Section 314
This query is : Resolved
03 September 2013
CAN ANYBODY EXPLAIN ME WITH A PROPER EXAMPLE SECTION 314 OF THE COMPANIES ACT, 1956
03 September 2013
Hi
As per section 314 certain persons cannot be appointed or allow to hold an office or place of profit in the company unless, they comply with the requirement of the provisions of this section. If any person is proposed to hold such office or place of profit in the company then company has to take consent of the shareholders by passing special resolution in the general meeting of the company.
No such consent is required, if a director receiving remuneration by holding such office or place in subsidiary of the company returned such remuneration to the subsidiary or its holding company.
As per section 314 certain persons cannot be appointed or allow to hold an office or place of profit in the company unless, they comply with the requirement of the provisions of this section. If any person is proposed to hold such office or place of profit in the company then company has to take consent of the shareholders by passing special resolution in the general meeting of the company.
No such consent is required, if a director receiving remuneration by holding such office or place in subsidiary of the company returned such remuneration to the subsidiary or its holding company.
03 September 2013
The section 314 regulates all such kinds of office or place of profit where any of the persons mentioned therein is required to perform functions on behalf of a company under the control, direction and supervision of the company. In general, there should be employer-employee relationship or that of principal-agent. The person appointed to the office should be required to render duties, services and functions under the instructions of the company concerned. Accordingly, just because some remuneration like fees or other sums are received from the company, will not make such transactions fall under the prohibition under the section.
The words 'office or place of profit' occurring in section 314(1) include selling and buying agents receiving commission and/or salary. [CIT v Principal Officer C/o Arkay Wires (P.) Ltd. (2005) 58 SCL 97 (All.)].
The DCA has given clarification vide Circular No. 14 of 1975, dated 5-6-1975 to clarify various doubts on the scope of the provisions of section 314(1B) of Companies Act, 1956, as under:—
Section 314 of the Companies Act, 1956, 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 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 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 (1B) provides that in the case of an appointment to 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 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.
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. of the Act. 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, 309, 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 whether by a public company or a private company.
Further, consistently with the 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.
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) ensures 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-suction (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).
In the case of a private company (not governed by section 269, etc. of the Companies Act, 1956) a question has arisen whether the appointment of a person as a managing director who is related to a director of the 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 circumstances that for the purpose of sub-section (1), which deals with appointments to an office of profit carrying less than a total monthly remuneration of Rs. 500 or more (i.e. up to Rs. 3,000), 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 call 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.
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 of that account cannot lead to an inference of an offence or place of profit in or under the company under section 314 of the Act. However, if such a solicitor/advocate, etc. is appointed on a regular retainer basis from rendering legal advice other than appearance in courts, the provisions of section 314 will be applicable.
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 as 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.
Few cases of appointment of relatives of directors as statutory auditors of the company managed by such directors have come to the notice of the Department. It is conceded that there is no legal bar to such appointments so long as the provisions of section 314 and those relating to appointment of auditor are complied with the appointments are to be regarded as legally valid. It is, however, felt that it would be in the large interests of the profession, if the auditors were to avoid any conflict between their duties as statutory auditors of companies and their personal interest in the management of such companies. As a matter of general principle, a Chartered Accountant, who was a near relation of a director of a company or a partner of a firm in which such director is a partner, should refrain from accepting the appointment of auditor of the company. As regards other categories or relatives of directors, a healthy convention should be established by such persons should not audit or sign the balance sheets of companies managed by their relatives or associates, even though the firms of which they were partners happened to be the auditors of
these companies. [Source: Seventh Annual Report on the Working and Administration of the Companies Act, 1956—Year ended 31 March, 1963.]
The section 314 regulates all such kinds of office or place of profit where any of the persons mentioned therein is required to perform functions on behalf of a company under the control, direction and supervision of the company. In general, there should be employer-employee relationship or that of principal-agent. The person appointed to the office should be required to render duties, services and functions under the instructions of the company concerned. Accordingly, just because some remuneration like fees or other sums are received from the company, will not make such transactions fall under the prohibition under the section.
The words 'office or place of profit' occurring in section 314(1) include selling and buying agents receiving commission and/or salary. [CIT v Principal Officer C/o Arkay Wires (P.) Ltd. (2005) 58 SCL 97 (All.)].
The DCA has given clarification vide Circular No. 14 of 1975, dated 5-6-1975 to clarify various doubts on the scope of the provisions of section 314(1B) of Companies Act, 1956, as under:—
Section 314 of the Companies Act, 1956, 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 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 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 (1B) provides that in the case of an appointment to 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 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.
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. of the Act. 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, 309, 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 whether by a public company or a private company.
Further, consistently with the 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.
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) ensures 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-suction (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).
In the case of a private company (not governed by section 269, etc. of the Companies Act, 1956) a question has arisen whether the appointment of a person as a managing director who is related to a director of the 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 circumstances that for the purpose of sub-section (1), which deals with appointments to an office of profit carrying less than a total monthly remuneration of Rs. 500 or more (i.e. up to Rs. 3,000), 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 call 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.
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 of that account cannot lead to an inference of an offence or place of profit in or under the company under section 314 of the Act. However, if such a solicitor/advocate, etc. is appointed on a regular retainer basis from rendering legal advice other than appearance in courts, the provisions of section 314 will be applicable.
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 as 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.
Few cases of appointment of relatives of directors as statutory auditors of the company managed by such directors have come to the notice of the Department. It is conceded that there is no legal bar to such appointments so long as the provisions of section 314 and those relating to appointment of auditor are complied with the appointments are to be regarded as legally valid. It is, however, felt that it would be in the large interests of the profession, if the auditors were to avoid any conflict between their duties as statutory auditors of companies and their personal interest in the management of such companies. As a matter of general principle, a Chartered Accountant, who was a near relation of a director of a company or a partner of a firm in which such director is a partner, should refrain from accepting the appointment of auditor of the company. As regards other categories or relatives of directors, a healthy convention should be established by such persons should not audit or sign the balance sheets of companies managed by their relatives or associates, even though the firms of which they were partners happened to be the auditors of
these companies. [Source: Seventh Annual Report on the Working and Administration of the Companies Act, 1956—Year ended 31 March, 1963.]
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