With a view of ensuring the affairs of large public companies are conducted in a manner beneficial to the interest of the stakeholders and in accordance with law, Section 203 of the Companies Act, 2013 (the "Act"), mandates such companies to have certain categories of whole-time key managerial personnels ("KMPs").
Extant Legal Framework
Section 203 (1) of the Act read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 ("Rules") inter-alia provides that every listed company and every other public company having a paid-up share capital of Rs. 10,00,00,000 (Rupees Ten Crores) or more shall have the following whole-time KMPs:
- Managing Director, or Chief Executive Officer or Manager and in their absence, a Whole-Time Director;
- Company Secretary; and
- Chief Financial Officer.
Section 203 (2) of the Act states that every whole-time KMP of a company shall be appointed by means of a resolution of the board containing the terms and conditions of the appointment including the remuneration.
The third proviso to Section 203 (3) of the Act, states that a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company and such appointment or employment is made or approved by a resolution passed at a meeting of the board with the consent of all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.
Section 2(53) of the Act defines the term manager to mean an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, 'whether under a contract of service or not'.
Meaning of 'whole time' in relation to Section 203
Considering that Section 203 (1) of the Act uses the term 'whole-time' in respect to the KMPs, a question may arise that as the position requires 'whole time' devotion whether it is implied that the designated shall be in whole time employment of the company. For the purpose, let's understand the meaning of whole time.
The term 'whole-time' is analogous to 'full-time' and this term has been defined in several dictionaries. The Webster's Dictionary gives the meaning of the words 'whole-time' as full time. The words 'full time' mean employed for or working the amount of time considered customary or standard e.g. full time clerks; involving or operating the amount of time considered customary or standard. The Shorter Oxford English Dictionary, also gives the meaning of words 'whole time' as full time. According to this dictionary, the term 'full time' (adjective) means the total normal working hours.
Analysis of Section 203
It is relevant to note here that the term used in Section 203 (1) of the Act in relation to the KMPs is 'whole time'. However, Section 203(2) of the Act uses the term 'appoint' and not 'employ'. Moreover, Section 203 (3) of the Act, inter-alia, permits a person to be appointed as a Managing Director of more than one company at the same time.
Further, Section 203(3) of the Act uses the term 'appoint' as well as 'employ'. Therefore, it may be concluded that, companies have been given an option under the Act to appoint or employ KMPs. The definition of manager under the Act, provides that a manager can be appointed under a contract of service or otherwise.
The legislature was well aware of the use of the terms 'appoint' and 'employ' in the context of KMPs and has used the two words in contrast to each other. If the intent of the legislature would have been to ensure that the KMPs are whole time 'employees' of the company, it would have used the term 'employ' instead of 'appoint' and would not have provided for an option as aforesaid. It is a well-established principle of law that if the law is clear and unambiguous all the words used should be given a literal construction and should be given their full meaning. In other words, a statue cannot be interpreted in a manner which ultimately will defeat the intent of the law makers.
This view has also been adopted by the Gujarat High Court, while interpreting sub-section (1) of section 383A (1) of Companies Act, 1956 in State of Gujarat v Coromandal Investment Pvt. Ltd. (1991) [as it stood before the 2000 amendment]. The Gujarat High Court upheld the view that, it was not provided in section 383A(1) of the Companies Act, 1956 that the secretary of a company should be its employee; therefore, if a person acting as a secretary of a company is not in employment of that company, the provisions of that section of the act are not violated.
New Law v/s Old Law
The reference of the above case law under Companies Act, 1956 can be held valid under the extant Companies Act, 2013 by applying the principle of Pari Materia, which means same matter or subject. Accordingly, similar language in statutes with common purpose is to be interpreted in the same way.
It was held in Rajapalyam Mills Ltd. v. Commissioner of Income-Tax, Madras AIR 1979 SC 117:1978 (4) SCC 322: 1979 (1) SCR 1138 that where the provisions of the two statutes, one succeeding the other, was found to be identical, the interpretation and applicability of earlier provision would govern the subsequent provision as well.
Conclusion
Taking into consideration the aforementioned interpretation of Section 203 of the Act and the case laws discussed, it may be rightly concluded that KMPs under Section 203 of the Act may be appointed as such on a contractual basis and need not be in the employment of the company in question.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
