2015 (12) TMI 992 - HC - Companies Law

Exclusive employment of the company - prohibition contained in Section 314(1)(b) of the 1956 - relative of a Director of a company - whether on account of the petitioner no.2 being a Director in other companies can be said to be not in the exclusive employment of the petitioner no.1 Company or holding a place of profit in the other companies - Held that - A Director cannot be said to hold any office or place of profit if he should receive the remuneration to which he is entitled as such Director; on the other hand he will be said to hold an office or place of profit only when, besides the remuneration to which he is entitled as such Director, he obtains from the company a remuneration such as salary, fees, commission, perquisites. It thus follows that the petitioner no.2, from the factum simplicitor of serving at Board level in other companies could not have been held to be in the employment of those companies, for it to be said that he could not be in the exclusive employment of the petitioner no.1 Company and could not have been on this ground refused appointment in the petitioner no.1 Company. Similarly, without the petitioner no.2 receiving any other emoluments from other companies in which he was/is a Director, it could not be said that he was/is holding any office of profit therein. though the impugned order reasons that the provisions of Section 314 cannot be got around by serving a non-executive/non-remunerative position in other companies but does not state that any other inquiry was done by the respondent or it was found that the petitioner no.2 though stated to be serving in non-executive and non-remunerative position in other companies but was devoting his time and energy thereto. Thus, though the reasoning may be correct if supported by the facts but de hors a factual finding is contrary to the statutory mandate. The statutory mandate is that being a Director in a non-remunerative and non-executive position in other companies does not amount to being in employment of those companies or holding a place of profit in those companies.

Summary

Issues Involved:
1. Rejection of the application under Section 314(1B) of the Companies Act, 1956.
2. Interpretation of "exclusive employment" and "place of profit" under the Companies Act.
3. Territorial jurisdiction of the Delhi High Court.

Issue-wise Detailed Analysis:

1. Rejection of the application under Section 314(1B) of the Companies Act, 1956:
The petition challenged the order dated 29th September 2015, by the Ministry of Corporate Affairs, rejecting the application for the appointment of petitioner no.2 as Executive President (Commercial) of petitioner no.1 Company with an annual remuneration of Rs. 77,41,539/- for five years starting from 1st October 2013. The previous rejection on 5th August 2014 was set aside for being passed without hearing the petitioners. The impugned order was detailed, giving reasons for the rejection. The Ministry held that post-1st April 2014, approval was not required due to Section 188(1)(f) of the Companies Act, 2013, thus the application concerned only the period from 1st October 2013 to 31st March 2014. The Ministry reasoned that the appointee must be in exclusive employment of the company and not serve in any capacity in other companies, which was not met as petitioner no.2 held non-executive positions in other companies.

2. Interpretation of "exclusive employment" and "place of profit" under the Companies Act:
The petitioners contended that the appointee was in exclusive employment of petitioner no.1 Company and did not hold a "place of profit" in any other company as defined under Section 314(3) of the Companies Act, 1956. The Ministry's interpretation that holding non-executive, non-remunerative positions in other companies violated the "exclusive employment" requirement was challenged. The court noted that the term "employee" or "employment" is not defined in the Companies Act. Relying on precedents, it was held that a director per se is not an employee unless there is a contractual relationship. The court concluded that being a director in other companies does not amount to holding a place of profit if no remuneration is received. The Ministry's principle that an appointee must be in exclusive employment was found to lack statutory basis.

3. Territorial jurisdiction of the Delhi High Court:
The respondent challenged the territorial jurisdiction of the Delhi High Court, arguing that the registered office of petitioner no.1 Company is in Kanpur. However, the court held that since the hearing and the impugned order occurred in Delhi, it had territorial jurisdiction under Article 226 of the Constitution of India. The court dismissed the respondent's objection, noting that no such objection was raised during the previous writ petition.

Conclusion:
The court found no merit in the Ministry's reasoning for denying approval. It was held that the Ministry cannot adopt principles without statutory basis, especially when the statutory mandate does not support such principles. The denial of approval for the period from 1st October 2013 to 31st March 2014 was set aside, and the approval for the said period was granted. The petition was disposed of without costs.