance of a person below twenty-one or who has attained seventy; an undischarged insolvent or one ever adjudged insolvent; one who has at any time suspended payment to creditors or made a composition; or one ever convicted and sentenced for more than six months. The age bar alone is liftable, by special resolution with justification, or, that failing, where votes in favour exceed votes against and the Central Government is satisfied the appointment is most beneficial to the company.
• 196(4): appointment and terms approved by the Board at a meeting, then by resolution at the next general meeting, and by the Central Government where at variance with Part I of Schedule V; the notice must state the terms, remuneration and any director's interest; a return within sixty days to the Registrar.
• 196(5): acts done before the general meeting's refusal to approve are not invalid.
• 202(1) and (2): compensation for loss of office may be paid to a managing or whole-time director or manager, but to no other director, and not at all where he resigned on a reconstruction or amalgamation and took office in the resulting company, resigned otherwise, vacated office under section 167(1), where the company is wound up due to his negligence or default, where he was guilty of fraud, breach of trust, gross negligence or gross mismanagement, or where he instigated or took part in bringing about the termination.
• 202(3): the payment may not exceed the remuneration for the remainder of the term or three years, whichever is shorter, on the average remuneration actually earned in the three years immediately preceding the cessation, or such shorter period as he held office; and no payment at all where winding up commences before or within twelve months after cessation and the assets, after expenses, cannot repay the share capital and premiums.
• 202(4): remuneration for services rendered in any other capacity is unaffected.

Test yourself

1. Distinguish a managing director from a manager. A managing director must be a director and is entrusted with substantial powers of management by the articles, an agreement, a resolution in general meeting or the Board: section 2(54). A manager need not be a director; he is an individual who, subject to the superintendence, control and direction of the Board, has the management of the whole or substantially the whole of the affairs, whether under a contract of service or not: section 2(53). A company may not have both at the same time: section 196(1).

2. For how long may a managing director be appointed? For a term not exceeding five years at a time, and a re-appointment may not be made earlier than one year before the expiry of his term: section 196(2).

3. Can a person of seventy-three be appointed managing director? Yes, but only by special resolution, the explanatory statement indicating the justification; and where no special resolution is passed but the votes in favour exceed the votes against, the appointment may still be made if the Central Government, on an application by the Board, is satisfied that it is most beneficial to the company: provisos to section 196(3)(a).

4. Whose approval is needed for the appointment and its terms? The Board at a meeting, then the company by resolution at the next general meeting, and the Central Government where the appointment is at variance with the conditions in Part I of Schedule V: section 196(4).

5. To whom may compensation for loss of office be paid, and how much? Only to a managing director, whole-time director or manager, and to no other director: section 202(1). The amount may not exceed the remuneration he would have earned for the remainder of his term or three years, whichever is shorter, calculated on the average remuneration actually earned during the three years immediately preceding the date he ceased to hold office, or such shorter period as he held office: section 202(3).

6. Name three situations in which no such compensation may be paid. Any three of: he resigned on a reconstruction or amalgamation and was appointed in the resulting company; he resigned otherwise; his office was vacated under section 167(1); the company is being wound up due to his negligence or default; he was guilty of fraud, breach of trust, gross negligence or gross mismanagement; or he instigated or took part in bringing about the termination of his office: section 202(2).