SECTION 314: OFFICE OR PLACE OF PROFIT

If a director is appointed to a hold a position other than that of a director or if a relative of director is appointed to hold a position in the Company against the remuneration I must be in compliance of the provisions of section 314 Companies Act, 1956.

·         MEANING OF OFFICE OR PLACE OF PROFIT:

 

a)    For Director: if Director receives anything except in the capacity of the director by way of salary, perquisite, rent free accommodation, fee commission etc. he/she would be called holding an office of profit in the Company.

b)    For Relative of Director: If a relative of any director appointed to hold a position and draws anything in the capacity of his appointment in the Company by way of salary, fee, commission, perquisite, rent free accommodation he/she would be called holding an office of profit in the Company.

 

·      MEANING OF RELATIVE FOR SECTION 314: Meaning of relative for the purpose of section 314 includes relative as defined in schedule IA of the Companies Act, 1956 and also Firm or Private Company in which such Director or Relative of such a director is partner/ member / director /manager/managing agent/ treasurer/ secretaries.

 ·      Here it must be noted that the provisions of this section will not apply on any appointment made by the order of the central government under section 408.

·        Another important point which has been clarified by the Department of Corporate Affairs now know as Ministry of Corporate Affairs that the approval of Central Government is not required to be obtained under section 297 for the appointment under section 314(1B) i.e. appointment of relative at a remuneration on or exceeding Rs. 2,50,000 per month.(or Rs. 50,000 if appointment done before 6^th April, 2011)

Now the real question comes about the legal compliance at the time of such appointment(s). To make it more presentable and easily understandable go through the below chart:

                                  

The chart in itself explains that there are separate provisions for appointment of relative of director and director to hold office of profit. To Conclude:

1.    If the Director to be appointed to hold office of profit the permission of shareholders is required by passing a special resolution which may be obtained either before the appointment or after the appointment in the ensuing general meeting no matter whatever be the amount of remuneration.(In case of Listed Company the Director shall be selected by selection committee to be appointed to hold office of profit as per the provisions of Directors’ Relative(Office or Place of Profit)Rule, 2003 as amended on 6^th April, 2011.

2.    If a relative of director is appointed to hold office of profit the nature of compliance will depend upon the amount of salary to be drawn by the relative, i.e.:

Ø  Remuneration between Rs. 10,000 to 19,999: Shareholders’ approval is to be obtained by passing a special resolution to be passed in ensuing general meeting or within 3 months of appointment whichever is later.

Ø  Remuneration is between Rs. 20,000 to Rs. 2,49,999: Shareholders approval shall be obtained by passing a special resolution in the general meeting before the appointment, to explain further the appointment cannot be done without the shareholders’ approval, prior approval of shareholders is applicable.

Ø  Remuneration is Rs. 2,50,000 or more: Shareholders’ approval is to be obtained before the appointment and the said appointment must obtain the approval of Central Government.

·                e-FORMS TO BE FILED

Form 23: Within thirty days of the appointment Form 23 shall be filed with the concerned registrar of companies.

           Form 24B: It is advisable to file Form 23 before filing Form 24B for taking Central Government’s approval for the appointment.

·                  MEANING OF REMUNERATION: Anything drawn by way of salary/rent allowance/ commission/perquisite/ fee etc on monthly basis will amount to remuneration. Any benefit paid on the yearly basis such as encashment of leave or annual bonus will not form part of remuneration for the purpose of calculating remuneration limit for appointment to hold office of profit. (Ravinder Kumar Sangal vs Auto Lamps Ltd. on 6 October, 1983 Judgment of Honorable Delhi High Court)

·                  PERIOD OF APPOINTMENT: No maximum or minimum time period has been defined for the appointment u/s 314

·                  INCREASE IN REMUNERATION AFTER APPOINTMENT: Any increase in remuneration will again require the approvals as explained above unless it has already been taken on a time scale basis at the time of appointment itself.

·                CONSEQUENCES OF NON-COMPLIANCE OF THE PROVISIONS OF SECTION 314: If the appointment has been made without complying the provisions the person shall be liable to vacate the office and return whole remuneration which had been received by him for holding such office from the date of such appointment. As the section 314 do not talk about any specific penalty under section 629A the Company and every officer in default of the Company shall be liable for a fine which may be upto Rs. 5000 and a further fine of Rs. 500 per day for each till the date of default continues.

Some important questions to be answered about office of profit which a person mostly face at the time of practically dealing with the subject such as:

Q: If a person is a whole time director in the Company does the remuneration drawn by him/her amounts to holding office of profit?

A: No.

Q: Does the approval of shareholders shall be obtained if the Director draws a remuneration of Rs. 10,000 p.m. or less for holding office of profit?

A: Yes, No limit on remuneration to be drawn has been defined for the purpose of holding office of profit so whatever be the amount of remuneration the approval shall have to be obtained for such appointment.

Q: What will be the date of vacation of office if the appointment made in violation of the applicable provisions?

 

A: The office shall be vacated on the date of general meeting in which the approval must have been obtained or within 6 months of commencement of Companies (Amendment) Act, 1974 Whichever is later.

Q: What is the purpose of making incorporating section 314 in the Companies Act?

A: As it seems from the very essence of the provisions, the purpose is no director or a relative shall be given any benefit our of Company’s funds unless the such a person posses qualification for the same. The authority to determine the eligibility have been given to shareholders by incorporating the criteria of special resolution and above the specified limit central government itself will decide the eligibility.

Few Case Laws for Assistance on the Subject:

1.    Ravinder Kumar Sangal vs Auto Lamps Ltd. on 6 October, 1983, Delhi High Court

2.    The State  V.  Akal Transport Co. (P.) Ltd., Punjab High Court

3.    Commissioner of Income-tax V. Principal Officer C/o Arkay Wires (P.) Ltd., Allahabad High Court

4.    A.R. Sudarsanam V. Madras Purasawalkam Hindu Janopakara Saswatha Nidhi Ltd.

5.    Madura Hindu Permanent Fund Ltd. V. Government Of India

·      The information given in this blog is the personal understanding of the writer and shall not be used as a conclusive material. The content stated/mentioned here is subject to changes by respective government/authorities in the applicable laws.

·       The writer shall not be liable for any direct or indirect damages caused to any person acting solely on/based upon the information provided herein.