Duties and Liabilities of Officers Of A Company
The statutory principles of Corporate Law in India are enshrined primarily in the Companies Act, 1956 ("the Act") and other supplementary and complementary enactments and regulations. The Common Law norms evolved by the Courts in England have also clearly influenced the legal principles adapted and adopted by the Indian judiciary. This is especially so with respect to the provisions dealing with the liabilities of corporate officers and directors in India. This article has been prepared with a view to provide an overview of the responsibilities of a Chairman, Managing Director and Manager in the Indian context vis-à-vis the provisions of the Act.
Although the position of Chairman does not carry with it any specific implied executive powers, there is a fair amount of discretion and latitude given to the Chairman by the Act.
Chairman of a Board Meeting
The Act does not specify any default mechanism for the appointment for the Chairman of the Board. Regulation 76 of Table A under Schedule I of the Act ("Table A Articles") states that the Board may elect a Chairman of its meetings and determine the period for which he is to hold office. It is a normal practice for a company's Articles of Association ("Articles") to set out the mode of appointment of the Chairman. The Articles often name a person who would hold the office of Chairman or give a particular party the right to nominate the Chairman. Table A Articles are those that normally govern an Indian company unless Table A is expressly made inapplicable in part or in whole by the Articles themselves.
Powers of the Chairman of a Board Meeting
The Chairman is not, in law, automatically entitled to have a second or casting vote and the Articles can negate such a casting vote. However, normally Articles governing an Indian company are those adopted from Table A where Regulation 74(2) gives him a casting vote. The Chairman's right to a casting vote must therefore be expressly negatived in the Articles of Association of the Company if the intention is not to give him a casting vote.
Section 193 of the Act lays down that it is the right of the Chairman to decide on inclusion or otherwise in the minutes of the meeting of any matter which, in the opinion of the Chairman, (a) is or could reasonably be regarded as defamatory of any person; (b) is irrelevant or immaterial to the proceedings; or (c) is detrimental to the interests of the company and the Chairman shall exercise an "absolute discretion" in regard to the inclusion or non-inclusion of any matter on the grounds specified therein. Thus in the event of a dispute, the version initialled by the Chairman is likely to carry a strong prima facie presumption of being the correct version unless proved otherwise.
Under Section 193(1A) of the Act, every page of the minute book and the minutes of the proceedings have to be signed and dated by the Chairman and thus he can choose to initial his version when a contest begins between the parties. Once this is done there is a presumption that the meeting has taken place, has been duly called and the proceedings as recorded in the minutes are deemed to be valid. Case law also holds that unless there is a manifest error or there is a patent breach of the Articles of the Company, the Chairman's decision normally will not be interfered with. Under Section 217(4) of the Act, the Chairman has the authority, if so authorized by the Board of Directors, to sign the report of the Board of Directors to the members and any addendum thereto.
Chairman of a Shareholders' Meeting
Under the Act, the Chairman of the Board of Directors is different from the Chairman of a Shareholders’ meeting, although in practice they are often the same. Although Section 175 of the Act provides that unless the Articles state otherwise, the members present at a Shareholders' meeting may elect one of themselves to be Chairman on a show of hands (with a poll being demanded, if necessary). It is open to a Company to provide for a different mode of appointment in its Articles. Regulation 50 of the Table A Articles provides that the Chairman of the Board will also be the Chairman of a Shareholders’ meeting and it is normal practice for companies to have a similar provision in their Articles.
Powers of the Chairman of a Shareholders' meeting
The Act also confers several powers on the Chairman of a Shareholders' meeting which are not available to the Chairman of a Board meeting.
1. Although the Chairman cannot, simpliciter, stop a meeting at his will, he can always contend that there was "serious disorder" and use his inherent powers to adjourn the meeting. The Chairman has been held to have the power to expel a member from a meeting if the Chairman feels such a member seriously interferes with the conduct of the meeting, although appropriate warnings should first be given by the Chairman. The Chairman is also charged with the responsibility of ascertaining the presence of a quorum and the number of members prescribed as competent to transact business. It is the duty of the Chairman to see that a sufficient quorum is present.
2. When parties become contentious and members become polarised, the Chairman can often use the "closure" method of a meeting to prevent discussion or the proper hearing of minority shareholders, which leaves them no option but to approach the Court. His decision on points of order and incidental questions are also normally taken as prima facie correct. If he acts in good faith and decides, amongst other things, who is entitled to vote at the meeting, he is normally protected from liability in damages.
3. Further, Regulation 54 of Table A states that in the case of equality of votes at a shareholders' meeting, whether on a show of hands or on a poll, the Chairman of the meeting at which the show of hands takes place, or at which the poll is demanded, shall be entitled to a second or a casting vote. This should normally be expressly negated by the Articles, if the intention is not to give the Chairman a casting vote.
4. Regulation 60 of the Table A Articles deals with the right of the Chairman to decide on objections raised with regard to the qualification of any voter at the meeting or adjourned meeting at which the vote objected to is given or tendered. Every vote not disallowed at such meeting shall be valid for all purposes. The decision of the Chairman of the meeting on the validity of any such objection raised in due time is final and conclusive.
5. Under Section 178 of the Act the declaration by the Chairman that on a show of hands a resolution has or has not been carried unanimously or by a majority and an entry to that effect in the minute books is normally conclusive evidence.
6. Under Section 179 of the Act, in addition to a member asking for a poll on the voting of any resolution, the Chairman may suo moto ask for such a poll. When a poll is to be taken, it is the Chairman of the meeting who will appoint two scrutineers to scrutinize votes given on the poll and to report thereon to him. Under Section 184(2) of the Act, the Chairman has the power before the result of the poll is declared to remove a scrutineer from office and fill up the vacancy.
7. Section 185 of the Act empowers the Chairman to regulate the manner in which a poll shall be taken. It is also the responsibility of the Chairman to give his ruling on any points or irregularities in proxies as may be raised by the scrutineers.
8. Regulation 53 of the Table A Articles which deals with proceedings in a general meeting, confers on the Chairman the power with the consent of the general meeting (and the duty when so directed by the general meeting) at which a quorum is present, to adjourn a meeting from time to time and from place to place.
II. Managing Director
Definition of a Managing Director
Section 2(26) of the Act defines a Managing Director. It provides that a director will be considered to be a Managing Director in any of the following cases:
1 The company in general meeting or the Board of Directors of the company has passed a resolution naming a director as the Managing Director; or
2 The concerned director has entered into a contract with the company to be its Managing Director; or
3 The concerned director is entrusted with substantial powers of management (this does not include the power to do administrative acts of a routine nature such as the power to affix the common seal of the company) by virtue of the Memorandum of Association or the Articles of Association which would otherwise not be exercisable by him; or
4 The concerned director occupies the position of or carries out the functions of the Managing Director even if he is not so designated.
A Whole-time Director is virtually a Managing Director though not so designated. Whether a director is to be regarded as a Whole-time Director or as a Managing Director of the company would depend on the nature and extent of the duties entrusted to him and the designation under which the appointment is made would not make a difference in this regard. If a director is entrusted with managerial functions he would be in a position of a Managing Director notwithstanding the fact that he may be, for instance, designated as a technical advisor or technical director of the company. One distinction between Managing Director and Whole-time Director is that a Managing Director of a private company which is not the subsidiary of a public company may be a Managing Director of more than one company. However, a Whole-time Director, being a whole time employee, cannot be a Whole-time Director in more than one company.
A Manager is defined under Section 2(24) of the Act as any individual subject to the superintendence, control and direction of the Board of Directors. The main distinction between a Manager and a Managing Director is that while a Managing Director is a director of the company it is not necessary for a Manager to be a director or even an employee of the company.
When there is no Managing Director and the Board is personally managed, the person performing the management of the whole, or substantially the whole, of the affairs of the company is, in substance, the manager. As per Section 197A of the Act, no company can continue the appointment of or employ a Managing Director and a Manager at the same time.
As per the definition of Managing Director, he may be entrusted with substantial power of management but not necessarily the whole or substantially the whole of the affairs of the company. A company may, thus, have more than one Managing Director.
Disqualifications from being a Managing Director:
Under Section 267 of the Act, there are certain disqualifications from being appointed / continuing as a Managing Director:
1 If the person in question is an undischarged insolvent, or has, at any time been adjudged an insolvent;
2 If he suspends, or has, at any time suspended, payment to his creditors, or makes, or has at any time made a composition with them;
3 If he is, or has, at any time been convicted by a Court of an offence involving moral turpitude.
Liability of the Managing Director under the Companies Act
Section 5 of the Act provides a list of officers of a company who are defined as "officers in default" so that those in charge of management or who have been charged with the responsibility of complying with any of the provisions of the Act are held responsible for any contravention of the Act. A Managing Director of a company is also included in this list of officers who are liable for the defaults and lapses of the company. The other officers in this list are Whole-time Directors, Manager, Company Secretary and certain other specified persons
In case a company does not have any Managing Director, Whole-time Directors or Manager, then any director or directors specified by the board of directors will be liable as officers in default. Such a resolution would have to be filed with the Registrar of Companies within 30 days of such resolution being passed. If no director has been specified then all the directors of the company will be liable as officers in default. In the case of Ravindra Narayan v. Registrar of Companies, Rajasthan it was held by the high court of Rajasthan that ordinary directors of a company will be liable as "officers in default" only if the company does not have any Managing Director or whole time directors or managers or a company secretary. The Directorate of Company Affairs has by a circular indicated that this interpretation given by the High Court of Rajasthan is correct. This position has also been reaffirmed by a decision of the Andhra Pradesh High Court in which it was held that the criminal liability of ordinary directors would arise only in respect of a company which has no Managing Director or a Whole-time Director or a Manager and where particular Directors are not specified to be liable by the company.
The liability of the Managing Director when compared with the other directors as “officer in default”, is comparatively higher. Whether a particular director (not being the Managing Director) could be proceeded against or not is a matter of evidence and even in cases where all the directors are deemed to be guilty of default, the presumption of their guilt is rebuttable on evidence. However, normally, the presumption as to the culpability of the Managing Director as the officer-in-default is much stronger and almost conclusive in nature.
However it has to be borne in mind that no officer of a company will be immune from prosecution if it can be shown that he had a role in the default even if he does not fall within the classification of an "officer in default".
Any officer (including a Managing Director) who is liable as an officer in default will be liable only for the defaults of the company committed during the duration of his tenure in the company. Thus in the case of C.V.Siva Prasad v. Registrar of Companies where the Petitioner was appointed as a Managing Director with effect from September 16, 1992 and the alleged offences related to periods up to March 31, 1992, the High Court of Andhra Pradesh ruled that the Petitioner could not be termed as an officer in default.
There are many penal provisions in the Act where the phrase "officer in default" does not appear. In such cases an action will lie only against the officer specified in that particular provision.
For instance, under Section 68 of the Act, any person who either by knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or by dishonest concealment of material facts, induces another person to enter into any agreement for acquiring, disposing off, underwriting shares and debentures, or any agreement the purpose of which is to secure a profit to any parties from the yield of shares of debentures or by reference to fluctuations in the value of shares or debentures, shall be punishable with imprisonment for a term which may extend to five years, or a fine which may extend to Rs.1,00,000 or both.
Under Section 59(1) of the Act, default in complying with Sections 57 and 58 which deal with a statement made by an expert in a prospectus, would result in the company and every person who is “knowingly a party to the issue of such prospectus” being punishable with fine which may extend to Rs.50,000.
The provision dealing with “officer in default” concerns itself with violations under the Act alone. Violations of other legislations will be covered by the procedures given in those legislations or by general principles of criminal law which require proof beyond reasonable doubt.
The following is an illustrative list of defaults for which a Managing Director can be liable as an officer in default. However, it would be pertinent to point out that since most of these provisions refer to ‘officers in default’, these provisions would be equally applicable to Whole-time Directors and the Manager as well.
1. Under Section 44(3) of the Act, default with respect to filing a statement in lieu of prospectus by a private company which, as a result of alteration of its Articles ceases to be a private company, within a period of thirty days after such alteration would render the company and every officer of the company in default punishable with a fine which may extend to Rs.5000 for every day during which the default continues.
2. Most of the provisions of the Act dealing with requirements to be fulfilled in respect if the issuance of prospectus do not use the phrase “the officer in default” in order to attribute liability in case of default. However, under Section 72(3) of the Act, default with respect to observing the requirement that no allotment of shares or debentures in pursuance of a prospectus should be made until the beginning of the fifth day since the day on which the prospectus is first issued by the company, shall make the company and every officer of the company in default punishable with fine which may extend to Rs.50,000.
3. Under Section 73 (2) of the Act, in case of default in complying with requirements such as repaying the moneys of the applicants for shares within 8 days after the company becomes liable to pay it by virtue of its permission for listing on a stock exchange not having been granted, the company and every director of the company who is an officer in default shall be, on the expiry of the eighth day, jointly and severally liable to repay that money with interest at least at the rate of four percent.
4. Under Section 80 of the Act, companies limited by shares are barred from issuing irredeemable preference shares. In case of default the company and every officer of the company who is in default can be punished with a fine that may extend up to Rs. 10000.
5. Under Section 113(2) of the Act, if default is made in complying with the requirement of delivering share certificates within three months of the allotment of the shares and within two months after the application of transfer, in accordance with the procedure laid down under the Act, it will render the company and every officer of the company in default punishable with a fine which may extend to Rs.5,000 for every day during which the default continues.
6. Under Section 150 of the Act every company shall keep in one or more books a register of its members, and enter therein the following particulars:
a. the name and address, and the occupation, if any, of each member;
b. in the case of company having share capital, the shares held by each member and the amount paid or agreed to be considered as paid on those shares;
c. the date at which each person was entered in the register as a member; and
d. the date at which any person ceased to be a member.
7. If default is made in complying with the above mentioned provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Rs.500 for every day during which the default continues.
8. Under Section 193(6) of the Act, default in maintenance of minutes of all proceedings of every general meeting and of all proceedings of every meeting of the Board of a company as specified under Section193 will result in the company, and every officer of the company in default being punishable with fine which may extend to Rs.500.
9. Under Section 209A of the Act, default with respect to keeping the books of accounts and papers of every company open to inspection during business hours by the Registrar of Companies or officers of the Central Government or such officers of the Securities and Exchange Board of India as may be specified by it in this behalf or default with respect to furnishing any information related to the affairs of the company as may be required by such person will make every officer of the company who is in default punishable with a fine not less than Rs. 50,000 and also imprisonment of a term not exceeding one year.
10. Under Section 219(3) of the Act, default with respect to sending a copy of the balance sheet (including the profit and loss account, the auditor’s report and every other document which is required to be annexed to the balance sheet) which is to be laid before a company in a general meeting at least 21 days before the meeting to the members of the company will make the company and every officer of the company who is in default, punishable with fine which may extend to Rs. 5,000.
11. Under Section 232 of the Act, default with respect to complying with the provisions of the Act dealing with the procedure for the appointment or removal auditors, observance of minimum qualifications provided in the Act with respect to the person appointed as auditor; complying with provisions of the Act dealing with audit of the accounts of the branch office of a company; non-compliance with Section 230 dealing with reading of the auditor’s report in the general meeting etc. shall render the company and every officer of the company who is in default, punishable with a fine which may extend to Rs. 5000.
12. As per Section 598 of the Act non-compliance with the provisions under the Act for foreign companies, i.e. companies incorporated outside India which have established a place of business within India, in delivering certain documents containing certain particulars, as specified in Section 592 of the Act to the Registrar of Companies; in rendering its accounts to the Registrar of Companies etc., will render the company, and every officer or agent of the company who is in default, punishable with fine which may extend to Rs.10,000 and, in the case of a continuing offence, there will be an additional fine of Rs.1,000 for every day during which the default continues.
13. As per Section 541 of the Act, where a company is being wound up, if it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of winding up, or the period between the incorporation of the company and the winding up of the company, whichever is shorter, every officer of the company who is in default shall, unless he shows he acted honestly and in the circumstances in which the company was run, the default was excusable, be punishable with a term which may extend to one year.
14. Section 629A of the Act provides that in case of the violation of any of the provisions of the Act for which no specific penalty is provided all officers in default will be punishable with a fine which may extend to Rs. 5,000. If the contravention is a continuing one, with a further fine which may extend up to Rs.500 for each day after the first day during which the contravention continues.
Liability of the Managing Director in the Course of Winding up Proceedings
Criminal liability cannot ordinarily be affixed on to the Managing Director of the company in the course of winding up proceedings, since “…in the course of liquidation, the legal dues of a company can be realised only by attaching the assets of the company and not by putting the Managing Director or any of the directors in prison.” However, the Court has held that where a company suffers loss on account of breach of duty on the part of a director or the Managing Director, he is liable to compensate the company to the extent of such loss. The liability of the Managing Director for breach of fiduciary duty by misfeasance proceedings in the company's winding up is well recognized. During the course of winding up proceedings of a company, the directors may be made personally liable by order of the Court only if they are found guilty or fraudulent trading, i.e., an act of misfeasance or the like.
One example of such an instance is provided under Section 543 of the Act, as per which Court is empowered, the course of winding up of the company, on application, to examine the conduct of any person who has taken part in the promotion/formation of the company, or any past or present director, Manager, liquidator or officer of the company who has apparently (a) misapplied, or retained, or become liable for the money/property of the company; or(b) been guilty of any misfeasance or breach of trust in relation to the company. The Court may compel such person to repay the money owed or pay damages, even though such person may also be criminally liable
The court further held that where the Managing Director of a company in liquidation had failed to take action for realisation of certain debts owing to the company and the debts became time-barred before the winding up order was passed by the Court, it would be a fit case for passing a decree against the Managing Director for the amount of the debts. The court thus ordered the Managing Director in question to reimburse the company for the amount of the debts. In Expo Expert Private Ltd. v. Jai Gopal Angrish and Others, it was held to have been proved on record that the Managing Director did not initiate any steps to recover the amount due from the defaulting party and the same became time-barred. The Court thus ordered him to re-imburse the company. However, if the official liquidator did not allege fraud or dishonesty on the part of the Managing Director for not recovering the amount for the company and held him liable merely for the reason that the debts had become time-barred, the same would not amount to misfeasance.
Section 201 of the Act deals with avoidance of liability and provides that any provision contained in the Articles of the company or in any agreement entered into with the company, or any instrument for exempting an officer of the company or an auditor of the company from or indemnifying him against any liability which, by virtue of any law, he might otherwise incur, is void.
There are, however, three exceptions to this rule, which allow the company to incorporate such a clause in its Articles of Association indemnifying such an officer against a liability. They are:
1 If the judgment in any criminal or civil proceeding is given in his favour; or
2 If the officer is acquitted or discharged in such a proceeding; or
3 If the Court as empowered under the Act, has granted him relief on the basis that even though he has, or appears to have been guilty of any misfeasance, he has acted honestly and reasonably.
The extent of the indemnity is limited to placing the funds of the company at the disposal of the officer to reimburse him for the costs incurred in his defence, after he has been acquitted or discharged.
However, Section 201 does not prevent a company from taking out an insurance policy for its own protection against loss caused to it by its directors. It also appears that a director can take out a policy to indemnify himself against a loss he may suffer because of his liability to the company.
Right to Hold Office of Profit
Under Section 314 of the Act, no director can hold an office of profit except that of Managing Director. For a director to hold an office of profit the consent of the company must be obtained by a special resolution.
Any office or place held by a director shall be deemed to be an office or place of profit under the company within the meaning of this section if the director holding it, obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
In case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, it shall be deemed to be an office or place of profit if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
Compensation for Loss of Office
Section 318 of the Act provides that only a Managing Director, or a director holding the office of Manager or in the whole-time employment of the company can be compensated for the loss of office or paid consideration for retirement from office, or in connection with such loss or retirement.
Hence a part time director cannot be compensated for the loss of office or paid consideration for retirement from office, or in connection with such loss or retirement.
Any payment made to a Managing Director or other Whole-time Director as mentioned above shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term or for three years, whichever is shorter. This is to be calculated on the basis of the average remuneration actually earned by him during a period of three years immediately preceding the date on which he ceased to hold the office, or where he held the office for a lesser period than three years, during such period.
However no such payment can be made to the Managing or other Whole-time Director 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 thereof, are not sufficient to repay to the shareholders the share capital (including the premiums, if any,) contributed by them.
No payment shall be made to a Managing Director or other Whole-time Director for the loss of office or paid consideration for retirement from office, or in connection with such loss or retirement in the following cases, namely:
1 where the director resigns his office in view of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the Managing Director, Manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
2 Where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
3 Where the office of the director is vacated by virtue of a director being disqualified by a court from managing a company under Section 203 or by virtue of any of the clauses (a) to (l) of sub-section (1) of Section 283;
4 Where the company is being wound up, whether by or subject to the supervision of the Court or voluntarily, provided the winding up was due to the negligence or default of the director;
5 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 any subsidiary or holding company thereof;
6 Where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.
This section does not prohibit the payment to a Managing Director, or a director holding the office of manger, of any remuneration for services rendered by him to the company in any other capacity.
III. The Chief Executive Officer (CEO)
The Companies Act does not provide any definition for the term ‘Chief Executive Officer’ (CEO). It is not the designation but the duties entrusted to a person that qualify a person to be a CEO. The CEO is an executive officer of the Company and could be the Managing Director or a Whole-time Director of a company. A CEO is usually appointed for the management of whole or substantially the whole of the affairs of the company by a resolution of the Board of Directors. As mentioned earlier, Section 5 of the Act provides for a list of officers of a company as "officers in default", to hold them responsible for the contraventions of provisions of the Act. A CEO would also be included in this list as the CEO is a person who directs the Board of Directors and advises the Board on several matters. The CEO also acts in a fiduciary capacity and also as an agent of the company for the purpose of managing the whole or substantially the whole of the affairs of the company.
Section 2(24) provides that a Manager is 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, and whether under a contract of service or not. A CEO could qualify as a Manager as defined under the Act if he is not a director and there is no Managing Director.
IV. General Manager
The Companies Act does not provide for any definition for the term ‘General Manager’. A General Manager is usually any person who is in charge of management of only a specific area / department of the company. A General Manager exercises supervision and control over his subordinates but is subject to the superintendence and control of the Board of Directors. In a few cases the person designated as the General Manager of a company could subject to the superintendence and control of the Board of Directors, have the management of the whole or substantially the whole, of the affairs of the company. In such case the General Manager would qualify as the Manager for the purposes of the Act, provided that Company has no Managing Director.
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