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What is an office or Place of Profit?

Introduction:

The Companies Act, 1956 is one of the most voluminous Legislation. It contains 658 sections, 14 schedules and several forms for meeting the compliance. Although several Companies bills have been introduced, they did not result in revamp of Companies Act, 1956. Even today we still find some of the important sections more complicated as successive amendments have inserted provisos and explanations. The successive amendments have made reading and understanding very difficult. In my view Section 314 is one of those sections, I am referring to.

This section is full of provisos, explanations, exceptions within the section and subsection 1 has to be read with sub section 3 to fully understand the intention of the legislation. I thought it fit to analyze and make its meaning simple for the readers.

What is the Objective of Section 314?

 "The objective of Section 314(1 B) is to ensure that the funds of the company are not siphoned into the pockets of the relatives of the directors who may not be competent and worthy of the office held by them. The heading of the section itself indicates that “directors etc.” not to hold office or place of profit. This leads us to two questions. The first question is what the prohibition under the section is and why it is there. The next question is who are the persons prohibited and what are the exceptions.

What is meaning of place of profit?

Firstly we must understand the meaning office or place of profits. It would be helpful to refer to sub section 3 of the section 314 which gives us an indication of what is an office or place profit as intended by the section.

The expression "place of profit" means "any office or place in a company in which a director obtains anything by way of remuneration other than the remuneration to which he is entitled as a director". For e.g., Let us say a director is entitled to commission on net profits as remuneration as approved by the Shareholders. Either director (in addition to his entitlement as director) or his relative or any firm in which director is a partner, a private company in which director or his relative is a member or director, receives any remuneration in the same company, it would be deemed that an office or place of profit is held in that company.

Who are the prohibited persons?

Let us refer to Section 314(1) and analyze it. The first limb says that Director of the company shall not hold any office or place of profit in the company except with the consent of the shareholder in a general meeting. The second limb says that certain persons connected with him also shall not hold any office or place of profit carrying a total monthly remuneration of Rs.50, 000/- per month except with the consent of the shareholders by a special resolution. Let us now see who are the connected persons/firms/companies to the director who can not hold office or place of profit?

The following are such persons who shall not hold office or place of profit in a company unless they are covered by exemptions.

1. Partner of such director.

2. Relative of such director.

3. Firm in which such  director or his relative is a partner.

4. Private ltd company in which director is either a director or a member.

5. Private ltd company in which  his relative is a director.

6. Director or manager of such private Ltd company.

Analysis of Section 314

This section is applicable to both private and public Ltd companies.

a) Section 314(1)

The implication of main part of sub section (1) is already discussed above and it would be clear that holding of office or place of profit is prohibited unless consent of shareholder is obtained by a special resolution, if monetary limits are crossed. This has been discussed in detail above.

First proviso says that the consent referred to above will have to be taken at the general meeting of the company held for the first time after the holding of such office or place of profit. {Section 314(1)}

The proviso further says that the requirement of passing of a special resolution for holding an office or place of profit will not apply to the holding of the office of Managing director or Manager or place of profit as banker or trustee for the holders of the debentures of the company.

The aforesaid restrictions and exceptions will equally apply to any office or place of profit under the subsidiary of the company.

Second proviso stipulates requirements in cases where a relative of a director or firm in which such relative is a partner is appointed to an office or place of profit under the company or a subsidiary thereof without the knowledge of the director.

1. Appointments without Knowledge: In such cases, the consent of the company may be obtained either in the general meeting held for the first time after such appointment or within three months from the date of appointment, whichever is later.

Let turn our focus to explanation at the end of Section 314(1).By this explanation to sub-section (1), it has been made clear that special resolution according consent shall be necessary for every appointment in the first instance to an office or place of profit and every such appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution. For example, if ' X person' is appointed to an office or place of profit on remuneration of Rs.50,000/- per month, any subsequent change in a remuneration, say, an increment of Rs. 5000 would require the consent of the general meeting by special resolution. But such consent would not be necessary if the appointment of 'X' has been consented to by the general meeting on a remuneration of Rs.50,000 in a time scale of Rs. 55,000- 5000(increment) up to 65000, In the latter event, further consent of the general meeting is necessary only when the remuneration of 'X' crosses Rs. 65,000 being the upper limit .

2. Prior appointments: The requirement of special resolution has been dispensed with in the case of office or place of profit held by relatives etc., before such director became a director of the company. Of course, even in those cases if the appointment is not on a time scale, any further change in remuneration would require the consent of the shareholders and can not claim the plea of prior appointment.{Section 314(1-A)}

b) Section 314(1-B) what it says?

The Companies (Amendment) Act, 1974, introduced sub-section (1-B) which provides that no partner or relative of a director or manager, no firm in which such director or manager or relative of either is a partner, no private company of which such a director or manager or relative of either is a director or member, shall hold any office or place of profit in the company which carries a total monthly remuneration of not less than Rs.2,50,000/-except with the prior consent of the company by special resolution and the approval of the Central Government.

What is monthly remuneration?

Initially there is some confusion that the prescribed threshold needs to be considered only if it is paid monthly and whether it is applicable for Annual payments. However “Directors Relative (Office or place of profit) Rules 2003 make it clear that monetary value of all allowance, perquisites whether annual or monthly shall be taken into account. The Rules further elicit information such as, undertaking as to exclusive employment experience, qualifications,  other employees drawing same salary, number of relatives and this information virtually prevent misuse of directors’ position in appointing relatives or other prohibited persons

c) Section 314(2) (Consequences of Violation)

Section 314(2) mentions about the consequences of violation of 314(1) and 314(1-B)

i) For Violation of Section 314(1)

Any office or place of profit held in contravention of the provisions of Section 314(1) would result in the vacation of office by the director, by the relative or partner, firm or private company holding the office or place of profit in the company on and from the day following the general meeting of the company held for the first time next after the appointment. Further, whatever remuneration has been received including the monetary equivalent of any perquisites or advantage enjoyed, has to be refunded to the company.

ii) For Violation of Section 314(1-B)

If any office or place is held in contravention of Section 314(1-B), the person or private company or firm holding such office or place of profit is liable to refund to the company the remuneration and the monetary value of perquisites or advantages enjoyed by him or it from the date on which the office was so held.

In both the cases, the company cannot waive the recovery of the amount without the approval of the Central Government.

d) Section 314(2-A)

Section 314(2-A) requires the persons holding place of profit to make declaration in writing how he is connected to the director i.e. whether as relative, partner, member, director of body corporate etc.,

e) Section 314(2-B) and (2-C)

If one reads both these sections, they look alike but they convey that after commencement of Companies (Amendment) Act, 1974, if prior consent of shareholders and approval of Central Government is not obtained for holding place of profit then the persons appointed to such office shall be liable to refund the benefits enjoyed by them. {Sec.314 (2-B)}

Sub section (2-C) clarifies when the office is deemed to have been vacated. The persons holding office or place profit shall be deemed to have vacated the same on expiry of 6 months(from 01.02.75) or the date next following which ever is earlier and refund the benefit enjoyed. These wordings should have been simplified to say, that office or place of profit shall be deemed to have been vacated for not taking consent of shareholders and/or prior approval of the central government and all benefits should be refunded to the company.

f) Section 314(4)

The provisions of section 314 are not applicable to person who is appointed by the Central government u/s 408 as a director and holds office or place of profit

Conclusion:

Department of Company affairs have given a lot of clarifications on issues arising out of application of this Section. It is always better to rely on the judicial precedents rather than on clarifications which do not have legal force. Sometimes there may be overlapping of issues which also come under the purview of another section. For eg, engaging a relative of Director for professional services under a contract, both section 314-B and 297(1) are applicable. Section 314 (1-B), requires prior approval of share holders and not of Central government. But the same issue also covered u/s 297(1) which requires prior approval of Central government, if  the company’s paid up capital is one crores or more, In  cases like this  compliance under both sections have to be considered and compliance of more rigorous section has to be met with.

G S Rao, Chief Manager (Legal), OCL India Limited

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