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Co. Law Quiz: Question 1

(Guest)

It is well-known to all that, Directors are liable to retire by rotation.

But My Question is Whether Managing Director is Liable to retire by Rotation or not?

If Yes, then Why?

If No, then Why?

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6 Replies

(Guest)

I have reserved this space for my answer. But, I will answer later on.

Now, check your Corporate Law Interpretation power & tell me your opinions.

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Your Opinions/answers are wrong.

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Managing Director is not liable to retire by Rotation.

I will give 2 reasons for that

Reason 1 : Realistic Approach

When the MD is appointed, He enters into the contract with the company for the appointment & mention the period of appointment e.g. 3, 4 or 5 Years(any).

Now, Suppose, If MD is the person, who has to be liable to retire by rotation, and In the AGM, if he is not re-appointed, then what happened?

The MD will retire at the end of 2 years, Though the contract is for the period of 4 Years.

then, Company becomes guilty under the Contract Act, 1872.

Because, It can be considered as the breach of the contract, as the company entered in the contract for the appointment of 4 Years and the same company retired him in the 2 years.

So, Company can not do this.

Note: Contract Act, 1872 has overriding effect to almost all the Acts including the Company Act, 1956.

So, as per contract act, 1872, MD is not liable to retire by rotation.

Reason 2 : Logical Approach

First of all look at the simple definition of the MD, which says that MD is a person who has the substantial control over the company & its functions. The derictors donot have the substantial power of the company.

The provisions related to MD for the appointment, retirement, signing of balance sheet, functionality is different from the other directors. It happened like this because Legislator wants the different provision related to MD.

MD is a special kind of Director.

If the Legislator wants the MD to retire by rotation, then he would not have definitely given the provision related to Appointment for maximum of 5 years & can be reappointed thereafter.

Because, Managing Director will be retire after 2 years and can be reappointed thereafter.

So, Managing Director is not liable to retire by rotation.

Note: Suppose, If the Ministry has clarified in this regards earlier, and considered MD as the Retiring Director, then also MD is not liable to retire by Rotation.

The reason for this is as follows:

The calrification issued by the Ministry doesn't have overridding effect to the Company Act, 1956, because clarifications are guiding in nature & not passed by the Parliament.

But If in the future the Ministry amends the clause related to Retire by rotation in the Company Act & Simultaneously adds that Company Act, 1956 has overriding effect to the Contract Act, 1872,

then & then only MD is liable to retire by rotation, otherwise not.

I have been very brief in giving reasons, If you need further clarifications than let me know.

Ankur Shah (Practicing Company Secretary)

“Guru Gautam” Bungalow, Inside Parshwa Tower,

Nr. Shyamal Cross Road, 132ft. Ring Road,

Satellite, Ahmedabad – 15

Contact: + 91-9427633901

E-mail: ankurjewel @ gmail.com

Blog: csankur.blogspot.com

Aisha (Finance Professional) (7547 Points)
Replied 28 September 2009

yes managing director can also be liable by rotation.. even though his appointment can be made for min 5 years

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 28 September 2009

section 255 of the companies Act also applies to MD . MD does not have special privilege, hnce he is also liable to retire by rotation, But AOA of most companies contain a provision relating to excluding MD and WTD from the retirement by rotation condition (section 255) & provides that a person shall not be liable to retirement by rotation so long as he continues to hold the office MD/WTD .

In case a Dir, is liable to retire by rotation, bur apponted as MD for fixed term say 4 years, then he shall retire at AGM and be reappointed, and as per DCA circular (don't know thw no. ) if a dir retires and again reappointed in same AGM, for such period (in our case 4 year ) no further CG permission is required for such 4 years, But after 4 years CG permission need to be obtained

[My answer may not be properly organised, but i think it is correct for 3 to 4 marks]

(Guest)

My answer has been posted.

Now, It is open for members comments.

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17848 Points)
Replied 20 May 2010

I am also of the view that the MD as well as WTD are not the Directors liable to retire by rotation.

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17848 Points)
Replied 20 May 2010

The company law (section 255) only requires that not less than two-thirds strength of the Board shall be liable to retire by rotation. The company can have an option, through its AOA, to have more directors than two thirds strength or all directors retire by rotation. If the AOA does not contain any provision regarding number of directors liable to retire by rotation, then section 255 is applicable. The company in such a case have its MD and WTD as not retiring by rotation but appointed for the period. If the AOA has a provision that all directors are liable to retire by rotation, then the MD / WTD, even if he is appointed for 5 years, shall be liable to retire.