Companies Act Section 196

Companies Act, Section 196: Appointment of Managing Director, Whole-time Director, or Manager

Section 196 of the Companies Act, 2013, deals with the appointment and employment of certain key management personnel in a company, specifically the Managing Director (MD), Whole-time Director (WTD), and Manager. These positions are critical in the functioning of the company, as they carry significant authority and responsibility. Section 196 seeks to regulate the appointments, ensure fairness in the process, and impose certain limitations to maintain good governance and prevent abuse of power by individuals in these high-ranking roles.

1. No Concurrent Appointment of Managing Director and Manager

Section 196(1): Prohibition on Concurrent Appointments

Under Section 196(1), a company is explicitly prohibited from appointing both a Managing Director (MD) and a Manager at the same time. This restriction is in place to avoid a situation where the company’s management is split between two top-level executives, which could potentially lead to conflicting directions and a lack of clarity in leadership.

Managing Director (MD): The MD is responsible for the day-to-day management of the company, typically overseeing operational decisions.
Manager: A Manager has a similar role to a managing director, but their powers and scope of work are typically more restricted, as defined by the company’s articles of association.
The law seeks to ensure that the leadership structure is not overlapping, thus promoting clarity in the management hierarchy.

2. Limitations on the Duration of Appointment

Section 196(2): Term Limitations for Managing Director, Whole-time Director, or Manager

Section 196(2) places a restriction on the term length for individuals appointed as MD, WTD, or Manager. According to this provision:

No person can be appointed or reappointed as MD, WTD, or Manager for a term exceeding five years at a time.
Reappointment of the same person to these positions cannot occur earlier than one year before the expiry of their existing term.
This rule is designed to ensure regular reviews of such appointments, allowing the company’s shareholders to reassess whether the individual in question is still the best person for the job. This provision also prevents the perpetual hold of such positions by individuals and encourages accountability and fresh leadership periodically.

3. Age Restrictions for Managing Director, Whole-time Director, or Manager

Section 196(3): Age Limitations for Appointment

This subsection defines the age requirements for the appointment of an MD, WTD, or Manager. According to Section 196(3):

A company cannot appoint or continue the employment of any person as MD, WTD, or Manager if they are:
Below the age of 21 years, or
Above the age of 70 years.
Exceptions for Appointments Above 70 Years of Age:

a) Special Resolution Requirement: If the individual to be appointed has reached the age of 70 years, their appointment may be made, but only by passing a special resolution in the company’s general meeting. The explanatory statement accompanying the special resolution must provide a justification for appointing someone over 70, addressing why the appointment is in the company’s best interest.
b) Central Government Approval: If a special resolution is not passed but the votes cast in favor of the motion exceed the votes against it, the appointment can still proceed with the approval of the Central Government. In this case, the Board of Directors must apply to the Central Government, and the government will assess if the appointment is beneficial for the company.
This provision provides a mechanism to ensure that individuals are fit to hold high office, considering the physical and cognitive demands of these roles.

4. Additional Restrictions on Appointments

Section 196(3)- (a)- (d): Prohibited Conditions for Appointment

Under Section 196(3), there are several additional disqualifications that would prevent a person from being appointed or continuing as an MD, WTD, or Manager:

a) Undischarged Insolvency: The person must not be an undischarged insolvent, i.e., they should not have unresolved financial obligations, which would disqualify them from holding a management position.
b) Past Insolvency: If the individual has ever been adjudged as an insolvent, they cannot hold the role. This ensures that individuals with a history of financial mismanagement are not put in charge of a company’s operations.
c) Suspension of Payments or Composition with Creditors: If the individual has ever suspended payments to creditors or made a composition agreement with creditors, they are deemed unfit to hold such a position of trust.
d) Criminal Convictions: If the individual has been convicted of any offence and sentenced for a period exceeding six months, they are barred from holding such a position.
These provisions ensure that the individuals appointed to the top roles are financially stable, law-abiding, and have a history of responsible decision-making.

5. Approval of Appointment and Remuneration by the Board and Shareholders

Section 196(4): Approval by Board and Shareholders

Section 196(4) sets out the process for approving the appointment and terms of remuneration for the MD, WTD, or Manager:

The Board of Directors must approve the appointment and the terms and conditions of remuneration at a Board meeting.
The appointment and terms must then be ratified by the shareholders in a general meeting.
Central Government Approval: If the terms and conditions of the appointment are at variance with Schedule V, approval must also be sought from the Central Government.
Additionally, the following information must be included in the notice of the meeting:

The terms and conditions of the appointment.
Details of the remuneration payable.
Other relevant matters, such as interest of directors in the appointment, if applicable.
Furthermore, a return of the appointment must be filed with the Registrar of Companies (RoC) within sixty days from the date of the appointment.

6. Validation of Acts Done Prior to Approval

Section 196(5): Validity of Acts Prior to Approval

According to Section 196(5), if the appointment of the MD, WTD, or Manager is not approved at the general meeting, any actions performed by the individual prior to the approval will not be deemed invalid. This provision ensures that the actions taken by the appointed individual are valid and effective, even if the appointment is later rejected or delayed, until the approval process is complete.