Whether both transferor company and transferee company should move High Court for direction where companies involved in amalgamation are incorporated in different States - Companies Law - Circular : No. 14/75

Circular : No. 14/75 [8/12/314(1B)/75 ‑ CL ‑ V], dated 5 ‑ 6 ‑ 1975. Subject:- Prohibition against director holding ‑ Certain persons not to hold place of profit which carries monthly remuneration of Rs. 3,000 and more Some doubts have been raised regarding the scope of sub‑section (1B) of section 314, inserted in the Act by section 29 of the Companies (Amendment) Act, 1974. These points have been examined by this Department and the Department s views thereon are given below : 1. Section 314 applies to public as well as private companies. Sub‑section (1) of this section provides that no director of the company and no partner or relative of such director shall hold any office or place of profit, except that of managing director or manager, banker or trustee for the holders of debentures of the company, carrying a total monthly remuneration of Rs. 500 [Rs. 10,000] or more, under the company unless a special resolution according the consent of the company is passed at the general meeting of the company held for the first time after the holding of such office or place of profit. The new sub‑section (1B) says that notwithstanding anything contained in the aforesaid sub‑section (1), no such office or place of profit carrying a monthly remuneration of not less than Rs. 3,000 [Rs. 10,000] shall be held except with the prior consent of the company by a special resolution and the approval of the Central Government. The proviso to the sub‑section provides that in the case of an appointment of such office of profit having been made prior to the coming into force of the Companies (Amendment) Act, 1974, the approval of the company in general meeting and of the Central Government for the holding by such person of the office of profit shall be obtained within a period of six months from the commencement of the Companies (Amendment) Act 1974. 2. A question has been raised whether a special resolution under section 314(1B) is necessary for the appointment of managerial persons who may be relatives of directors and whose appointments are already regulated by section 269, etc. This query arises with reference to public companies to which the said section 269 applies and, strictly, will have to be answered in the affirmative. But in the interests of administrative convenience, it has been decided that the approval of the Central Government, once again, under section 314(1B), will not be necessary in the cases where the Central Government s approval has already been taken under sections 198, 269, 310 and 311, as the case may be. Irrespective of the question of Central Government s approval, the special resolution required under section 314(1B) will have to be passed by a public company or a private company. 3. Further, consistently with reference to the special resolution in the main part of sub‑section (1B), it is necessary to understand the reference in the proviso of the sub‑section to the approval of the company in general meeting as meaning the approval by a special resolution of such meeting. But in a case where the special resolution was passed in terms of sub‑section (1), it will not be necessary to have another resolution ordinary or special, once again and only the approval of the Central Government in terms of the proviso to sub‑section (1B) will be necessary. 4. Another question raised is whether approval of the general meeting and of the Central Government is necessary for an employee drawing salary exceeding Rs. 3,000 per month who is a relative of an existing director but the appointment of such employee was made before his relative became a director, i.e., whether the exemption under section 314(1A) enures under section 314(1B) as well. It is considered that sub-section (1) and sub‑section (1A) should be read together before applying sub‑section (1B) and inasmuch as there is nothing in sub‑section (1B) to affect the operation of the principle underlying sub‑section (1A), the exemption under sub‑section (1A), continues to apply even with reference to a case concurrently falling under sub‑section (1B). 5. In the case of a private company (not governed by section 269, etc.) a question has arisen whether the appointment of a person as a managing director who is related to a director of a company, will attract the provisions of section 314(1B) where the remuneration payable to such managing director is in excess of the limit envisaged in sub‑section (1B). This question is answered in the affirmative. The circumstance that for the purpose of sub‑section (1), which deals with the appointments to an office of profit carrying less than a total monthly remuneration of Rs. 500 [Rs. 3,000] or more (i.e., up to Rs. 3,000) [Rs. 10,000], an exception is made in respect of an appointment of managing director or manager is not considered relevant because sub‑section (1B) expressly overrides sub-section (1) and calls for the exercise of a greater vigilance against the likelihood of the abuse of patronage in a case where the remuneration proposed is of the order of Rs. 3,000 per month and more. 6. A question has also been raised whether provisions of section 314(1B) are applicable where a company proposes to appoint a firm of solicitors and advocates, etc., to help the company in its work. It is considered that an advocate or solicitor appears in a court of law as an officer of the court in pleading the cause of justice and hence, such appearance and receiving fees on that account cannot lead to an inference of an office or place of profit in or under the company under section 314. However, if such a solicitor/advocate, etc., is appointed on a regular retainer basis for rendering legal advice other than appearance in courts, the provisions of section 314 will be applicable. 7. A question has also been raised whether provisions of section 314(1B) will be applicable to selling arrangements entered into by the company with a partner or relative of directors or with private companies of which such a partner or relative is a director or member. It is considered that these arrangements represent contracts which fall under section 297 and so far a selling arrangements are concerned, they may also attract section 294AA if the conditions for its operation are attracted; but section 314(1B) is not attracted.