Background
Key Managerial Personnel (“KMP”) play an integral role in the management and functioning of a company. Earlier, the Companies Act, 1956 under Section 269, provided for the appointment of managing or whole-time director or manager in certain cases. However, the Dr. J.J. Irani Report[1], recognized that the board of directors (“Board”) typically look towards KMP for formulation and execution of policies and recognized their role in conducting the affairs of the company. The Committee highlighted the need to recognise the concept of KMP, govern such appointments and identify them as officers responsible for certain functions of the company, along with making them liable for any related non-compliances. Further, the Parliamentary Standing Committees on the Companies Bill in 2009 and 2011[2] also discussed the necessity for the concept of KMP to be included in the Companies Act, 2013 (“Companies Act”). Accordingly, the Companies Act, re-envisioned the importance of KMP and for the first time provided for a detailed definition of KMP along with the provisions governing their appointment.
Distinction between KMP and whole-time KMP
The Companies Act defines KMP under Section 2(51) of the Companies Act and the list of whole-time KMP is provided under Section 203 of the Companies Act.
Section 2(51) defines ‘key managerial personnel’ as:
“(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
(vi) such other officer as may be prescribed.”
While, Section 203 provides:
“(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel ,—
(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer.
(3) A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time:….”
Section 2(51) of the Companies Act covers a large universe of designations that fall within the meaning of ‘Key Managerial Personnel’. The Companies Act has several provisions that apply to KMP such as Section 2(59) and 2(60) which include KMP within the ambit of “officer” and “officer who is in default”, Section 170 which provides for the maintenance of register of KMP with details of their shareholding, Section 179 which requires all KMP appointments be done by the Board, and Sections 184 and 189 which pertain to disclosure of interest by KMP.
Section 203 of the Companies Act, which deals with the appointment of whole-time KMPs, is limited to (i) managing director, or CEO or manager and in their absence, a whole-time director; (ii) company secretary; and (ii) CFO and was intended to apply to only specific classes of companies, with private companies being excluded from its ambit The exception to this is Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (“Rules”) which mandates every private company with a paid-up share capital of INR 10,00,00,000 or more to have a whole-time company secretary.
The Companies Act seems to distinguish between KMP and whole-time KMP. For instance, restrictions provided under Section 203(3) such as restriction on not holding more than one office, except in a subsidiary would be applicable only to whole-time KMP and not to all KMP as defined under Section 2(51) of the Companies Act. However, the National Company Law Appellate Tribunal (“NCLAT”), through its recent order on Rattan India Finance Private Limited (“Rattan Finance”) has blurred this line of distinction.
NCLAT’s view on Rattan Finance vide order dated September 7, 2022 (“NCLAT Order”)[3]
The NCLAT Order set aside the order of National Company Law Tribunal, Delhi dated March 29, 2022[4] on the appointment of CFO at Rattan Finance. Hamlin Trust and other shareholders, who were entitled to appoint a CFO as per the articles of association (“AOA”), had filed an appeal challenging the appointment of the CFO. It was contended that the AOA of Rattan Finance did not provide for any pre-conditions for appointment of CFO. While delving into this issue, the NCLAT held that if a private company, which is otherwise exempt from appointing a CFO, chooses to appoint a CFO, then since the CFO is a KMP in terms of Section 2(51) of Companies Act, it would have to comply with Section 203 of the Companies Act, dehors an agreement to the contrary. The NCLAT Order also held that in the absence of any specific mention regarding eligibility and the method of selection of the CFO in the AOA, it would be logical to take recourse to Section 203 of the Companies Act in selecting and appointing of CFO, and also take into consideration Sections 184 and 189 of the Companies Act in adjudging the eligibility of the KMP.
Based on the NCLAT Order, if any company (including private companies) voluntarily appoints an individual with a KMP designation, they will have to comply with requirements of Section 203 and other provisions applicable to KMP as per the Companies Act.
Registrar of Companies (“RoC”) order on Landomus Realty Private Limited dated February 7, 2022 (“RoC Order”)
The NCLAT’s view on extending Section 203 of the Companies Act to private companies was also observed earlier in the RoC Order. During an inquiry under Section 206 of the Companies Act, it was found that in Landomus Realty Private Limited (“Landomus”), a director had filed a return under Section 170, by signing it in the capacity of chairman and CEO. However, no resolution had been passed for appointing him as a CEO by Landomus or the Board. Further, as per the records, Form DIR-12 had not been filed for change in designation and no proper approvals to this effect were taken with respect to such designation.
The RoC adjudicated that although Landomus did not fall under the class of companies required to appoint a KMP under Section 203 read with Rule 8 and 8A of the Rules, the usage of the abbreviation CEO without proper approvals, and without filing of Form DIR-12 with the RoC, was held to be in violation of the Companies Act.
View against use of internal designations without compliance with the Companies Act
The NCLAT Order on Rattan Finance and the RoC Order on Landomus will have a significant impact on companies (predominantly private companies) which follow the practice of conferring designations such as CEO, CFO, Chief Risk Officer, Chief Information Officer, Chief Credit Officer, etc. without intending it to be as per the Companies Act (i.e. without requisite approvals and filings). Apart from increasing the already burgeoning compliances at the company and individual level, this could also lead to increased liability of such individuals under the Companies Act, as the definition of KMP is wide enough to include any such individual designated by the Board as KMP .
Thus, the NCLAT Order might have cast the net too wide by applying Section 203 to voluntary appointments of KMP by private companies, it appears that if private companies seek to appoint or continue the appointment of such KMP on a voluntary basis, then they must take quick action to ensure that the requisite approvals, including appointment by the Board and relevant disclosures as mandated under the Companies Act are made and the provisions pertaining to KMP are strictly followed. No doubt, many companies will now have to relook at the practice of conferring such designations on their key employees.
Lastly, if this reasoning is extended to other provisions of the Companies Act, then it may lead to unintended consequences – for example, if a private company appoints directors and proposes to remunerate them for the same, then one would be posed with a question of whether the company is required to follow the limits on director remuneration provided under Section 197 of the Companies Act, which again as per the provisions applies only to public companies. Therefore, NCLAT’s and RoC’s views may have to be re-evaluated to avoid the burden that would be created especially on private companies in the form of increased compliances and costs without actually providing for any additional benefits.
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] Report of the Expert Committee on Company Law, chaired by Dr. Jamshed J. Irani, submitted to the MCA on May 31, 2005.
[2] 21st Report of the Parliamentary Standing Committee on Finance, The Companies Bill, 2009, 15th Lok Sabha; and 57th Report of the Parliamentary Standing Committee on Finance, The Companies Bill, 2011, 15th Lok Sabha
