LEGALITY OF FORECLOSURE OF TENURE OF WHOLE TIME DIRECTOR FOR FRESH APPOINTMENT

[Dr. Sanjiv Agarwal]

 Based on provisions of the Companies Act 1956, restrictions on appointment of Managing Director are contained in section 316-317 read with section 267 – 269 et

(i)  Section 316 provides restrictions on number of companies of which a person may be appointed as Managing Director.

(ii) A managing director of a public company can be appointed for a maximum terms of five years at a time (Section 317(1)].

(iii) The Managing Director may be reappointed, re-employed, or his term of appointment may be extended for a further period of maximum five years at a time (ie, on each such occasion), But in such as case, the re-appointment/ re-employment or extension must not be sanctioned earlier than two years from the date on which it has to come into force. In other words, it must be sanctioned within two years before the appointment   [section 317(3)].

(iv) Section 317 only prohibits appointment for a period of more than 5 years at a time. The Act does not intend to prohibit re-appointment so as to have perpetual management. This section only provides the maximum term for which a Managing Director can be appointed at a time eg, a Managing Director can not be appointed for 6 years or 10 years but he can be appointed for a period of upto 5 years at a time and then re-appointed or re-employed or term extended as the case may be.

(v)  The appointment or re-appointment of Managing Director shall, however, be subject to other applicable  provisions of the Companies Act, 1956, viz sections 267, 268, 269, 316, 317 etc and Schedule-XIII as well as in conformity with Clause 49 of SEBI’s listing agreement in respect to nomination committee/ remuneration committee.

(vi) Although sub-section (2) of section 269 requires that no appointment shall be made ‘except with the approval of the Central Government’, this requirement is not the requirement of a prior approval. This is made clear by the provisions of sub-section (3) which specifically permits an application to be made for approval within a period of ninety days from the date of making the appointment.

(vii) There is no specific provision in the Companies Act that prohibits severing of the relationship between company and the Managing Director or termination of the contract of employment of Managing Director before the expiry of the fixed term. It only provides for the maximum term, ie, 5 years which can be perpetually extended as per the provisions of law.

In view of the above, company can foreclose the agreement and enter into a new agreement subject to compliance of other provisions of Companies Act and observance of corporate governance norms. Also, since no prior approval of shareholders /government is required, appointment can also be done subject to post facto approvals.  However, as a caution, it would be desirable to ascertain and document the cogent reasons for the same. 

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