Thursday, November 24, 2011

Can a Company have more than one Managing Director


ABC Co. Ltd. has 3 businesses, namely, Textile, Sugar and Fertilizers.  Mr. X, Mr. Y and Mr. Z have been simultaneously appointed as Managing Director of each of the above businesses.  Are the appointments valid in law?

Sub-section (26) of Section 2 of the Companies Act, 1956 defines the expression “Managing Director” as follows:

“ “managing director” means 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 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 authorized 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 direction of its Board of directors;”

A perusal of the definition of the expression ‘managing director’ will show that only a director who is entrusted with substantial powers of management which would not otherwise be exercisable by him will be deemed to be a managing director.  Further, it is apparent that a director occupying the position of a managing director, by whatever name called, will also be deemed to be a managing director.  Whether more than one managing director can be appointed in a company is better appreciated by examining the distinguishing features between the definitions of the terms ‘manager’ and ‘managing director’.

Sub-section (24) of the Section 2 of the Companies Act, 1956 reads as follows:

“ “manager” means an individual (not being the managing agent”) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not;”

The distinguishing features in the two definitions are that while Clause (26) of Section 2 of the Companies Act, 1956 stipulates that the managing director should be entrusted with substantial powers of management, under Clause (24) of Section 2 of the Companies Act, 1956, it is provided that a manager has the management of “the whole, or substantially the whole, of the affairs of a company”.  It is pertinent to note that the words “the whole, or substantially the whole, of the affairs of a company” as contained in the definition of ‘manager’ when contradistinguished with the words “entrusted with substantial powers of management” in the definition of ‘managing director’ clearly indicates that while the essence of the powers of management of the ‘manager’ are defined in terms of the ‘quantum’, the connotation of the expression ‘substantial powers of management’ in the absence the words “of a company”, in the definition of ‘managing director’ relates to the ‘nature’ of powers entrusted.  This standpoint is only buttressed by a plain reading of the first proviso to the sub-section (26) of Section 2 of the Companies Act, 1956, which speaks of the nature of powers.

The upshot of the distinction is that while only one person can hold the position of manager with the power of management of the whole or substantially the whole of the affairs of a company, which power is derived by virtue of the very appointment to the office of manager, substantial powers of management can be entrusted to one or more than one director in a company.

The Department of Company Affairs has issued the following Clarification in this regard:

“Department’s Clarification.–  “Section 2(26) defines “Managing director” as a director who is entrusted with substantial powers of management which term refers to the nature of the powers and not the quantum thereof.  Section 2(24) of the Companies Act, 1956, on the other hand has defined the word “manager” as an individual who has the management of the whole or substantially the whole of the affairs of a company.  Thus the managing director of a company may be entrusted with substantial power of management but not necessarily of the whole or substantially the whole of the affairs of a company.  A company may, therefore, have more than one managing director. [Department’s Clarification F. No. 8/16(1)/61-PR].

In view of the above, in the instant case, the simultaneous appointments of Mr. X, Mr. Y and Mr. Z as Managing Director of each of the 3 business divisions of ABC Co. Ltd., viz., Textile, Sugar and Fertilizers, is valid in law as it involves entrustment of substantial powers of management to them, and does not involve the management of the whole or substantially the whole of the affairs of a company; and as such the same is in line with the definition of the term managing director in Clause (26) of Section 2 of the Companies Act, 1956.  


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