Legal regime of employment and work of the employees of a company is a 3-tier system. The regular employees and workers are governed by a set of HR statutes and legislations dealing with employees/workmen. The key managerial personnel of the company including directors and managerial staff are administered principally by the Companies Act, 2013 and the Indian Contract Act, 1872. In this article, I will be discussing as to how a segment of the corporate law impacts the key managerial personnel of a company in so far as their employment/working is concerned.
Transparency and accountability are sine qua non to the better governance of any corporate entity. The fairly new Companies Act, 2013 (hereafter referred to as the Act or the Act, 2013) recognizes the concept of good governance at the corporate work place. Some of the provisions of the Act, which many consider least important actually have tremendous ramifications on governance and accountability in relation to the corporate officers or in other words the key managerial personnel. Section 190 of the Act as applicable to the public limited companies specifically entails that every company shall keep a written contract of service/employment with a managing or whole-time director; or in case of a verbal contract, the oral terms reproduced as a written memorandum, available at its registered office for the inspection by any member of the company without requiring any payment of fee. Nothing is confidential or privy when it comes to the terms of employment of whole-time directors including managing directors. Breach of this provision can lead to fiscal penalty.
Another key provision, which has also been wrongly considered by many as a routine law, actually imposes an extraordinary element of self-accountability on the directors in relation to their work profile. Section 191 of the Act forbids any director of the company from receiving any payments including commissions, fee etc. in relation to transfer of any undertaking or property and even shares of the company in certain conditions. The directors are specifically forbidden to receive any payment by way of compensation for loss of office or as consideration for retirement from office, or in connection with such loss or retirement from such company. The only exception being that the proposal with detailed disclosures will have to be cleared by the members of such company in general meeting. If any director contravenes then the amount so received by the director shall be deemed to have been received by him in trust for the company. Breach of this provision can lead to fiscal penalty. Interestingly, there is an exception the exception laid down in Section 202 of the Act, where the directors are absolutely barred from receiving any payments notwithstanding the backing of general meeting.
There is a new stringent provision introduced for the first time in the Act. Section 194 strictly prohibits directors or any key managerial personnel of a company from buying certain kinds of forward contracts regarding the shares and other securities of the company. This basically caps the insider information, which the officers at work place may have and use to their benefit. If a director or any key managerial personnel of the company contravenes this provision, they shall be punishable with imprisonment up to two years or with fine or with both. It is imperative to note as to who are or could be the key managerial personnel of a company. Section 203 of the Act contains the list of such personnel. It states that every company, as may be prescribed shall have the following whole-time key managerial personnel (i) managing director, or chief executive officer or manager and in their absence, a whole-time director; (ii) company secretary; and (iii) chief financial officer. The board of the prescribed company shall appoint such personnel by means of a resolution containing the terms and conditions of the appointment including the remuneration.
Bringing about parity amongst the employment eligibility conditions for directors, Section 196 of the Act provides that 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 logic is to give meritorious security to the term and not permanency. Further, such officers ought to be above the age of twenty-one years but below the age of seventy years. There are certain other disqualifications as well such the person should not be an insolvent, credit defaulter or convict. But to give protection to the third parties, an immunity has been carved out regarding the actions of an invalid director. Section 176 of the Act provides that no act done by a person as a director shall be considered invalid, even if subsequently his appointment was found invalid by reason of any defect or disqualification or termination.
Author: Hemant K. Batra, Founder & International Lead, Kaden Boriss Partners, Lawyers
New Delhi, India