Analysis of Section 196 Appointment of Managing Director

Any business’s smooth running depends on a capable management team. Only when an organization is led by competent management will it be successful in achieving its objectives. For the nomination of members of the management team of any company, such as the Managing Director (MD), whole-time director, or manager, a systematic procedure and set of rules have already been established under Section 196 of the Companies Act, 2013 approved by the Indian parliament to guarantee uniformity in the compliance systems used by the various businesses across the nation. In this post, we’ll attempt to learn about the different aspects of Section 196 Appointment of MD.

Overview of Section 196 under the Companies Act, 2013

The requirements and circumstances for the appointment of high-level management, such as the managing director, whole-time director, or manager of the company, have been specified by Section 196 of the Companies Act, 2013 so that they can be appropriately followed by the companies. Additionally, this will establish consistency in corporate management throughout the nation and fair the hiring playing field for senior management.

Section 196 under the Companies Act, 2013

The following guidelines regarding the appointment of a managing director, whole-time director, or manager are set forth in Section 196 of the Companies Act, 2013:

• No company shall concurrently appoint a Managing Director and a Manager.
• No individual may serve as a managing director, full-time director, or manager for more than five years at a time in any one position. This time frame will not exceed five years in the event of reappointment. With the caveat that no appointment shall be made until a year has passed since the term’s expiration.
• No employee of a company may be appointed as managing director, full-time director, or manager if such employee:
  • Who are under the age of 21 or over the age of 70, albeit an individual over the age of 70 may be nominated by special resolution. In this situation, the offer notification must be accompanied by a statement explaining why the appointment was made.
  • Has ever been declared insolvent or has been discharged insolvent?
  • Has ever stopped making payments to its creditors;
  • Has ever been sentenced to a period longer than six months after being proven guilty by a court of law of any crime?
• Subject to the requirements of section 197 and Schedule 5, a Managing Director, Whole-Time Director, or Manager shall be appointed, and the terms and conditions of such appointment, as well as the compensation due, shall be approved by the board of directors at the company’s next general meeting. If the appointment varies from requirement 2, it must be approved by a decision of the Central Government (specified in Part I of that Schedule):
• Provided, however, that the notice of the Board or the general meeting convening to consider such appointment includes the terms and circumstances of such appointment, the salary due, and the director or directors’ interest in such appointments, as well as any other matters.
• Furthermore, within sixty days after such appointment, the return in the appropriate form must be filed with the Registrar.
• Subject to the terms of this Act, if the appointment of a managing director, whole-time director, or manager is not authorized by the company at a general meeting, any action taken by him prior to such approval is deemed invalid.

Who is the Manager?

A Manager in any company is a person who works under the supervision, control, and guidance of the board of directors, which is in charge of the whole or almost all of the company’s management. A person can be appointed as a manager of a company even if they are not a director. He may be chosen by both parties or by the service contract.

Who is the Managing Director of the Company?

According to section 2 (54) “Managing Director” refers to a director who has been given substantial management authority over the company’s affairs by virtue of the company’s bylaws, a contract with the company, a resolution adopted at its general meeting, or by its board of directors. 

In any company, a Managing Director is a director who has been given sufficient authority by the board of directors or by the company’s articles of incorporation, an agreement with the company, a resolution adopted at its general meeting, or another arrangement with the company. A person must be a director of the company in order to be selected as the Managing Director.

Powers and Responsibilities of the Managing Directors in the Company

The following are the powers and responsibilities of the Managing Directors in the Company:

• He takes part in the Board of Directors’ policy-making and objective-setting processes as one of its members.
• To put into effect the Board of Directors policies.
• He serves as the organization’s point of contact with the Board of Directors.
• To explain and communicate company policies to subordinate staff.
• To evaluate the company’s activities and regularly submit reports and statistics to the Board outlining the company’s development and current position.
• To create an employment and compensation plan in accordance with the organization’s established policies.
• To choose the company’s top executives.
• To organize the growth and expansion of a business.
• To schedule appointments with departmental heads.

Appointment of a Managing Director, Whole-Time Director, or Manager

One should keep in mind for appointing a Managing Director, Whole- Time Director, or Manager:

• At the same time, the company must have either a managing director or a manager. In the company, the manager and executive cannot be appointed at the same time.
• A CEO, full-time director, or manager’s longest single term of office maybe 5 years. The company cannot appoint executives for more than five years.
• Re-appointment may be made only in the last year of the term of office. However, a person may be re-appointed after the term has expired, and this will be considered a fresh appointment rather than a re-appointment.
• The appointment of the Chief Executive Officer, Whole-Time Director, or Manager shall be made by the Board of Directors in its meeting, subject to approval by resolution at the next general meeting and by the Central Government in the event of deviations from the prescribed rules in terms of appointment and remuneration.
• The notice calling such a board of directors or general meeting must include all of the conditions of this appointment as well as the salary due.
• Within 60 days following the appointment, the company must return the appointment in MR-1.

Managing Director, Whole-Time Director, or Manager Qualification

The following qualifications should be held by the Managing Director:

• The appointment requires a minimum age of 21 years and a maximum age of fewer than 70 years. A person over the age of 70, on the other hand, can be appointed by a special resolution. If an appropriate resolution is reached, the application must be sent to the federal government for approval.
• The individual should not have been declared bankrupt or insolvent.
• The individual has never failed or stopped payments to his creditors.
• For more than 6 months, the individual has not been convicted of a criminal offense by a court.

Procedure for appointing a Managing Director, Whole-Time Director, or Manager

The method for appointing a Managing Director, Whole-Time Director, or Manager is as follows:

• Send a seven-day notice of a board meeting to all directors, together with an agenda outlining the topic of the meeting, i.e. the terms of appointment of the CEO, full-time director, or management, and remuneration payable.
• Manage the board of directors meetings and, with the permission of the members, decide the appointment and compensation of executives at the next general meeting. In the case of private enterprises, the appointment does not require the consent of the members.
• Section 170 requires that DIR-12 be submitted within 30 days of appointment.
• Section 117 requires that MGT-14 be submitted within 30 days of appointment.
• Section 196 requires that the MR-1 be submitted within 60 days after the appointment. Filling out this form is not essential for private companies.
• Obtain shareholder approval by passing an appropriate resolution at the next annual general meeting. It should be emphasized that in the case of private companies, the permission of the members at the general meeting is not required.
• It should be emphasized that if the nomination of executives is not accepted by the members of the general meeting, this does not invalidate any action taken by these executives in the fulfillment of their responsibilities, pursuant to Section 196.

Note: In the case of private companies, there is no need to seek consent from the members at the general meeting, nor is there any need to file MR-1, since both exemptions are specified in the exemption announcement dated 05.06.2015.

Disqualification for Managing Director under Section 196 of the Companies Act, 2013

The following are the criteria for disqualifications for Managing Director:

• No one who has reached the age of 70 can be assigned to the management staff unless a special resolution is provided, accepted by the members, and accompanied by an explanation and adequate justification. 
• Additionally, the Council may submit an application to the Central Government with justifications for the proposed appointment if no special resolution is enacted but more votes are cast in support of the proposal than against it. Company. If the Central Government determines that such an appointment is essential and advantageous to society, a person who has reached the age of 70 may be appointed.
• Has ever been declared bankrupt or is an unreleased insolvent;
• Has ever stopped payments to or reached a deal with his creditors; or
• Has ever been found guilty by a court and received a sentence that was longer than six months?

Takeaway

The process for the appointment of Managing Director, Whole Time Director, or Manager has been established under Section 196 of the Companies Act, 2013, in order to ensure a fair system for the appointment of high-level management of companies and to bring consistency to the management of companies across the nation. Over time, these systems have demonstrated their value in ensuring the efficient operation of businesses in India.