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. To understand the exact legal position of a Managing Director in India, a look at some of the relevant provisions of law is necessitated.

Legal Provisions

The term ‘Director’ has been defined under Section 2(34) of the Companies Act, 2013 (Companies Act) to mean a Director appointed to the Board of a company.

‘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.

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’.

a.    Affixing the common seal of the company to any document,

b.    Draw and endorse any cheque/negotiable instrument on the account of the company,

c.    Sign any certificate of share,

d.    Direct registration of transfer of any share

On a perusal of the above definitions, it is clear that to be eligible to be appointed as a Managing Director of a company, it is imperative that such a person ought to be the Director of a company in the first place.
It is to be noted that a Managing Director is included in the list of Key Managerial Personnel as provided in 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-appointment as Managing Director, however, cannot be made earlier than one year before the expiry of his term.

• Who can be appointed as a Managing Director?

Section 196(3) of the Companies Act provides for certain criteria to be fulfilled before someone can be appointed as a Managing Director-

1. Such a person cannot be below the age of 21 years or above 70 years of age. However, in the event a person above 70 years of age is to be appointed as a Managing Director, a special resolution to that effect indicating the justification for the same must be passed.
2. Such a person is not an undischarged insolvent or has been adjudged as 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 for appointment as provided under the Act

The procedure for appointment of a Managing Director is as follows:

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. At the general meeting convened pursuant to the board meeting, a special resolution has to be passed by the shareholders of the company confirming the appointment of the Managing Director.
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

A Managing Director of one company cannot hold office in another 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 Managing Director of a Company with respect to certain Statutes 

It will now have to be seen that by virtue of the position that a Managing Director holds in a company, to what extent such a person could be held liable under some statutes.

Under the Negotiable Instruments Act, 1881

The Hon’ble Supreme Court in the matter of SMS Pharmaceuticals vs Neeta Bhalla & Anr [(2005) 8 SCC 89] was posed with a question as to whether a Managing Director, who admittedly in charge of the company and responsible to the company for the conduct of its affairs, can be held to liable for an offence of cheque bouncing.

The Supreme Court inter alia held that since the managing director, by virtue of its position, is in charge of and responsible for the conduct of the business of the company, they would get covered under Section 141 of the Negotiable Instruments Act, 1881 and hence liable to be prosecuted in an offence of cheque bouncing.  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]

Under the Employees State Insurance Corporation Act, 1948

The Hon’ble Supreme Court in the matter of Employees State Insurance Corporation vs Apex Engineering [(1998] 1 SCC 86] was concerned with a case where the question arose if the Managing Director of a company can be regarded as an ‘employee’ 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 and the company on the other hand which employs the Managing Director.

Under the Indian Penal Code, 1860

The Hon’ble Supreme Court in the case 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 for offences allegedly committed by the company under certain provisions of the Prevention of Corruption Act, 1988 and the Indian Penal Code, 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

The Hon’ble Delhi High Court in the matter 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 can be designated as the ‘Principal Officer’ of the company. It was further held that such a person’s involvement in the management and administration of the company ought to be established.

Conclusion

It can be concluded that not every director of a company is liable for the offences/non-compliances committed by the company. However, by virtue of the position which a managing director holds in a company, wherein they are generally responsible for the day-to-day affairs and operations of the company, a very heavy burden would lie on the Managing Director of a company to absolve himself from the liability.  

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 various roles and responsibilities that they would need to perform as a Managing Director.

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