“Anomalies and Interpretation –

Companies Act 2013”

“Anomalies and Interpretation –

Companies Act 2013”

-[Context - Key Managerial Personnel]

-By CS Makarand Joshi

-makarandjoshi@mmjc.in

Coverage

1. About appointment

2. About remuneration

3. Remuneration of WTD /MD in private company

4. What is meaning of ‘whole time’ ?

5. Whether KMP should be an ‘employee’?

6. How many positions can be held by KMP?

7. Whether KMP can hold non KMP position in other company?

8. Whether ONE person can hold post of CS and CFO ?

9. Se. 189 (2) read with se. 184(1) Vs. Section 184(5)

10. Whether CFO appointed by pvt. co. is KMP?

11. Liabilities of KMP?

Appointment

Approval by Audit Committee [se.177]

“(4) (iv) approval or any subsequent modification of

transactions of the Company with related parties “

Related Questions

Whether ‘related party’ would include KMP?

Section 2(76) (ii) – “a key managerial personnel or his

relative” Or “KMP of holding company or his relative”

At the time of appointment person is not a KMP

and therefore not a related party.

Approval of Nomination

Remuneration Committee

Section 178 (2) & Cl. 49.IV.

NRC shall identify person, who may be appointed in

senior management in accordance with criteria laid

down [Is it mandatory for Board to accept this person??]

Identify – “to recognize and be able to say who or what

they are”

“Senior Management” means personnel of the Company

who are members of its core management team excluding

board of directors comprising all members of management

one level below executive directors, including functional

heads”

Appointment by Board?

Appointment or removal of KMP only by means of

resolution passed at meeting of the Board [Section

179 read with Companies (Meetings of Board and

its Powers) Rules 2014

Section 203 (2)–

“Every whole time KMP shall be appointed by means

of resolution of the Board containing terms and

conditions of appointment including remuneration”

Approval by Audit Committee [se.177]

“(4) (iv) approval or any subsequent modification of

transactions of the Company with related parties “

Related Questions

Whether ‘related party’ would include KMP?

Section 2(76) (ii) – “a key managerial personnel or his

relative” Or “KMP of holding company or his relative”

Meaning of TRANSACTION

Meaning of ‘Transaction’ – “a piece of business done

between people, especially act of buying and

selling”

Blacks Law - “something performed or carried out”

AS 18 - Related party transaction – “a transfer of

resources or obligations between related parties,

regardless of whether or not a price is charged.”

Para 20 – “In particular, attention is focussed on

transactions with the directors or similar key

management personnel of an enterprise, especially

their remuneration”

Approval of Transaction

Whether approval would include appointment?

Meaning of approval – “positive opinion of or the

feeling that it is good or acceptable”

‘Remuneration’ and ‘service’ is certainly a

‘transaction’

Audit Committee

Approval and Modification of transaction with

related party requires approval of audit committee

Meaning of modification – “to change”

Transaction includes ‘service’ and ‘remuneration’

Modification would include change in service or

remuneration

NRC And Board

NRC shall recommend to Board “policy relating to

remuneration of KMP” [section 178 (3) and (4)

Clause 49.IV]

Approval of salary is not required

Every whole time KMP shall be appointed by means

of resolution of the Board containing terms and

conditions of appointment including remuneration

[Section 203 (2)]

Section 197

Sub section (1) which provides for restrictions i.e.

11%, 5% or 10% are applicable to public

company

Sub section (3) which talks about in adequate or no

profit, refers to “Company”

Section 196 (4) states appointment of MD, WTD,

Manager shall be subject to section 197 and

Schedule V

Schedule V has 4 parts. Part I deals with eligibility

of person AND Part II deals with remuneration

Literal Rule OR Harmonious

Construction

The first rule of construction is that the words used in a section

must be given their plain grammatical meaning; and when we

are dealing with two sub sections of a section it is necessary

that the said two sub sections must be construed as a whole,

each portion throwing light if need be on the other. The two

sub sections must be read as a part of an integral whole and

as being inter-dependent; and an attempt should be made to

reconcile them if it is reasonably possible to do so, and to

avoid repugnancy.

Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Limited

[1962] 32 Comp Cas 604 (SC)

Sub Section (3)

By combined reading,

If there is no ceiling specified in se. 197(1), sub

section (3) has to be read in the context

And therefore, requirement of compliance of

Schedule V, PART II may not be relevant

Section 196

It is well settled that any interpretation which leads

to absurdity should not be accepted. An

interpretation which rendered a provision not only

meaningless and redundant but manifestly

misleading cannot be accepted.

S.R. Batra and Anr. V. Smt. Taruna Batra AIR 2007 SC 1118

B.D. Gupta, J. for himself and S.N.Katju, J. in Rajendar Prasad Oil Mills

V. Chunni Devi ALL (FB) 1969 (39)cc 193:1968 (2) Comp LJ 137.

Another Principle “Special Provision will override

over general provision”

Section 196 – Schedule V

Section 196(4) requires compliance of Schedule V

Part II deals with remuneration ceiling. Whether

applicable to private company?

Part I and III does not deal with remuneration.

Would be applicable to private Company

Means appt of MD / WTD / Manager requires

compliance of Part I [Eligibility]

Appt. of MD / WTD / Manager requires

shareholders approval

Whole time

Whole Time = “Full Time” [Webster's Dictionary]

Whole time means who gives full time attention [to the

company or to function?]

The phrase "whole-time" was considered by the

Bombay High Court in the context of whole-time

director and it has been held that “the expression

‘whole-time director’ must refer to a director who

spends his whole-time in the management of the

company” [Ramaben A. Thanawala v. Jyoti Ltd ]

State of Gujarat v. Coromandal

Investment Pvt. Ltd

It was held that “no requirement to be in

employment”

Has not elaborated on the word “whole time”

This judgment is prior to insertion of proviso to sub

section (1) to section 383A, which has used the word

“employ”

Employment Vs. Deputation

Section 203 (1) has not used word ‘employ’

Full time vs. employment. Law maker has used word

“whole time” and not “employment” OR “employ”

It has used the word ‘employ’ and ‘employment’ in 3rd

proviso to sub section (3)

Provided also that a company may appoint OR employ a

person as its managing director, if he is the managing

director or manager of one, and of not more than one,

other company and such appointment or employment

“We need not add our words to the statute”

Multiple Posts

Section 203(3)

A whole-time key managerial personnel shall not hold

office in more than one company except in its

‘subsidiary company’

1. Whether ‘singular’ includes ‘plural’?

2. Whether purposive interpretation is relevant?

3. What is the intent of this provision?

Whether singular includes ‘plural’?

Section 203(3) states “a whole time Key

Managerial Personnel shall not hold office in more

than one company except in subsidiary company at

the same time”

In all central Acts and regulations unless there is

anything repugnant in the subject or context –

words in the singular shall include the plural and

vice versa [section 13 of General Clauses Act, 1897

PURPOSIVE INTERPRETATION

While the literal interpretation is the rule,

purposive interpretation is an exception.

The literal rule is the primary rule when the words

of a statute are clear and unambiguous; the

purposive interpretation rule is resorted to when the

words in a statutory provision are unclear, vague or

ambiguous and admit of more than one meaning or

when literal interpretation results into absurd

interpretation of the provision.

33

PURPOSIVE INTERPRETATION

In this situation, the court attempts to find out the true

purpose that the Legislature wanted to achieve, by

using other (external) aids such as background of the

provision; statement of objects and reasons or notes

on clauses appended to the bill; debate on the Bill in

Parliament; other provisions of the Act; a mischief

that the Legislature wanted to plug; report of a

committee on whose recommendation the provision

was enacted; etc

34

Other provisions of Statute

A whole time Key Managerial Personnel shall not

hold office in more than one company except in

subsidiary company at the same time;

3rd Proviso – “Provided that company may appoint

or employ a person as its Managing Director, if he

is the managing director or manager of one and

not more than one, other Company ….”

Section 203

Every Company belonging to such class or classes of

companies as may be prescribed shall have the

following whole time key managerial personnel, -

1. Managing Director or CEO or Manager in their absence,

a whole time director;

2. Company secretary; and

3. Chief Financial Officer

What is meaning of “shall have”?

[Literal Rule]

In one case, Gujarat High Court interpreted the words

Every company having such paid-up share capital as

may be prescribed shall have a whole-time secretary, in

s. 383A of Companies Act 1956, and held that -

-the words “shall have” cannot be read as “shall be in

the employment “; so a company secretary need not

be in the employment of a company but may be

engaged on a contractual basis.

Mischief Rule [Purposive Interpretation]

What is the mischief which is trying to be corrected?

Earlier only CFO was not officer in default

Now CS is not directly covered in officer in default

But both CS and CFO + MD / CEO / Manager are

officer in default

2013 Act covers CFO as KMP and officer in default

Mischief does not appear about one person acting

as CFO and CS

Other comparable provisions to

arrive at conclusion….

Section 203 says company should have following Whole

Time Key Managerial Personnel – MD, WTD, Manager, CS

and CFO…

Se 203 provides Chairman can not be MD in certain cases

Se. 203 allows KMP in holding and Subsidiary company

Act defines who can be MD / CS etc.

No express bar on one person holding 2 posts in one

company

Whether it is advisable or not? … answer is subjective

Disclosure of Interest

Se. 184(1) – “every director shall …. Disclose his

concern or interest in any company …”

Companies (Meetings of Board and its Powers)

Rules 2014 (Rule 16) – “provided that the

particulars of the Company or companies or bodies

corporate in which a director himself together with

any other director holds 2% or less of the paid up

share capital would not be required to be made

entered in the register”

Disclosure of Interest

Section 184(5) (b)“nothing in this section shall

apply to contract or arrangement entered into or

to be entered into between two companies where

any of the director of one company or two or more

of them together holds or hold not more than 2 %

of the paid up share capital of other company”

[does not talk about disclosure]

Section 189(2) “every director or KMP shall within

30 days of his appointment or relinquishment of his

office disclose to the company particulars specified

u/s 184(1) ….”

Whether KMP need to disclose his

other directorship and shareholding?

Section 184 does not cover KMP [unless Director]

Section 189 covers KMP

KMP needs to disclose about appointment and

relinquishment of office within 30 days

2% criteria is not relevant for KMP

Key Managerial Personnel [KMP]

Section 2 starts with words “in this act, unless the

context otherwise requires ….”

Section 2 (51) defines KMP

Section 203 defines which companies require KMP

Context of “companies which mandatorily require

KMP and who do not require KMP” is it relevant?

What is role of definition?

The function of a definition is only to clarify or explain

the meaning of a word or phrase used in a statute and

avoid repetition and a definition is not an operative

provision in the sense that a definition of a word used in

a section is to be used only to understand the meaning

of the word or phrase used in a section which contains

operative provision. circumstances.

A construction which is likely to defeat the purpose of

the act has to be ignored. [KV Muthu v. Angamuthu

Ammal AIR 1997 SC 628]

Officer in default

Se. 128 and 129 makes MD, WTD, CFO liable

Se. 205 – CS to report to the Board about

compliance with provisions of the Co. act, other laws

Se. 205 – CS to ensure company complies with

secretarial standards

Section 205(2) – role of CS shall not affect duties

and functions of Board, Chairperson, Managing

Director or Whole Time Director [this does not

include CFO?]

Se. 2(60) defines KMP as officer in default

Officer in Default

For KMP “mens rea” may not be relevant

Se. 5 of 1956 act uses the word “all the following

officers …”

Se. 2(60) of 2013 act uses the word “any of the

following officers..”

If acted honestly, reasonably and that having

regard to all the circumstances of the case, …, he

ought fairly to be excused, the court may relieve

him … [section 463]

THANK YOU.

Lets help Industry to be compliant

makarandjoshi@mmjc.in

098205 03721

022 – 2167 8100