Nomination of Managing Director of the Company

A managing Director is defined in Section 2 (26) of the Companies Act, 1956. It is at once clear from the definition that a managing director may be appointed in any one of five ways, namely,

• By virtue of a consent with the company;
• By virtue of a resolution passed by the company in general meeting;
• By virtue of a resolution passed by the Board of Directors;
• By virtue of articles of association; and
• By virtue of the memorandum of association ;

Nomination of managing director under the provisions of articles of association is only one out of the five methods indicated in the Act. If, for instance, a director is appointed by a resolution of the Board of Directors, there is no need for the existence of any provision in the articles of association for such nomination.

Rectification by shareholders of appointment of Managing Director by Board

In the absence of any provision in the articles, the nomination of managerial personnel, i.e. managing or Whole-time Director or manager can be made by the Board of Directors. Section 203 of the 2013 Act requires appointment of key managerial personnel in certain cases and a Managing Director may also be a Key Managerial personnel. Section 309(1) of the 1956 Act and by virtue of the 1956 Act, the nomination made under schedule 13 shall be respect to approval by resolution of the shareholders in general meeting.

Knowledge of managing Director as knowledge of company

The question whether the director of the company the right person to act on behalf of the company came up for consideration before the court. 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 proceedings and the opponent order, was the proper person to act on behalf of the company to oppose the winding up petition through no notice had been served on him. Even in the context of the 1913 Act, it is the duty of a 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, which position was granted to him for the protection of the interest of the company of which he was the Managing Director. Managing director’s knowledge is imputed to the company.

Status of Managing Director

An ordinary director and a managing director hold positions which are distinct in their roles. A Managing Director cannot be equated with an ordinary director. Section 2(26) and 2(13) of the 1956 Act show the intention of the legislature to treat the two as separate categories. Therefore, when the term of a Managing Director expires, he cannot continue as a Managing Director without being reappointed. A person does not acquire the status of a manager or Managing Director only on being appointed as a director. As per the section 197(A) of the 1956 Act, there cannot be both a manager and Managing Director at the same time in a company. The question whether a Managing Director, in as much as he is both a director and employee should in his capacity of employee be considered a servant or agent of the company is unimportant for purposes of the Companies Act, though it may be relevant for determining whether his remuneration is salary or business income for the purposes of the Income tax Act. For a discussion of his position as servant and agent and the remuneration of Managing Director, however paid, was taxable as a salary and not as income from business. Acting on those principles, it was held that the remuneration of a  Director, however paid, was taxable as a salary. He can exercise the powers of management without reference to the Board. A Director is a director with powers of management delegated to him by the Board, and it is an essential requirement of his office as Managing Director that he should hold the office of a director. A managing director who is not a director is contradiction in terms.

Resignation by Managing Director

It is necessary to accept the letter of resignation for it to come into effect especially when a person discharges administrative functions in addition to being a director came up before the court in the following cases. Section 168 of the 2013 Act is also relevant in this regard. A managing director who was prosecuted for default under section 220 of the 1956 Act contended that he was not liable as he had resigned before the last date for filing accounts. The Court held that a Managing Director combines two capacities, namely, manager and director. The capacity as manager cannot be terminated by merely sending two resignations. It becomes effective only when the company accepts the resignation and relieves him from his duties (on facts held that despite resignation, he continued to be Managing Director). In our view the observation that a Managing Director holds two offices namely that of manager and of a director is not correct. The concept of a manager as defined by the Act is a different from that a managing director. A managing director as defined by the Act is a director who is entrusted with substantial powers of management. It is, however, true that a managing Director may resign his office and continue to be an ordinary director. His resignation as Director becomes effective only when accepted by the company.

Position of Managing Director, etc. on Private Company becoming public

When the office of a director is terminated, his nomination as a Managing Director would also terminate with it but when he is removed from Managing Directorship only, his appointment as a director would remain effective and when this happens on the conversion of a private company into public company he would remain a director till he is rotated out at the next annual general meeting of the company.

Representative capacity of Managing Director

The following cases decided under the 1956 Act and other contemporary legislation are also relevant under the 2013 Act. When the interests of the Managing Director do not conflict with the interest of the company, the court may allow him to appear in a court and make representation on behalf of the company notwithstanding the fact that he does not hold a power of attorney as required by order 3 of the Code of Civil Procedure. The correctness of this judgment is doubtful. But so much is absolutely true that a manager, or managing director is vested with representative capacity and persons dealing with him in the ordinary course of business are entitled to assume that he has the necessary authority. Where a company has borrowing powers, its Managing director by virtue of his position as in charge of management, would get authority to authenticate promissory notes on behalf of the company. A Managing Director is a natural custodian of company’s records and property and therefore he has as such a right to sue the former managing director in whose place he was appointed and who was refusing to handover the charge, to compel him to do so. A managing director, being in charge of the management of the company’s affairs, enjoys the power to vary the duties of employees within permissible limits. The Civil Court will not grant an injunction to restrain the company from interfering with a managing director carrying out the duties of Managing Director who is removed from his office. Where a managing director has ceased to hold the office, any subsequent act of his will not be valid, as it is not only an irregular exercise of power, but exercise of power by person who has no authority at all.

Managing Director not necessary party to corporate proceedings

The following case law under the 1956 Act is also relevant under the 2013 Act. The loan documents of the company were signed by the Managing Director on behalf of the company. In the lending bank’s action against the company for recovery, the Managing Director being not personally liable, it was held that he was not a necessary party to the proceeding.

Taxes due from Managing Director

The following case decided under the 1956 Act is unique in the facts of the case but is also relevant under the 2013 Act. In order to affect recovery of tax amount due from the Managing Director, his deposits with the company were attached. The amount due was adjusted against the refund amount due to the company. The company agreed to the attachment. An appeal was pending for a decision whether the assessment of the Director was of protective or substantive nature. At this stage of the matter, the company’s writ petition for a direction that the money due  to it by way of refund should be refunded to the company directly was held to be not maintainable.

Managing Director as employee

The following cases decided under the 1956 Act and other contemporary legislations are also relevant under the 2013 Act. The Supreme Court laid down the test as to whether or not a Director is an employee in the following words; “though an agent as such is not a servant, a servant is generally for some purposes his master’s implied agent, the extent of the agency depending upon the duties or position of the servant. It is again true that a director of a company is not a servant but an agent in as much as the company cannot act in its own person but has only to act through directors who the company have the relationship of an agent to its capacity. A director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a Managing Director ha may be regarded as having not only the capacity of a director but also has an employee, or an agent, for the term “employee” is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and or the agreement, if any, under which a contractual relationship between the directors and the company has been brought about, where under the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary. In other words, whether or not a director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment”.

Position in Family Company

In case of a family company, if no express contract of service has been entered into, it may be difficult to persuade a court to deduce from the circumstances of the case that the managing or executive director is an employee of the company. Here it may be important whether the company treated payments to the director as directors fees rather than as salary, and whether the company complied with the provisions about directors service contacts. The company’s treatment of the relationship for the purpose of its own accounts, however, cannot be conclusive. For example, the applicant in an unfair dismissal claim was one of the three brothers who were directors of a family company, the applicant being also directors of the subsidiary company. One was removed from those offices by the votes of his brothers. There was no express contract of service, remuneration was voted at the end of each year by resolution, and the accounts did not treat the brothers as employees. Although three brothers worked full time business , the Court of Appeal decided that the industrial tribunal was entitled to find the applicant was not an employee.

Removal of Managing Directors from directorship and his remedies

There is no doubt that a managing director, like any other director, can be removed by the general meeting under section 284 of the 1956 Act from his office of a director and with that his office as a director will also come to an end. The shareholders can exercise its power whatever be the tenure of office. The only remedy available to the aggrieved director is that he can claim compensation for his loss if his removal operates as a breach of contract and is not covered by the restrictions of section 318 of the 1956 Act. The courts have repeatedly held that no injunction will be issued against the company either to prevent it from removing the director or to compel it to reinstate him.

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