Company act. 1994 specially provides for the provision of directors to hold office of profit. Critically analyze the provision.

1. Introduction:

Company Act 1994 specially provides the provision for directors to hold office of profit in the section-104. But meanwhile it is stated that director not hold office of profit. So if it is,  then how it is possible to  hold the office of profit for directors. It means these directors and those directors are not identical. Also it means there is privilege difference among directors to hold the office of profit.

Here “the term ‘Office of profit’ actually include an office of profit which  is not  a subsisting, permanent, substantive position having an existence independent of the person who  fills it”[1].  A person may be appointed legal or technical adviser or managing director or managing agent for the first time and yet he would be holding an office of profit within the meaning of the section.

It is as that “director not to hold office of profit – No director or firm of which such director is a partner of private company of which such director is a director shall, without the consent of the company in general meeting, hold any office of profit under the company except that of a managing director or manager or a legal or technical adviser or a banker.”[2] But in spite of saying this it can depict as holding office of profit in different point of view which is given by special provision toward particular in this section. In general without the consent of  company  in general meeting a director  can not hold any office of profit but there  are exceptions  in case of different point of view.

2. Concepts in general:

Conceptually it’s the partial portion of Company Act. Provision- director not to hold office of profit which is the exceptional case of holding office of profit in section -104. Also a term referred to in section- 104 whereby any director except the managing director or legal or technical adviser, is prohibited from accepting any other place or position the office of profit in the company regardless his directorship. The term, ‘office of profit’ basically bears the meaning of salary and/or other benefits form the company. To be quite clear, a director is considered to occupy the position of ‘office of profit’ if he draws anything from the company by way of additional remuneration over and above his usual one as a director. This additional remuneration or compensation may be in the form of salary, fees, commission, perquisites, free   accommodation or otherwise.  The Board,   however,   by an unanimous resolution may employ a managing director fixing his salary and other benefits (such as commission or contribution in profits or partly in one way and partly in different means) under an agreement with the company. Any other director can not accept such an office of profit without the consent of the company in general meeting as  provided in section 104.

3. Relativity with previous companies Act:

Purpose and objective of this section is also same and almost bearing the same meaning as it is in section – 104 (company Act 1994).Directors etc. not to hold any  office or place of profit (Sec. 314). Section – 314 of the Companies Act provides that without the consent of the company authorized  by a special resolution :

“(a)   no director of a company shall hold any office or place of profit; and

  (b)(I)    no partner or relative of such director ;

(II)      no firm in which such director or his relative is a partner;

(III)            no private company of which such director is a director or member, and

(IV)            no director or manager of such private company,

shall hold any office or place of profit carrying a total monthly remuneration of such sum as may be prescribed.”[3]

In the situation of such appointment is made regardless the permission of the company, it will be enough if the permission of the company is given by a special resolution permitted in the first general meeting held after the appointment. In case a relative of a director is employed regardless the knowledge of the director, the consent or permission of the company may be obtained either in the first general meeting held after the appointment or within three months of the date of the appointment, whichever is later.

The term “office of profit” or “place of profit” can be explained by the courts in different ways. The House of Lords in Dale v.. Inland Revenue Commissioners,[4] held that an ‘office of profit’ means an office or -employment which carries with it remuneration as different or distinct from an honorary office. “A person holds a ‘place of profit’ under a company when he is not in the employment of the company but obtains remuneration from the company.” [5]

But the term ‘office or place of profit’ has been defined in section 314(3) in the Companies Act as follows :

So here the term- ‘office’ or ‘place’ could  be assumed to be an office or place of profit under the company within the meaning of this section  which are mentioned below:

  In the situation of a director, he or she  is seemed to hold an office or place of profit under a company if he or she obtains from company anything by the way of remuneration to which he or she is entitled as a director whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise.[6]

  An individual ( regardless a director) firm, private company or other body corporate is meant  to hold an office or place of profit under a company if he or she or it obtains from a company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise. In Firestone Tyre & Rubber Co v. Synthetics & Chemical Ltd.,[7] it has been held that sole selling agency is a place of profit. Section 314(1-A) provides that if a relative[8] of a director or firm in which such relative is a partner has been holding any office or place of profit under the company before the director becomes a director of the company, these provisions shall not have application regarding like before mentioned situations.

The company law which was existed  on the 1st of April, 1956. when the old Act was replaced by the new Companies Act and in which offices of profit in or under the company were held by “directors themselves or by relations of theirs”[9]. Section 652 which was related  with the necessity  for having the holding of these offices of profit  by directors or their relations approved by a special resolution as provided in Section 314.

Case prior to Companies Act of 1882—Where the partner of a director is appointed as a solicitor of the company in due course and there is nothing to indicate that the particular director even procured his employment the appointment cannot be condemned as improper and wrong.[10] It is noted that the directors have vacated their office as directors by virtue of Section 314 is not a pure question of law and depends largely on relevant facts being established—Hence in absence of pleading it cannot be raised at the stage of argument[11].

 The Legislature never intended Section 314 to apply to the prevailing stale of affairs of any company as existing on April 1, 1956 or to apply the said provision to existing appointments on that date. As a “precaution against nepotism and favoritism on the part of the Directors, and by way of reasonable”[12] safeguard, the Legislature introduced the provisions contained in Section 314 which will apply to all appointments to be made after the said Act came in force.

 In  the sense of the expression “subsequent appointment”[13] in Explanation  to section 314(1) does not include increments granted to a permanent incumbent who happens to be a director or the partner or relative of a director of the company. It is only when the company accords its consent by a special resolution in that case the director is absolved from the liability as envisaged under Sec-314. Though the appointment of the director was adopted subsequently in the general meeting no special resolution according its consent to the said appointment was passed threat, “the Branch Manager was disqualified from acting as a director of the company as well”[14].

 Company—Manufacturers and dealers—Appointment of sole selling agents regarding approval by special resolutions of the company necessary and granted—“Objections to terms of agreement raised by the Company Law Board—Not pursued”[15] But to be kept in view in case of appointment for a further term according to resolution  for appointment   for further term which is passed by the vote of an  interested director and Resolution if validly passed.

Also the words ‘subsequent appointment’ in the Explanation to Section 314(1) would imply continuity, without a break. An appointment for a further term not made before or on the expiry of the earlier appointment would not be a ‘subsequent appointment’[16].The object of Section 314(1B) is to see that the moneys of the company are not siphoned into pockets of the relatives of the directors without such persons being otherwise competent to fill the office or without rendering real services to the company.[17]

 It may further be noted that a special resolution according consent shall be necessary for every appointment in the first instance and to every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except when an ap­pointment on a time scale has already been approved by the special res­olution.

 “Directors and relative of Director-Prohibition against holding office or place of profit-Prohibition does not apply to a relative of any ordinary sitting Director but applies to relative of a Directors who holds any office or place of profit”.[18]The provisions of Section 314 are applicable to a public as well as a private company but not applicable to a director appointed by the Central Government ( this is according to previous company Act.). Also it is out of the portion of normal situation of directors regardless special privileged directors( case of exceptions).

The Department of Company Affairs vide its circular No. 14 of 1975 has issued a clarification[19] that a lawyer related- to-erecter of- a -company in any manner contemplated-by Section 314 will not be considered to be holding an office or place of profit under the company in respect of the fees obtained by him from the company for appearing before any Courts. But if he is appointed on a regular retainer basis for rendering Legal advice other than appearance in Courts, the provisions of Section 314 shall be applicable.

 4. Exceptions (Holding office of profit):

In section 104, there is a restriction of holding the office of profit in general case of directors but in the mean time exception of occupying the same thing is opened for several particular directors. This is the special privilege for those directors regardless of consent. Also the same thing is that “no such consent of the company is required for holding the posts of managing director, manager, banker or trustee for the hol­ders of debentures either under the company itself or under any subsi­diary of the company unless the remuneration received from such a subsi­diary is paid over to the company or its holding company.”[20] Same thing in earlier company Act in 1974 but later in amendment provision with privilege for directors of exceptions in few areas.

With influences of effects of contravention is there. The office or place of profit held in contravention of the above provisions becomes automatically vacant with a liability to refund to the company any remuneration already received. The company shall not waive the recovery of any sum refundable to it unless permitted to do so by the Central Government[21].

This section shall also not apply to a person who, though holds any office of profit in the company, has been appointed by the Central Government under Section 408 as a director of the company.[22]

 5. Conclusion:

In spite of imposing restrictions to hold office of profit in case of general directors, there is exception. Provision’s having privilege of holding office of profit is the exceptions for the particular sensitive position of directors in special case. In one point of view, its almost like a precautionary section of company Act on the part of the directors against nepotism and favoritism, with the reasonable safeguard according to legislative rules & regulation by the provision  for the directors specifically in case of normal directors other than exceptions. Also   the Governing  and managerial part specially has to take into account that the financial position of the Company and other factors which are enumerated in that section. These include public policy relating to the removal of disparities in income. Since this section does not apply to approval under such circumstances, the only relevant section for the purpose of approval under some particular situations which have been enumerated  and which are required to be considered by the Governing body also. This does not, however, mean that it is open to the Governing body to grant its approval or withhold such approval arbitrarily. Also it is not open to the Governing body[23] to impose any condition arbitrarily while according its approval. If any conditions are sought to be imposed, they ( the rules of sec-104 according to company Act. 1994) must be imposed on the basis of relevant perspective pertaining to the Company which seeks such an approval regarding to hold the office of profit or not to hold it.Also it is important that Appointment of director as technical adviser or banker or in any other exceptions.[24] He or she must have technical qualifications for the particular issue of place of profit he or she would be occupied. This provision on the other hand try to place the right person in the right place (position) for ensuring the total qualities of particular position holding by the exceptions placed by the means of unbiased.

6.Bibliography :

Md.Mahbubur Rahman, The Companies Act,1994, Shams publications, Dhaka, seventh edition: July, 2011,Sec- 104, page- 135.

Ashok K Bagrial (1976), Company Law,Vikas Publishing house Pvt Ltd, New Delhi, tenth edition:2000, paragraph # 7, page # 236.

Md.Shafiqul Islam, The Companies Act,1994, Shams publications, Dhaka,: March, 2011,Sec- 104, page- 42

Arun Kumar Sen & Jitendra kumar Mitra (1956), Commercial Law & Industrial Law- Business Law, the world press Pvt Ltd, Calcutta, twenty fifth edition: 2008, paragraph # 4, page # 696.

Soiloor, Company : Law and Practice, paragraph # -1 & 8, page-534, paragraph # -3, p-535

[1] See, in companies Act (1964} related to sec- 314 5 Guj LR 1041 (DB).

[2] See, in Companies Act XVIII of 1994 ( section – 104 )

[3] See, in Companies Act of 1974 ( section – 314 )

[4] see, in company Act.(1953)2 All ER 67! HL.

[5] see, in Astley v. fJeu- Trimli, (1899) 1 Ch 151.

[6] See, in S/I2/3I4 (IB)/75-CL-V dated 5 June. 1975.

[7] See, (I97l)4IConipCas377Bom.

[8] The term ‘relative’ has been defined in Sec. 2(40) of (he Act and an exhaustive list of relatives has been given in Schedule i-A of the Act.

[9] See, in company Act amendment -AIR 1959 1’iinj 22.

[10]See, in company Act (1871) 6tieng LR278.

[11] See, in company Act !LR (1973) 1 Cat 207.

[12]See, in company Act ILK (1973) 1 Cal 207.

[13]See, in company Act (1971) 75 Cal WN 704 DB.

[14]See, in company Act- 1978 Tax LR 2382 Call.

[15] See, in company Act- 1978-41 Com Cas 377 Bom.

[16] See, in company Act- 1978 41 Com Cas 377 Bom.

[17] See, in company Act-(1980) 50 Com Cas 18 Delhi.

[18] See Companies Act (I of 1956), S. 198. (1985) 57 Com p. Case. 776..

[19] See, in Company Act-1974, Sec-314

[20] See, in Company Act-1974, Sec-314(1).

[21] See, in Company Act-1974, Sec. 314(2)

[22] See, in Company Act-1974, Sec. 314(4)

[23] See, in ‘Company : Law and Practice’Soiloor, p-537.

[24] See, in ‘Company : Law and Practice’Soiloor, p-535. According to 47 Com cs- 318.