Managing Director in India: Legal Position, Rights & Duties

Managing Directors play a pivotal role in the overall operations and expansion of a company. They enjoy substantial powers coupled with various responsibilities to ensure that the company functions in an effective manner. It’s essential to check certain relevant provisions of law to thoroughly understand the exact legal position of a Managing Director in our country.

Legal Provisions

The term ‘Director’ is positioned under Section 2(34) of Companies Act, 2013. This is for the purpose of appointing ‘Director’ in a company’s board.

‘Managing Director’ has been defined under Section 2(54) of Companies Act to mean a Director, who by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting or by its Board of Directors is entrusted with substantial powers of management of the affairs of a company.

Managing Director is positioned under Section 2(54) of Companies Act who is entrusted with the management powers of a company affair. This is done through a passed resolution.

The explanation to Section 2(54) clarifies that certain acts such as those mentioned below which are done as part of routine administrative acts would not be considered as ‘substantial powers.

• Pinning the company’s common seal with the document.
• Draw and endorse any cheque/negotiable instrument on the account of the company,
• Sign any certificate of share,
• Direct registration of transfer of any share Direct registration of share’s transfer.

A Managing Director of a company is further eligible to be selected as MD of company. It is essential to add the MD in the list of Key Managerial Personnel as stated by the Companies Act.

Appointment of a Managing Director

It is to be noted that a company cannot appoint or employ a Managing Director and a Manager at the same time.

• Tenure

Further, by virtue of Section 196(2) of the Companies Act, a Managing Director cannot be appointed for a term exceeding five years at a time. His re-selection as MD can’t be done before one year before term expiry.

• Who can be an MD?
  

There are certain criteria to be met before appointing an MD governed by the Section 196(3) of the Companies Act.

1. Age limit is between 21-70 years. In case someone is to be appointed who is above the age of 70, a special resolution is required
2. The person cannot be an insolvent at any time
3. Such a person has not at any time suspended payment to his creditors.
4. Such a person has not been convicted of an offence and sentenced for a period of more than 6 months.

• Procedure as stated by the Act Appointment Procedure

Appointment of an MD – Procedure: 

1. The company shall first obtain consent for appointment as Managing Director from the proposed Managing Director.
2. Once the consent and declaration of disqualification has been obtained from the proposed Managing Director, a board meeting after the requisite notice must be conducted by the company.  
3. The board meeting is then to be conducted where the board resolution to appoint such a person as the managing director must be passed. Furthermore, a date is also to be fixed for holding a general meeting of the company.
4. The resolution passed at such board meeting has to be filed with the Registrar of Companies (ROC) in form MGT-14 within 30 days of passing of such resolution.
5. A special resolution is required to be passed by the shareholders of company stating the appointment of the MD.
6. It would be worth noting that if the appointment of a person as Managing Director is not approved at the general meeting, then any act done by him before such approval shall not be deemed valid.

• Miscellaneous

One company’s MD cannot hold office in other company.  This is however subject to 2 exceptions-

1. A Managing Director of company X may hold office in company Y only if company Y is a subsidiary of company X.
2. A person being a Managing Director can be employed as a Managing Director of another company only if such appointment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of which meeting, specific notice has been given to all directors then in India.

Roles and Responsibilities of a Managing Director

Though a Managing Director would have to perform a myriad of roles in the functioning of the company, some of the important acts to be carried out by the Managing Director are as under-

1. Act as a bridge between the employees and the board of directors.
2. Ensure smooth and efficient working in the day-to-day operations of the company.
3. Issuing necessary directions to the various departments of a company.
4. Providing strategic advice to the board and chairperson.
5. Overseeing the company’s financial performance and developing strategies for more efficient utilization of the company’s funds.
6. The Managing Director shall exercise the above functions with due care and diligence.
7. The Managing Director should not involve himself in a situation where he may have a direct/indirect conflict of interest with the company.
8. The managing director should not obtain any undue gain by taking advantage of his position in the company.

Liabilities of a company’s MD with respect to Statutes:

Extent to which a person could be held as an MD:

Under the Negotiable Instruments Act, 1881

In the case of SMS Pharmaceuticals VS Neeta Bhalla & Anr (2005) 8 SCC 89 was questioned whether an MD is responsible to the company for its affairs conduct, can be seen liable for a cheque bouncing offence by the Supreme Court.

The Supreme Court inter alia held that since the managing director, by virtue of its position, oversees and responsible for the conduct of the business of the company. This position was reiterated by the Hon’ble Supreme Court in the matter of National Small Industries Corp. Ltd. vs Harmeet Singh Paintal & Ors [(2010) 3 SCC 330]

Employees State Insurance Corporation Act, 1948 View:

In the case of Employees State Insurance Corporation VS Apex Engineering (1998) 1 SCC 86), a question came up if the MD should be considered as an ‘Employee’ too to bring that company with 19 employees within the purview of the Employees State Insurance Corporation Act, 1948.

While holding that the Managing Director would be an ‘employee’ of the company, the Court observed that an employer-employee relationship existed between the Managing Director on the one hand being employed by the company for remuneration

Under the Indian Penal Code, 1860

In the matter of Narendra Kumar A. Baldota vs The State of Karnataka [(2022) 2 SCR 969] was concerned with a case where the Managing Director of a company was sought to be summoned by the Magistrate regarding offences and crimes committed by the company via provisions of Prevention of Corruption Act, 1988 and IPC 1860.  The Supreme Court held that without attributing any specific role to the Managing Director, no criminal proceedings can be initiated against him. The Court further held that the Managing Director cannot be held vicariously liable for the offences committed by the company.  

Under the Income Tax Act, 1961

In the case of Varun Sood VS Asst. Commissioner of Income Tax [WP(C) No. 8577/2019] was concerned with a case where the Managing Director was sought to be prosecuted under Section 276B of the Income Tax Act, 1961 for being the ‘Principal Officer’ of the company in default. The Delhi High Court clarified the position that merely because a person holds the office of a Managing Director in the company, does not automatically mean that such person shall be positioned as the ‘Principal Officer’ of that company. Such a person’s involvement in management of company should be established.

Summary

It can be concluded that not every director of a company is liable for the offences/non-compliances committed by the company. By the virtue of a position that an MD holds in a company, their responsibilities are to cater to the daily affairs and operation. It is seen as a very senior position which makes the MD to absolve himself from the duties and responsibilities.

It is thus important that before being appointed as Managing Director of a company, such person ought to completely familiarize themselves with the functioning of the company as well as the duties and roles that they would need to perform as MD.