Nirma University of Science and

Technology

Institute of Law

Ahmedabad

Corporate Law- II

Project on

“Powers of Managing Directors”

Submitted To: Submitted

By:
Ms. Asha Verma Monika Deol
08BAL013
Semester-V

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound sense of gratitude to all

those, without whose encouragement, assistance and co-operation,
successful completion of this project would not have been possible. I am
thankful to my college professor for her support and guidance. I am
grateful to my professor for giving me the opportunity to work on this
topic.

I express my deep sense of gratitude for my dear friends for their support
and cooperation throughout my study and work, without which this work
would never have been completed.

Though this project, I got to learn a lot about managing directors, their
appointment, their powers and their liabilities.

CONTENTS

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1. Aim and Objective of the Project
2. Hypothesis
3. Introduction
4. Managing Directors- Appointment,
Disqualifications, etc.
5. Powers and Liabilities of Managing Directors
6. Conclusion
7. Bibliography

AIM AND OBJECTIVE

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The object of this project is to understand the term “managing director”

and to study and analyse the powers of managing directors under the

Indian Companies Act.

HYPOTHESIS

The following hypotheses have been formed before studying the topic:

1. That the powers conferred upon managing directors put them in a

superior position than the Board of Directors.

2. That a managing director has the power to manage all the affairs of

the company and such powers cannot be questioned by anyone.

INTRODUCTION

A company is an artificial person created by law. And since it is an

artificial person, it needs some human minds to control it and manage its
affairs. The owners of a company or organization have the complete right

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to manage the affairs of the company or organisation. Shareholders,
despite being the owners of a company, are usually inefficient and
incompetent to manage the affairs of a company. Therefore, a company
needs some efficient and expert people to control and manage the
company’s affairs. These experienced and efficient people are called the
directors of the company.

A company carries on its business through individuals called directors who

are collectively called Board of Directors. No body corporate, association
or firm can be appointed as a director of a company, and only an
individual can be appointed. Subscribers of the memorandum who are
individuals, are deemed to be the directors of the company, until the
directors are duly appointed in accordance with the Act. Directors are
appointed in general meeting, in board meeting, by central government,
by proportional representation or a person can stand for directorship, if
eligible.

The Board of Directors of a company, which is a representative body,

directs and controls the affairs of the company. The Companies Act allows
a person to become the director of fifteen companies. The Act does not
prescribe the time and the amount of attention a person should devote to
a particular company. The common law excuses him from the
consequences of non-attendance generally. The primary function of the
Board is to lay down the business policies and make a general supervision
over their execution. The day-to-day administration has to be delegated to
professional management.1

Under the Act, two types of professional management are recognised,

namely, managing director and manager. A company can have either a
manager or a managing director, but not both of them at the same time.

1
Singh, Avtar (2009). Company Law, Eastern Book Company, Lucknow, p 363.
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 MANAGING DIRECTOR

A managing director is a director of a company given some special

powers. In most companies, the managing director is the senior executive
director, subordinate only to the chairman of the board. The MD is usually
the most senior manager of the company, heading the organisation, and
so may have a title such as Chief Executive Officer or CEO.

According to Section 2(26) of the Companies Act:

“Managing director means a director who, by virtue of an agreement with

the company or of a resolution passed by the company in general meeting
or by its Board of Directors, or by virtue of its memorandum or articles of
association, is entrusted with substantial powers of management which

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would not otherwise be exercisable by him, and includes a director
occupying the position of a managing director, by whatever name called:

Provided that the power to do administrative acts of a routine nature

when so authorised by the Board such as the power to affix the common
seal of the company to any document or to draw and endorse any cheque
on the account of the company in any bank or to draw or endorse any
negotiable instrument or to sign any certificate of share or to direct
registration of transfer of any share, shall not be deemed to be included
within substantial powers of management.

Provided further that a managing director of a company shall exercise his

powers subject to the superintendence, control and direction of its Board
of Directors.”

The following things are clear from the above definition:

i. To become a managing director, a person must be a director of the

company. Consequently, if a person ceases to be a director, he also
ceases to be managing director. However, the reverse is not true. If
a managing director ceases to be a director, he continues to be a
director.

It has been held in landmark case that: “when the office of a

director is terminated, his appointment 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
limited company into public company, he would remain a director till
he is rotated out at the next annual general meeting of the
company.”2
2
Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Com Cases 562, 582 (DB-Cal).
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 ii. A person can be managing director only if substantial powers of
management are given to him.
iii. Managing Director also includes a person who occupies the position
of and exercises the powers of a managing director irrespective of
by what title he is addressed.
iv. Powers to do administrative acts in a routine manner are not
deemed to be substantial powers.
v. A managing director is subordinate to the Board of Directors.
vi. A person can become a managing director through an agreement
with the company, through a resolution passed by the company in
its General Meeting or its Board of Directors, or through its
memorandum or Articles of Association.

By virtue of Paragraph 1 of Part III of Schedule XIII in the Companies Act,

1956, the appointment of a managing director is subject to shareholders’
approval and to this extent, the Board’s power to appoint such a
managing director is only recommendatory.3

As mentioned by the Department of Company, 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 that the designation under which the appointment is made
would not make any difference in this regard. Thus, if a director is
entrusted with managerial functions, he would be in the position of a
Managing Director notwithstanding the fact that he may be designated as
a technical
adviser or as a technical director of the company.
Section 269 makes it obligatory for a company having capital of a sum of
Rs. Five Crores or more (w.e.f. 18-9-1990) to appoint a managing director
or wholetime director or manager.

3
Iyyer LVV (2003). Guide to Company Directors: Powers, Rights, Duties and Liabilities,
Wadhwa and Company Nagpur, New Delhi, p 628.
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Procedure of Appointment [S. 269]:
In the case of public companies or their subsidiary private companies,
Teaching a figure of paid-up share capital which may be prescribed [Rs 5
crores or more] the appointment of a managing director, whole-time
director or manager has been made compulsory. The appointment has to
correspond with
the conditions specified in Parts I and II of Schedule XIII, which parts are
subject to the provisions of Part III. The appointment and remuneration
require approval of shareholders in general meeting. The auditor of the
company or company secretary has to certify that requirements have
been complied with. A return of the appointment in a prescribed form
must be filed with the Government within 90 days. Approval of the Central
Government is not necessary in such cases. But if the appointment does
not comply with the schedule, the approval becomes necessary.
Application for approval must be made within 90 days.
The Central Government may not accord the approval if it is satisfied that
the candidate is not a fit and proper person for the post and his
appointment is not in public interest and the terms and conditions of the
appointment are not fair. The Government may accord the approval for a
shorter period than proposed.

If there is no approval, the appointee should vacate the office from the
date of the communication of the refusal to the company, failing which he
incurs a penalty of Rs 500 for every day of usurpation of the office.

Where the Government suo motu or on information received is prima facie

of opinion that an appointment has been made without approval in
contravention of the requirements of the schedule, the Government shall
be competent to refer the matter to the Company Law Board for a
decision. The Board has to give notice to the company, the appointee and
any other officer of the company who was responsible for compliance of
Schedule XIII to show cause why the appointment should not be
terminated and the penalty of sub-section (10) imposed. The Board should
give appropriate opportunity and then may make an order declaring that
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there has been a contravention. The declaration will have the following
effects: (1) the company is liable to a fine extending upto Rs 5000 ; (2)
every officer of the company who is in default is liable to a fine of Rs
10,000 ; (3) the appointment comes to an end and the appointee is liable
to a fine of Rs 10,000 and is also liable to refund the entire
amount of salaries, commissions and perquisites received by him upto the
date of the order.

Any violation of the order of the Board or any default in meeting its
consequences is further punishable under sub-section (II). Every officer of
the company who is in default and the managing or whole-time director or
the manager, shall be punishable with imprisonment extending upto three
years and also fine extending upto Rs 50 for every day of default. Whether
such a double penalty amounts to a violation of the doctrine of double
jeopardy, only time will decide.

Sub-section (12) provides that the acts of such a person done by him upto
the date of the finding that his appointment was void would be valid
provided that they were otherwise valid.

The section concludes with an Explanation that the word "appointment"

includes reappointment and "whole-time director" includes a director in
the wholetime employment of the company.

The Government examines whether the proposed candidate is a fit and

proper person. The Government may refuse the proposal where there is a
pending prosecution against the person concerned. Further, the
Government may sanction the appointment subject to any condition that
it considers necessary. Thus where the person proposed to be appointed
was
a promoter of the company and had in that capacity made a secret profit
of three lakh rupees, the Government approved his appointment subject
to the condition that he restored the profit to the company.

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Disqualifications [S. 267]:

The following cannot be appointed managing or whole-time directors: (1)

A person who is an undischarged insolvent or has at any time been
adjudged insolvent. (2) A person who suspends or has at any time
suspended, payment to his creditors or makes or has made a composition
with them. (3) A person who is or has been convicted by a court of an
offence involving moral turpitude. The first Part of Schedule XIII gives the
list of statutes and provides that any person convicted for
violating them and sentenced to imprisonment or fine up to Rs 1000 shall
not be appointed without the approval of the Central Government.

Where a person is already a managing director of another company he

can be appointed only with the unanimous resolution of the board of
directors. 16 The Central Government may permit any person to be
appointed managing director of more than two companies if the
Government is satisfied that it is necessary that the companies should, for
their proper working, function as a single unit and have a common
managing director [S 316(2), proviso].

The maximum term of appointment can be five years at a time and a new
term cannot be sanctioned earlier than two years from the date on which
it is to come into force. The terms of appointment can be changed, when
they are to be different from those prescribed by Schedule XIII, only with
the approval of the Central Government.

The remuneration of a managing director cannot exceed five per cent of

the net profits and if there are more than one managing directors, ten per

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cent for all of them together, [S. 309] Where a managerial personnel is
working in more than one company, he can draw remuneration from one
or both companies provided that the total remuneration drawn from the
companies does not exceed the higher maximum limit admissible from
any one of the companies of which he is a managerial personnel.

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 POWERS AND LIABILITIES

As mentioned earlier, a managing director is entrusted with substantial

powers of management which can be done by virtue of an agreement with
the company, or of a resolution of the company or its board, or by virtue
of its memorandum or its articles. As is given in the definition provided by
the Act, the power to do administrative acts is not deemed to be included
within substantial powers. The administrative acts include powers such as
the power to affix the common seal of the company to any document or to
draw and endorse any cheque on the account of the company in any bank
or to draw or endorse any negotiable instrument or to sign any certificate
of share or to direct registration of transfer of any share.

Such powers are subject to the control and supervision of Board of

Directors of the company. A managing director occupies dual capacity,
namely, that of a director and of an employee. The substantial powers
may be revoked or reduced or altered.

In J Boschoek Proprietary Co Ltd v Fuke4, the service agreement of a

manager provided that he should exercise his powers in relation to the
company’s business. And any of its subsidiaries as may be resolved by the
directors. The directors resolved that he should confine his attention only
to one subsidiary. It was held that the directors’ action was competent
and no action lay for breach of contract.5

A managing director, being an agent of the Board of Directors, cannot

exercise any power beyond those of the board. He can exercise only the
powers that have been delegated to him. In a certain case, a managing
director commenced proceedings for dishonor of cheque. He commenced
the proceedings without any authorisation from the board. The
proceedings were struck out.6

4
[1906] 1 Ch 148, 159: 94 LT 398.
5
Singh, Avtar (2009). Company Law, Eastern Book Company, Lucknow, p 364.
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Also, a mere grant of a power of attorney to a director conferring
substantial powers of management would not make him a managing
director since a power of attorney cannot be described as an agreement.
A power of attorney is a mere authority to do some acts given by the
Company as a principal to its agent and may be revoked anytime and
there need not be any consideration for a power of attorney.7

The managing director is also an employee of the company. It has been

held in Ram Prashad v CIT8 that the remuneration payable to him is
taxable as salary. The Court observed in this case that the managing
director is more like an agent than a servant, but this does not prevent
him from entering into a contract of employment with the company. But
he is not entitled to preferential payment.

If a managing director is appointed by the Board by virtue of the articles

of the company or through an agreement, the powers conferred on him
can be withdrawn. The only remedy available to him is to sue for the
breach of contract.

It was held in M.S. Mani v M.S. Madhusoodhan9, that even when the
manager director continues, the Board can reduce or add to the powers of
managing director.

Meaning of the word “substantial”- The substantial powers are

deemed not to include administrative acts such as the power to affix the
common seal of the company to any document or to draw and endorse
any cheque on the account of the company in any bank or to draw or
endorse any negotiable instrument or to sign any certificate of share or to
direct registration of transfer of any share.
6
CBS Gramophone Records and Tapes (India) Ltd v P.A. Noorudeen, (1992) 73 Comp Cas
494 Ker.
7
Iyyer LVV (2003). Guide to Company Directors: Powers, Rights, Duties and Liabilities,
Wadhwa and Company Nagpur, New Delhi, p 629.
8
(1972) 2 SCC 696.
9
(1991) 5 CLA 187 (DB-Ker).
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It was observed by the Supreme Court in Meenakshi Mills v Vishvanatha
Sastri10 that the word ‘substantial’ has no fixed meaning and would
depend on the facts of each case.

The managing director of a company may be entrusted with substantial

powers of management but not necessarily of the whole of affairs of the
company.

The Supreme Court recently dealt with the question of the powers of
directors vis-a-vis the managing director [SMC Pharmaceuticals Ltd v
Neeta Bhalla [2005] 127 Comp Cas 563]. The division of powers between
shareholders, board and MD has been examined by the courts in several
cases. The Court observed:

“The powers of an MD derive from one of the source stated in the

Companies Act, although the law does recognise 'implied powers'; the
principal source of an MD's powers is the board of directors. This principle
carries great weight with respect liability for defaults and contraventions
of law by the company, because the liability depends on the powers.

The directors of a company can do what the company can do, subject to
the restrictions imposed in law and the articles of the company.
Recognising this principle, s.291 of the CA vests in the BoD, as a
governing body and the supreme managerial organ of a company, general
powers of management of a company, subject, however, to the
exceptions mentioned in that section. The BoD is the principal organ of a
company...”

It was held in Boschoek Proprietary Co. Ltd. v. Fuke, (1906) 1 Ch 148 that
the day to day management is entrusted to the managing director who
can exercise powers of management without referring to the Board. It is
necessary that the articles must provide for such an appointment being
made.

10
AIR 1955 SC 13, 18.
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In Achutha Pai v. ROC, (1966) 36 Com Cases 598 (Ker), a managing
director who was prosecuted for default under S. 220 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 in himself two
capacities, namely, manager and director. The capacity as manager
cannot be terminated by merely sending up resignations. It becomes
effective only when the company accepts the resignation and relieves him
from his duties. The Court observed, “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
different from that of 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 managing director
becomes effective only when accepted by the company.”

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.11

Where, for recovery of dues from the company, a decree was passed
against the company as well as its managing director, it was held that the
managing director was not the judgment-debtor in his individual capacity
and, therefore, he was not liable to be arrested and detained in civil prison
for enforcement of the decree.12

Section 314 (3) states that in case of a director he would be deemed to

hold an office or place of profit in case he obtains from the company more
than what he is entitled as a director. Since a managing director gets only
11
Joginder Singh Palta v.Time Travels (P.). Ltd., (1984) 56 Corn Cases 103 (Cal).

12
Maruti Lid. v. Pan India Plastic P, Ltd., (1995) 83 Com Cases 888 (P&H).

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the remuneration he is entitled to under Schedule XIII or under
Government approval, he cannot be deemed to hold an office of profit
under Section 314.

It was held in Bank of Maharashtra v Racmenn Auto Pvt Ltd, (1992) 74

Comp Cases 752, that where a managing director signs bank documents
on behalf of the company for loans for the company and where the bank
thereafter files a suit, there is no personal liability of the managing
director.

It was held in H.S. Sidaha v Rajesh Enterprises, (1993) 77 Com Cases 251,
that where there was a decree for recovery of sums due to a bank from
company, in a suit against the company and its managing director, the
liability to discharge the amount was that of the company and not of its
managing director.

In Maharashtra State Financial Corporation v Mosvi & Co Pvt Ltd, (1993)76

Com Cases 168, it was held that a managing director is entitled to accept
notices on behalf of the company.

In Maruti Ltd v Pan India Plastic P Ltd, (1985) 83 Com Cases 888 (P&H),
where, for recovery of dues from the company, a decree was passed
against the company and its managing director, it was held that the
managing director was not the judgment debtor in his individual capacity
and, therefore, he was not liable to be arrested and detained in civil prison
for enforcement of the decree.

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 CONCLUSION

After studying various provision of the Companies Act regarding the

position of managing directors, it can be concluded that both the
hypotheses were wrong. A managing director is not in a superior position
than the Board of Directors and neither are a managing director’s powers
unquestionable and do not control all the affairs of the company. The
Board of Directors of a company may not be able to manage the day-to-
day administration of the company due to various reasons. Hence, the
need for professional management, like managing directors. The
managing directors are appointed by virtue of resolutions or articles of the
company or agreements and therefore, cannot be said to be
unquestionable. Also, as is clear from the definition of managing director
in S. 2(26), administrative acts of a routine nature are not deemed to be
included within substantial powers which are conferred upon managing
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directors. Hence, all powers of administration cannot be said to be
exercised by managing directors.

It is also clear from the definition under Section 2(26) that managing
directors exercise their powers subject to the superintendence, control
and direction of the Board of Directors. It can be concluded from this that
managing director’s position is not superior to that of the Board of
Directors. A managing director in fact, can be removed from the position
by the Board of Directors anytime and he cannot take any action against
such removal except filing a suit for breach of contract or for
compensation.

Also, managing directors are conferred substantial powers and the answer
to the question as to what are substantial powers, varies from case to
case. Thus, powers of managing directors are according to the agreement
or the resolution or the articles of the company, as the case may be.

Hence, both the hypotheses have been proved wrong.

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 BIBLIOGRAPHY

The following website was referred to for the purpose of this project:

 www.legalservicesindia.com/articles/magd.htm

The following books were referred:

1. Singh Avtar. Company Law. (Lucknow: Eastern Book Company)

2009.
2. Iyer IVV. Guide to Company Directors: Powers, Rights & Liabilities.
(New Delhi: Wadhwa and Company) 2003.
3. Jain N.K. . Company Law: Law and Practice. (New Delhi: Deep &
Deep Publications Pvt. Ltd.) 2007.

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