Director of his relative holding an office of profit in the company

Director of his relative holding an office of profit in the company

Consent of members may be taken subsequently

To suit the practical convenience, the company board of directors is allowed to make the appointment first and take the consent of the company in general meeting by special resolution at the general meeting held for the first time after the said appointment.

Section applies to a public or private limited company

The provision of section 314 are applicable to a public limited company or private limited company.

Scope of the term ‘office or place of profit’

The section seeks to regulate such kinds or office or places of profit where any of the persons specified is required to perform functions on behalf of the company under the control, direction and supervision of the company. In general, there should be employer-employee relationship or that of principal-agent. The persons appointed to the office should be required to render duties, services and functions under instructions of the company concerned.

Director acting as secretary or secretary appointed as director

The department has clarified that, the company secretary is appointed as director or a person acting as director is also appointed secretary, the said appointment does not require the approval of the central government.

A person rendering such service may become director subsequently

The procedure outlined above and approval of the central government shall apply whether an existing director on the board of the company is appointed in such capacity or whether a person acting in any such capacity is subsequently appointed company director.

A director rendering professional services under 309 also comes under section 314

A director may be paid remuneration for rendering services to a company of a professional nature after satisfying the central government that the said director possesses the requisite qualification for the practice of the profession in question.

Other services of a professional nature

When a professional, (a chartered accountant, doctor, advocate, etc.) who is director in a company, is consulted by the company for his professional advice as and when the occasion arises and he is paid remuneration for such service, this does not come under the prohibition of section 314(1).

Section 314(1) distinguished from the office of whole time director

Under section 269, a whole-time director is defined to include a director in the whole-time employment of the company. His appointment and earnings are found on the provisions of section 269. Where a director is appointed to an office of profit under section 314(1), he does not become a whole time employee of the company as his scope of work with the company may be intermittent.

Office of profit held by relatives of a director or his relatives

The provisions of section 314 also regulate the appointment of relatives and others who may be taken to be associates of directors to an office of profit of the company and as a result the person receives remuneration from the company. The persons known as relatives and associates may be one of the following :

(a) A relative of a director under the section 6.

(b) A firm in which a relative of a director is a partner

(c) A firm in which the director is a partner or any other partner of the firm.

(d) A private limited company in which the said director is a director or member.

(e) A director or manager of the private limited company as in (d) above.

Restriction on appointing any of the above persons by the company

Where a company proposes to appoint any of the above persons to an office of profit under the company of the nature explained earlier carrying a total monthly remuneration as may be prescribed. The company shall get the approval of the company in general meeting.

Interpretation of clause (b) of section 314(1)

Clause (b) of section 314(1) prescribes that no partner or relative of such “Director”, no firm in which “such” director or relative of “such” director etc.

Restriction applies where office of profit is held in a subsidiary

The restriction under section 314(1) will also apply where company director or any other person specified holds an office or place of profit in a subsidiary company.

Section not applicable to contrast for sale or purchase

In view of the reasons mentioned above, the section is not applicable to a contract for sale or purchase or materials by a company from or to a director or from or to any of the persons specified above to which section 298 will be relevant.

Where the director being not aware of the office held by a relative, etc– Second proviso under sub-section(1)

Where a relative of a director or any of the other person mentioned above is appointed to an office of profit without the knowledge of the director concerned.

Every increase in the remuneration needs a separate approval by special resolution

The section provides under the explanation that a separate consent by special resolution would be needed for every appointment in the first instance and every subsequent appointment on a higher remuneration unless a time-scale has already been approved in the first instance.

When government approval required

Where any person listed under sub-section (1B) is proposed to be given monthly remuneration of above Rs.50,000. It is approved by the company in general meeting. The sub-section (1B) has extended the scope from sub-section (1) (b) by making the approval of the central government necessary when the office is held also by :

(i) a partner or relative of a director/manager of a company.

(ii) a firm in which a manager/director or relative of either is partner

(iii) a private limited company in which such a manager/director or relative of either is a director or member.

Rules notified by the government

These rules provide guidelines as to how the company concerned shall make the application to the government when any of the persons specified in sub-section (1B) as mentioned above is employed to an office or place of profit in the company which carries monthly earnings of Rs.50,000.

Particulars to be furnished in the application– Rule 4

The following information shall be given in the application :

(1) An understanding from the appointee that he/she will be in the exclusive employment of the company and will not hold a place of profit in any other company.

(2) Indication of the monetary value of all allowances and perquisites and total remuneration package (monthly/annual) proposed to be paid to the appointee and details of the services that will be rendered by the appointee to the company.

(3) Shareholding pattern of :

Directors, their relatives, public holding and holding of each institution, should be given.

(4) The educational qualification, experience, pay scale, allowances and other benefits of similarity placed executives shall be given. Where a relative is proposed to be appointed, an undertaking from the Director/Company Secretary of the company.

(5) List and particulars of employees who are in receipt of remuneration of Rs.50,000 or more per month shall be furnished. It would have been alright if the list relates to employees drawing remuneration above Rs.50,000.

(6) The following further information be given :

(a) Total number of relatives of all the directors either appointed as Managing/Whole-time Director, Manager or in any of the position in the company.

(b) Total remuneration paid to each relative

(c) Total remuneration paid to them altogether as a percentage of profits as calculated for the purpose of section 198 of the act.

(7) The selection and appointment of a relative of a director for holding an office or place of majority in a public limited company shall have to be appointed by a selection committee.

Holding an office in a company by a public company

Holding an office or place of profit by a public limited company does not come under sub-section (1) or (1B). But the requirement of disclosure under section 299 shall be compiled with the registration of a company.

Declaration from the appointee – Sub-section (2A)

Where a person (namely, an individual, firm, private limited company or other body corporate) is proposed to be appointed to an office or profit covered by this section as explained above. The person shall be declare in writing whether he or it is not connected with a director.

Application should furnish full particulars of remuneration

The department has advised all companies vide its Letter No.1/12/CL.IX/88, dated 21-4-1988 to spell out clearly the nature and quantum of perquisites in the special resolution passed under section 314 (1B) and also in the application made to the central government.


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