Conditions for appointment of managing/whole-time Director, etc. - Companies Law - Circular : No. 3,

Circular : No. 3, dated 13-4-1989. Subject:- Conditions for appointment of managing/whole-time Director, etc. - Provisions of Schedule XIII inserted by the Companies (Amendment) Act, 1988 explained Part I: (a) The conditions specified therein are required to be satisfied only at the time of appointment. In case the appointee, after appointment, does not satisfy any of the said conditions, it will not debar the person concerned from continuing in office for the full tenure of his appointment. For example, as per clause (c), an appointee must not have attained the age of 65 years at the time of his appointment. If, for example, the appointment is made at the age of 64 years and thereafter, the appointee crosses the age of 65 years during the tenure of his appointment, no approval of the Central Government is required under section 269 for the latter part of his appointment which may fall outside the upper age limit. (b) Insofar as clause (f) is concerned, the company has to ensure at the time of appointment of its managerial personnel that it had not suffered loss or had adequate profits during the financial year immediately preceding the financial year in which the appointment is made or in any of the three financial years in the four financial years immediately preceding the financial year in which the appointment is made. In other words, the company must have earned adequate net profits computed in the manner laid down in sections 349, 350 and 351 either during the financial year immediately preceding the year of appointment or during any of the three financial years out of four financial years immediately preceding the preceding financial year. Illustration - Where the appointment is made during the financial year 1990, approval of the Central Government is not necessary if the profits were adequate (1) during the financial year 1989, being the financial year immediately preceding the financial year in which appointment is made; or (2) in any of the three financial years out of four financial years, namely, 1985, 1986, 1987 and 1988 [being the four financial years immediately preceding the preceding financial year ]. (c) Where the profits are found to be inadequate or where the adequacy or inadequacy of profits cannot be computed, the dispensation envisaged under clause (f) will not be available to the concerned company. As such a newly incorporated company will not be in a position to satisfy the conditions laid down in clause (f) and, therefore, will be required to seek approval of the Central Government in accordance with the relevant provisions of the Act. (d) The ceilings specified in sections 198(1) and 309(3) determine the adequacy of profits with reference to managerial remuneration paid during the relevant year(s) specified in clause (f) and not with reference to the proposed remuneration payable in the year of appointment. In a case where no managerial remuneration had been paid during the relevant year(s), any profit earned by the company as computed in the manner laid down under sections 349, 350 and 351 would be deemed to be adequate. (e) For the purpose of determining net profits of any financial year, the amount of depreciation required to be deducted in pursuance of clause (k) of sub-section (4) of section 349 read with section 350 shall be the amount calculated as per the written down value method at the rate specified in Schedule XIV, on the assets as shown by the books of the company at the end of the relevant financial year. Part II : (a) The slabs of remuneration laid down in paragraph 2 of Part II are subject to the ceilings of 11 per cent specified in section 198(1) and 5 per cent and 10 per cent specified in section 309(3). If the remuneration of managerial personnel exceeds the aforesaid ceilings in any financial year, the company can pay managerial remuneration subject to a cut of 10 per cent of the substantive salary laid down in Paragraph 2 of Part II read with Paragraph 2 of Part III of Schedule XIII. (b) As indicated, vide Note (d) on Notes below Schedule VI, long-term loans , for the purpose of effective capital , would mean loans repayable after one year, whether secured or unsecured.