( Expert )
14 August 2010
In ordinary parlance, an office or place of profit means an office or profit or position, which brings to the person holding it some pecuniary gain or advantage or benefit. It will be an office or place of profit if it carries some remuneration, pecuniary advantage, benefit etc. The amount of such profit is immaterial. Section 314 of the Companies Act,1956 regulates the provisions relating to appointment of a director or any relative , firm, body corporate to an office or place of profit. The underlying object of this section is to ensure that those who occupy a fiduciary position in the company do not misuse, directly or indirectly, except with the permission of the shareholders or central government in certain cases. The provisions of this section are applicable to both public and private companies. The Companies Bill, 2003 proposes that the section shall not be applicable to private companies.
1.1 An office or place of profit can be deemed to be an office or place of profit
(a) Where the office is held by a director,
If the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise;
(b) If the office or place is held by an individual other than a director or by any firm, private company or other body corporate,
If the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
1.2 A mere contractual arrangement entered into between a company and the persons listed in the section under which some monetary benefit flows to such person does not per se amount to holding an office or place of Profit, by such other person. A person is said to hold an office or Place of Profit if there is. Between him and the company a relationship of employer and employee or such other person performs for and on behalf of the company certain acts under the control, direction or supervision of the company and also he is in receipt of consideration in due discharge of his duties. It is pertinent to note that this section prohibits a director of a company from holding an office or Place of Profit under the company or subsidiary. It, however, does not prohibit a director of a subsidiary company from holding an office or Place of Profit under the holding company
2. Approval of shareholders in General meeting
In terms of Section 314(1), approval of shareholders by passing a special resolution in general meeting will be required for appointment of any of the following persons to an office or place of profit
a. Any director
This section will be attracted even if the director receives an additional one rupee towards discharge of service in a capacity other than a director.
b. Partner in a firm in which a director is a partner
c. Relative of such director
The Madras High Court in A R Sundarasanam v Madras PHJS Nidhi Limited (1985) Comp Cas 776 (Mad) held that the office or place of profit held by a relative of a director is attracted by this section only if the director himself holds an office or place of profit. The words "such director' in subsection (1)(b) referred to the director already holding the office of profit and not to any other director. This lacuna in law is proposed to be plugged by the Companies (Amendment) Bill, 2003 as the article 'a' has substituted the words 'such' before the word director.
d. A firm in which such director or relative is a partner
e. Any private company of which a director is a director or member
f. Any director or manager of such a private company
2.1 The object of this section is to prohibit a director and any person connected with him from holding any office or Place of Profit of such sum as may be prescribed unless the company approves it by means of a special resolution. The consent of the Board of Directors and the subsequent approval by the general meeting is no substitute for a special resolution. Gobind Pritamdas Malkani v Amarendra nath Sircar, (1980) 50 Com Cases 219, 233 (Cal)
2.2 The provisions of this section will be attracted if any of the entities referred to in (b) to (f) receive monthly remuneration of Rs 10,000 or more but less than Rs 50,000 per month. The Delhi High Court in Ravinder Kumar Sangal v Auto lamps ltd. (1984)55 Comp Cas 742(Del). Held that the word "monthly" necessarily connotes anything taking place once a month, relating to a month, payable every month, based on a month, having a duration of one month, occurring, appearing or being done or acted upon every month or once a month. No other implication has been stressed. Considered in this context, the payment of bonus, reimbursement in lieu of privilege leave not availed, employer's contribution to provident fund, reimbursement of medical expenses, etc., cannot be treated as events of monthly regularity of occurrence. They are dependent upon certain events happening during the course of the entire year, and as and when they take place.
2.3 Any office or place of Profit held by the following persons shall be excluded from the rigors of this section
a. Managing Director
c. Banker or
d. Trustee for the debenture holder. This office may be held by them under the company or under any subsidiary of the company. This subsection has been retained in the Companies (Amendment) Bill, 2003 also.
2.4 The section does not envisage prior approval of shareholders in general meeting. The person(s) referred to in subsection (1) of Section 314 of the Act may hold office and that the special resolution may be passed by shareholders at the general meeting held for the first time after the holding of an office or place of profit. However, consent of the company shall be obtained in the general meeting or with in a period of three months of the appointment which ever is later if either the relative of a director or a firm in which such relative is a partner is appointed to an office or place of profit with out the knowledge of the director. Approval of shareholders in general meeting will not be required if the relative of a director or a firm in which the relative is a partner holds any office or place of profit under the company before the appointment of such director as a director of the company. It is pertinent to note that this relaxation is available only in cases where either a relative of a director or a firm in which such relative of a director is a partner.
3. Prior approval of shareholders and Central Government
Subsection 1B of Section 314 lists persons who shall not hold office or place of profit carrying such remuneration as has been prescribed except with the prior approval of shareholders in general meeting and approval of Central Government. These persons include
a. Partner in a firm in which a director of the company is a partner.
b. Relative of a director
c. Firm in which such director or his relative is a partner.
d. Firm in which such manager or relative is a partner.
e. Private company in which such director or his relative is a director or member.
f. Private company in which the manager or relative is a member.
3.1 Subsection 1B does not cover a director holding an office or place of profit and also a director or manager of a private company in which the director is a director or member. It also does not exclude the offices exempted under subsection (1) i.e Managing Director, manager, banker or trustee for the debenture holder. However, the Deptt. of Company Affairs has clarified that the provisions of subsection (1A) shall apply to cases falling under subsection (1B) of the Act. A director receiving only sitting fee for attending meetings is not holding an 'office or Place of profit' (A.R.Sudarasanan v Madras Pursawalkam Hindu Janokara Saswatha Nidhi Ltd. (1985) 57 Comp. Cas. 776 (Mad).
3.2 The Director's relatives (office or Place of Profit) Rules,2003 provides that approval of central Government shall now be required for cases where the remuneration exceeds Rs 50,000 p.m. The application shall be made in form 24B to the secretary, Government of India, Department of company Affairs accompanied by treasury challan for the payment of the requisite fee. Form 23 together with a certified true copy of the special resolution will be filed with the Registrar of Companies with in thirty days of the general meeting.
3.3 The Companies (Amendment) Bill, 2003 has omitted the provisions of subsection (1B). It has, however, inserted a clause providing that the appointment of a relative of a director holding more than two percent of the equity of the company shall require the approval of central Government if the remuneration exceeds such sums or percentage of profits or turn over as may be prescribed.
4. Vacation of office
The office or Place of Profit held in contravention of the provisions of this section will become vacant and the director, partner, relative, firm, private company or the manager concerned, shall be deemed to have vacated his office as such on and from the date next following the general meeting and shall be liable to refund to the company any remuneration received or the monetary equivalent or advantage taken in respect of the office or place of profit.
The Amendment Bill has simplified this otherwise complicated provision and proposes to do away with central Government approval except in case where a relative of a director has been appointed and he holds more than two percent stake in the company and draws remuneration more than such sums as may be prescribed.