AI Structured Summary
Not yet generated for this judgment
Judgment
Shanmukham, J.—An application by a member of the first respondent company (incorporated under the Companies Act, 1956) under s.
314 of the companies Act, 1956 (for brevity, ""the Act""), and rule 9 of the Companies (Court) Rule, 1959, the declare that the second respondent,
a director of the said company, and the third respondent, an employee in the said company had vacated their respective offices at least from
December 31, 1979.
The applicant''s case is that while the second respondent was holding the post of a director, his son, the third respondent, was appointed on
probation as a clerk on a starting monthly salary of Rs. 600 in May, 1979, and therefore, as per the provisions of s. 314 of the Companies Act,
1956 no relative a director shall hold any office or place of profit carrying a total monthly remuneration of Rs. 500 or more without prior consent of
the company. In this case, as the consent of the company was not obtained either in the general meeting of the company held for the first time after
holding of such office or place of profit or within three months from the date of appointment, whichever is later, there is a violation of s. 314 of the
Act and that, therefore, both respondents Nos. 2 and 3 shall be deemed to have vacated their respective offices by virtue of s. 314(2)(a) of the
Act. It is, therefore, necessary to refer to the relevant part of s. 314 :
(1) Expect with the consent of the company accorded by a special resolution, -
(a) no director of a company shall hold any office or place of profit, and
(b) no partner or relative of such director, no firm in which such director, or a relative of such director, is a partner, no private company of which
such director is a director or member, and no director or manager of such a private company, shall hold any office or place of profit carrying a
total monthly remuneration of five-hundred rupees or more,
except that of managing director or manager, banker or trustee for the holders of debentures of the company, -
(i) under the company; or
(ii) under any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place of profit is paid
over to the company or its holding company :
Provided that it shall be sufficient if the 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 :
Provided further that where a relative of a director or a 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, the consent of the company may be obtained either in the general meeting
aforesaid in within three months from the date of the appointment, whichever is later.
Explanation. - For the purpose of this sub-section, a special resolution according consent shall be necessary for every appointment in the first
instance to an office or place of profit and to every subsequent 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 .....
(2)(a) If any office or place of profit is held in contravention of the provisions of sub-section (1), the director, partner, relative, firm, private
company, managing agent, secretaries and treasures or the manager, concerned, shall be deemed to have vacated his or its office as such on and
from the date next following the date of the general meeting of the company referred to in the first proviso or, as the case may be, the date of the
expiry of the period of three months referred to in the second proviso to that sub-section, and shall also be liable to refund to the company any
remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him or it for the period immediately preceding the
date aforesaid in respect of such office or place of profit.
A close reading of the above provision will reveal that it envisages two prohibitions, one in respect of a director, while the other in respect of a
relative of such director. The prohibition is that no director of a company shall hold any office or place of profit unless the special resolution,
according the consent of the company, is passed at general meeting of the company held for the first time after the holding of such office or place of
profit. The second is that no relative of such director shall hold any office or place of profit carrying a total monthly remuneration of Rs. 500 or
more, unless the consent of the company was obtained either in the general meeting of the company held for the first time after the holding of such
office or place of profit or within three months from the date of appointment, whichever is later, it is necessary at this stage to advert to the
argument advanced by Mr. Thampi, learned counsel for the applicant. Pointing out the second proviso, viz., provided further that where a relative
of director or a firm in which such relative is a partner, is appointed to an office of place of profit under the company or a subsidiary thereof
without the knowledge of the director, the consent of the company may be obtained either in the general meeting aforesaid or within three months
form the date of the appointment, whichever is later the learned counsel submitted that in so far as there is no emphasis as ""such director"" in that
provision, even if a relative of any director of the company, he is liable to vacate office as provided in s. 314(2). I find such a contention is hardly
acceptable. Under s. 314(1)(a) of the Act, as already pointed out, no director of a company shall hold any office or place of profit unless the
consent is obtained as stated above; so too, no relative of such director shall hold any office or place or profit carrying a total monthly
remuneration of Rs. 500 or more unless the consent is obtained as indicated already, the relative of such director used in s. 314(1)(b) will
necessarily refer to a director of the company should was holding any office or place of profit, but not any director; that is the plain grammatical
meaning of s. 314(1)(a) and (b). Further the first proviso in the order it is set out, deals with a case of a director holding any office or place of
profit, while the second proviso deals with a relative of such director. I am avoiding reference to the partner referred to in these provisions as not
Germanies for the present discussion. Thus, the second proviso has to be read in conjunction with s. 314(1)(b). It so read, it is amply clear that the
prohibition under s. 314(1)(b) is restricted to a relative of such director, meaning thereby the director holding any office or place of profit referred
to in s. 314(1)(a) but not any ordinary director. The deeming vacation of the office of the director visualised under s. 314(1)(a) will apply to a
director who holds any office or place of profit without obtaining the consent referred to above. This, in turn, takes me to the question, when is a
director said to hold any office or place of profit. The answer is found in s. 314(3) and I extract the relevant portion :
Any office or place shall be deemed to be an office or place of profit under the company within the meaning of this section, -
(a) in case the office or place is held by a director, if the director holding it obtains from the company anything by way of .... whether as salary,
fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
It is thus clear that a director cannot be said to hold any office or place of profit if he should receive the remuneration to which he is entitled as
such director. On the other hand, he will be said to hold any office or place of profit only when besides the remuneration to which he is entitled as
such director, he obtains from the company a remuneration such as salary, fees, commission, perquisites, etc. it is apposite at this juncture to refer
to ss. 198 and 309(2) of the Act. Section 198 runs thus :
(1) The total managerial remuneration payable by a public company or a private company which is subsidiary of a public company, to its directors
and its managing agent, secretaries and treasures or manager in respect of any financial year shall not exceed eleven per cent. of the net profits of
that company for that financial year computed in the manner laid down in sections 349, 350 and 351, except that the remuneration of the directors
shall not be deducted from the gross profits ....
(2) The percentage aforesaid shall be exclusive of any fees payable to directors under sub-section (2) of section 309.
According to s. 309(2) of the Act, a director may receive remuneration by way of a fee for each meeting of the board, or a committee thereof
attend by him. From the above, it is obvious that if a director were to receive remuneration by way of see for each meeting of the board or a
committee thereof attended by him, he shall not be deemed to hold any office or place of profit. Article 39(a) in the articles of association of the
first respondent company prescribes the remuneration that is to be paid to every director as sitting fee per meeting of the board of directors in
addition to travelling expenses. Unfortunately for the applicant, he has not stated in his affidavit filed in support of the application that over and
above the remuneration to which the second respondent is entitled as an ordinary director as provided in art., 39(a), the second respondent is
drawing any further remuneration from the company. There is no whisper either that the second respondent is holding any office or place of it
within the meaning of s. 314(1)(a) of the Act It is significant to note that in the counter-affidavit filed by the first respondent company, it is
specifically pointed out that the second respondent was not a director holding any office or place of profit. The applicant has not chosen to file any
reply/affidavit dispute such statement made by the secretary of the company on behalf of the company. On the affidavit evidency therefore, I
cannot but conclude that the applicant has not only failed to allege, but also failed to prove that the second respondent was a director holding any
office or plea of profit. If the second respondent did not hold any office or place of profit, the applicant is not entitled to contend that so far as the
second respondent is concerned, there is violation of s. 314(1)(a) of the Act.
Now, turning to the third respondent, I must hold that here also, the applicant has no case. I have already held that s. 314(1)(a) does not apply
to a relative of any ordinary sitting director holding any office or place of profit carrying even a monthly remuneration of Rs. 500 and of but applies
to the relative of a director who holds any office or place of profit. In this case, the applicant has not succeeded in establishing that the third
respondent was a relative of such director holding any office of place of profit. It is true that the third respondent is the son of the second
respondent, but then the second respondent is only an ordinary director, but not one holding any office or place of profit as defined in s. 314(3) of
the Act. If that is so, there can be no violation of s. 314(1)(b) of the Act.
The result is, the application fails and is dismissed but without costs.