Brief of Section 196, 197 & Schedule-V of Companies Act, 2013

Introduction

In the realm of corporate governance, the appointment and remuneration of key managerial personnel play a crucial role in ensuring effective leadership and management of a company. Sections 196 and 197 of the Companies Act 2013, along with Schedule V, outline the guidelines for the appointment and remuneration of managing directors, whole-time directors, and managers.

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

According to the Companies Act 2013, every company must have either a managing director or a manager. It is important to note that the appointment of a manager and a managing director cannot be made simultaneously. The Act also stipulates that the maximum term of office for a managing director, whole-time director, or manager is five years. Re-appointment may be made in the last year of the term, but not earlier. In case of re-appointment after the expiry of the term, it is considered as a new appointment.

The appointment of a managing director, whole-time director, or manager is made by the Board of Directors in a meeting, subject to approval by resolution at the nearest general meeting. In case of any deviations in terms of appointment and remuneration, approval from the Central Government is required. The notice convening the board meeting or general meeting must contain all the conditions of the appointment and the remuneration payable. The company is required to file the appointment details in Form MR-1 within 60 days of the appointment.

Qualification of Managing Director, Whole-Time Director, or Manager

To be eligible for the appointment as a managing director, whole-time director, or manager, an individual must meet certain qualifications. The minimum age for appointment is 21 years, and the maximum age should be less than 70 years. However, a person above the age of 70 can be appointed by a special resolution, which must be forwarded to the Central Government for approval. It is important to note that the individual should not have been declared insolvent or bankrupt, suspended payments to creditors, or convicted of a criminal offense for more than six months.

Procedure for Appointing a CEO, Whole-Time Director, or Manager

The procedure for appointing a CEO, whole-time director, or manager involves several steps to ensure compliance with the Companies Act 2013. Firstly, a seven-day notice must be sent to all directors regarding a board meeting that will discuss the terms of appointment and remuneration. The agenda of the meeting should clearly state the subject of the appointment.

The board of directors then needs to manage the meeting and resolve the appointment and remuneration matters with the consent of the members at the next general meeting. In the case of private companies, the approval of members is not required for the appointment. After the appointment is finalized, the company is required to submit Form DIR-12 within 30 days and Form MGT-14 within 30 days of the appointment. Additionally, Form MR-1 must be filed within 60 days of the appointment.

It is essential to obtain the approval of shareholders by adopting a proper resolution at the next annual general meeting. However, in the case of private companies, the consent of members at the general meeting is not mandatory. It is worth noting that if the appointment of executives is not approved by the members at the general meeting, it does not invalidate any actions taken by the appointed individuals.

Disqualification for Appointment as Managerial Personnel

The Companies Act 2013 specifies certain disqualifications for the appointment of managerial personnel under Section 196. Firstly, individuals who have attained the age of 70 years cannot be appointed unless a special resolution is passed along with an explanatory statement justifying the appointment. If no special resolution is passed but the votes in favor of the proposal exceed the votes against it, the Council may apply to the Central Government, providing reasons for the appointment.

Additionally, an individual is disqualified from appointment if they are an undischarged insolvent or have been declared bankrupt at any time. Moreover, if an individual has suspended payments to creditors or has been convicted by a court of an offense and sentenced to a term exceeding six months, they are also disqualified from appointment.

Conclusion

In conclusion, Sections 196 and 197 of the Companies Act 2013, together with Schedule V, govern the appointment and remuneration of managing directors, whole-time directors, and managers. It is essential for companies to adhere to these provisions to ensure effective governance and compliance. By understanding the qualifications, procedures, and disqualifications outlined in the Act, companies can make informed decisions regarding the appointment of key managerial personnel. Compliance with these regulations not only promotes transparency but also contributes to the overall success of the organization