The Hindu Business Line : A caution about headroom

THE company law permits corporates to have more than one managing director. Section 316 (2) provides that "a pubic 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 company."

This provision has created a number of difficulties and opened up the Pandora's box, as to whether two managing directors who may be designated as chairman and vice-chairman respectively can exercise the same powers, duties and responsibilities unless specified otherwise.

Section 2(26) defines managing director to mean "a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or by virtue of its memorandum or articles of articles of association, is entrusted with (substantial powers of management) which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called;

"Provided that the power to do administrative acts of a routine nature when so authorised by the Board, such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management;

"Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and directions of its board of directors."

Therefore, all the managing directors in law enjoyed "substantial powers of management".

This can, in some cases, conflict with the interests of the different managing directors and leave the administration in the lurch as to whose instructions has to be obeyed. Each one claims that he is the boss. The ongoing battle between the two Ambani brothers is perhaps a revealing example. This situation is more prevalent in a family hierarchy.

Anomaly

Section 2(69) of the Companies Act 1956 provides for mandatory appointment of a (note the word singular) managing director by a public company having a paid-up share capital of more than Rs 5 crore. However, it should not be taken to mean that companies are forbidden from appointing more than one managing director, since such an appointment will be in excess of the requirement and does not dilute the provision.

There is an anomaly in the provision insofar as it applies to the appointment of a managing director. Under the compass of the Act, the company secretary cannot be a secretary of another company whereas a managing director can be a managing director of another company. The same applies to a whole-time director.

Permitting a person holding such a high office and enjoying substantial powers of management to act as the managing director of another company seems incongruous. It may constrict his involvement in decision-making power. Section 5 defines the meaning of "officer who is in default" one of the person so defined is the "managing director or managing directors".

Conversely, all the managing directors of corporates will be hit by the section in the event of default or contravention of any of the provisions of the Act committed by any one of such managerial personnel without the knowledge of the other. This is totally unfair.

Designation mania

In some companies a person is designated as chairman and managing director and the second as the vice-chairman and MD and third as vice-chairman and joint MD, and so on. In the event of a dispute, a stand is taken that the chairman and managing director is the supreme boss.

This is totally incorrect in law and perhaps in fact. There is no provision in the Act for the appointment of a chairman nor does the Act contain a word on any special powers to the chairman except that the chairman of the meeting enjoys a casting vote in the event of equality of votes in the meeting.

The legal position, as confirmed in Table A and the Articles of Association, is that the directors elect a chairman of the board for each meeting or for a specified period of time or until otherwise dissolved. The chairman has no special powers, except that he is the sole authority to conduct the proceedings of the meeting and to decide what should be included or expunged from the minutes.

In the event of equality of votes he has a casting vote. The chairman of the board presides at the general meeting. It is significant to note that most companies provide in their Articles that the directors need not hold qualification shares, so much so that the chairman is a director and not a member, though he presides at the meeting of the members.

Of late, non-de-plume chairman is being brandished as a designation. Therefore, the position of the chairman is merely a figurehead.

Resultantly, both managing directors, designated as chairman and MD or vice-chairman and MD, are on par in law.

In the event of any dispute between the managing directors, it should be brought before the board for resolution and the decision of the board on such matters will be final and binding.

Recommendations

To avert any conflict of interest or assertion of excess powers, the issue is better handled in any one or more of the following ways:

Right at the time of appointment, the board of directors should define duties, functional responsibilities and accountability of each of the managing director. The agreement between the company and the managing director concerned will be binding on the incumbent.

The AoA of a company may provide for the appointment of one or more managing directors and spell out the functional duties, responsibilities and accountability of each of the managing directors.

The managing directors between themselves mutually agree to distribution of powers and responsibilities and get them confirmed by the board and recorded in the minutes.

The Act may be amended to mandate that in the event of appointment of more than one managing director, it shall be the duty of the board to define the functional duties, responsibilities and accountability of each of them.

This should be agreed to by the persons concerned.

The shareholders, while confirming the appointment, can fix functional responsibility and accountability on each of the managing directors, which will thereupon be binding on the incumbents.

(The author is a Pune-based company secretary.)