Recently, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) passed a judgment dealing with the provisions of Section 203 of the Companies Act, 2013 (“Act”). The appellants, i.e. the Hamlin Trust, and others (“Appellants”) are shareholders of Rattan India Finance Private Limited (“Company”) holding 50% of the share capital of the Company. LSFIO Rose Investments S.a.r.l., a company incorporated under the laws of Luxembourg (“Respondent”) also acquired the 50% share capital of the Company. In terms of the Articles of Association (“AoA”) of the Company, the Respondent had a right to nominate a person to the position of chief financial officer of the Company (“CFO”). In the event the other shareholders, i.e., Respondent reject the appointment of such nominee to the position of CFO, Appellants shall have the right to nominate another person to the position of CFO. Further, in the event the Respondents reject the appointment of the second such person nominated by Appellants to the position of the CFO or at least (forty-five) days have passed since the position of CFO was vacated (whichever is earlier), Appellants shall have the right to nominate any person to the position of CFO and the Respondent shall support the appointment of such person as CFO.
Definition of KMP Under the Companies Act, 2013
Section 2(51) of the Act defines Key Managerial Personnel (KMP). It states that the KMP of a company means:
- Chief Executive Officer, manager or Managing Director
- Company secretary
- Whole-Time Director
- Chief Financial Officer
- Such other officers, designated by the Board as KMP but are not more than one level below the directors in whole-time employment
- Such other officer as may be prescribed
Chief Executive Officer, Manager or Managing Director
The Chief Executive Officer and Managing Director are responsible for running the company. The Managing Director has authority over all company operations. They are also responsible for growing and innovating the company to a larger scale.
Under the Act, the Managing Director is defined as a director having substantial powers over the company management and its affairs. A Managing Director is appointed through any of the following means:
- By the Articles of Association
- An agreement with the company
- A resolution passed in a general meeting
- By the company board of directors
The Act defines a manager as the individual who manages the whole company affairs, subject to the board of directors’ direction, control and superintendence. A manager also includes a director or a person occupying a manager position in a company, even under a contract of service. However, a company cannot appoint a managing director and a manager at the same time.
Company Secretary
A company secretary is responsible for looking after the efficient administration of the company. They take care of the company’s compliance and regulatory requirements. They also ensure that the instructions and targets of the board are implemented.
As per the Act, a company secretary or secretary means a company secretary defined under Section 2 of the Company Secretaries Act, 1980. The Company Secretaries Act defines a Company Secretary as a person who is a member of the Institute of Company Secretaries of India (ICSI). The company secretary should ensure that the company complies with secretarial standards.
Whole-Time Director
Under the Act, a Whole-Time Director is defined as a director who is in whole-time employment of the company. A Whole-Time Director means a director who works during the entire working hours of the company. They are different from an independent director as they are part of the daily operation and has a significant stake in the company. A Managing Director can also be a Whole-Time Director.
Chief Financial Officer
A Chief Financial Officer is responsible for handling the company’s financial status. They keep a tab on cash flow operations, create contingency plans for financial crises and do financial planning. They lead the treasury and financial functions of the company.
Companies Required to Appoint KMP
Section 203 of the Act provides that certain classes of companies must appoint the KMP, which includes the Managing Director or manager or Chief Executive Officer, company secretary and Chief Financial Officer. The company must appoint a whole-time director if it does not have a Chief Executive Officer, manager or Managing Director.
Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides the class of companies that must appoint the whole-time KMP, which are as follows:
- Every listed company
- A public company having a paid-up share capital of Rs.10 crore or more
Further, a private company having a paid-up share capital of Rs.10 crore or more must appoint a whole-time company secretary.
Every whole-time KMP is appointed through a resolution of the board containing the conditions and terms of appointment, including remuneration. A whole-time KMP must not simultaneously hold office in more than one company except its subsidiary company.
The board is responsible for filling the vacancies in the post of KMP within six months of the vacancy. A company can appoint or re-appoint a person as its managing director, whole-time director or manager for a maximum of five years.
Roles and Responsibility of KMP
- The KMPs will be liable for non-compliance of the provisions provided under the Companies Act,2013.
- The management functions and the decisions of the company are the responsibility of the KMPs.
- As per section 170,detailed information of securities will be provided by KMPs and recorded in the register of the company.
- In the audit committee, the right to heard will be provided to KMPs while considering the audit report. But they don’t have the right to vote.
- AS per section 189(2), KMPs will disclose all their concerns and interest within 30 days of their appointment.
Disqualifications for being KMP
Section 196(3) of the Companies Act,2013 states that a company shall not appoint or continue the employment of a managing director, whole-time director, or manager if such person:
- Not completed age of 21years or exceeds the age of 69 years.
- Is an uncharged insolvent or adjudged as an insolvent.
- Record of holding payments from creditors.
- Convicted by the court for an offence and imprisonment for more than 6 months.
- Not appointed for more than 5 years at a time.
- Detained under the contravention of Foreign Exchange and Prevention of Smuggling Activity Act,1974.
Penalty for Non-Appointment of KMP
When a company does not appoint KMP as provided in the Act, the company will be liable to pay a penalty of Rs.5 lakh, and every director and KMP, if any, of the company in default will be liable to a penalty of Rs.50,000. A further penalty of Rs.1,000 per day but not exceeding Rs.5 lakh will be imposed after the first day, during which such default continues.
The KMPs of the company are essential persons who look after the management and affairs of a company. The companies specified under Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, must mandatorily appoint KMP for the company management, or they will have to pay a penalty as provided under the Act
LSF10 Rose Investment S.A.R.L. v. Rattanindia Finance Private Limited and ors. (2022)
Facts
In this case, the petitioner LSF 10 Rose Invest, and the respondents, Rattanindia Finance Private Limited, were in conflict regarding the appointment of the position of full-time CFO. The Article of Association laid down the procedure for the appointment of the CFO, which was that the petitioner had the right to nominate a CFO, and the respondent could take it down if dissatisfied. The petitioner could nominate a second CFO, and if that is also rejected by the respondents, they can appoint a third CFO. The petitioners had nominated two candidates, both of whom were rejected by the petitioners on the ground of Section 203(3), according to which a KMP could hold office in one company at a time. Since the nominated persons failed to disclose their interest after their nomination as to what company they would be working with, they were rejected. When the last candidate was rejected, the petitioner filed several applications to the tribunals to appoint the third nominee as the CFO, as agreed in the Articles of Association.
Issue
The issue raised was whether the petitioner acted unlawfully by filling several applications for failure to appoint the third nominee as the CFO.
Judgment
It was held by the tribunal that the Article of Association clearly lays down the procedure to be followed. So the defence on the ground of the validity of nomination could not be taken by the respondents. Since the respondents claimed that the first two nominees were invalid on grounds as per Section 203, it does not imply that the third nominee, who had validity, counted as the first-named candidate. So following the article of association, the tribunal ordered the appointment of the third nominated candidate, the CFO of the company and the application was allowed.
FAQs
What is the meaning of Key Managerial Personnel (KMP)?
Key Managerial Personnel (KMP) refers to a group of officers who hold important positions in a company and are responsible for managing and overseeing its operations. As per Section 203 of the Companies Act, 2013, KMP includes the CEO, Managing Director, Company Secretary, CFO, and others as specified by law.
Is it mandatory for all companies to appoint KMP?
No, it is not mandatory for all companies. According to the Companies Act, 2013, every listed company and every other public company with a paid-up share capital of Rs. 10 crore or more must appoint KMP. Private companies and smaller public companies are not required to do so unless otherwise specified by law.