Role of a Managing Director

A Managing Director plays a crucial role in the day-to-day functioning of a company. She/ he is responsible for the growth and progress of the Company, and the position is so important that, as per Section 2(51), a managing director is “Key Managerial Personnel” (KMP) placed along with a Chief Executive officer and a Chief Financial Officer. Further, every listed Company and every other unlisted public limited Company is required under Section 203 to appoint KMPs full-time. This blog will focus on the roles and responsibilities of such an important figure in the Company.

Introduction and Definition

A “Managing Director” has been defined under Section 2(54) as “a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.”

The Explanation of this section says, “For the purposes of this clause, the power to do administrative acts of a routine nature when so authorised 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 the substantial powers of management.”

Before taking on the role of managing director, the managing director must first be appointed as a director. This is evident from the fact that the section indicates explicitly that she/ he is “a director”. Moreover, she/ he is ineligible to continue serving as a managing director, even if his term ends, until he is reassigned to the same position. It held in Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd.

However, because of the Act’s special rights and responsibilities for managing directors, they are not permitted to hold both positions simultaneously. The intention and purpose of the Act, as stated in sections 267–269, 317–320 of the 1956 Act, make it abundantly clear that the managing director, whole-time or non-rotational directors, and ordinary directors of a company are wholly distinct officers with distinct rights and obligations under the Act.

Roles and Responsibilities

A managing director is given substantial powers following section 2(51). It states that the managing director is given significant authority to manage the Company’s affairs either by the Company’s articles of incorporation, a contract with the Company, a resolution adopted by the Board of Directors or members of the Company at a general meeting, or any combination of these.

There is no clear definition of “substantial powers of management” in the provision, other than a negative one. According to the section’s explanation, the managing director may not act in any way that would amount to exercising significant managerial authority, like:

(a) the power to affix the common seal of the Company to any document;

(b) to draw and endorse any cheque on account of the Company in any bank;

(c) to draw and endorse any negotiable instrument;

(d) to sign any share certificates; and

(e) to direct registration of any share.

As seen from the above, these are merely administrative rights that have no bearing on the business’s operations.

As managing director, the incumbent is in charge of the business’s day-to-day operations and must make strategic decisions on issues that impact operations. His authority is typically outlined in terms of his contract with the business or in the resolution appointing him.

The managing director in Shantav Kumar v. Printer (Mysore) Ltd. was only given regular powers. As a result, it was determined that his appointment as a newspaper editor was unlawful because the Board had not given its approval.

According to Section 291 of the Act, the Board of Directors shall have the right to exercise all powers and perform all acts and things that the Company is authorised to perform within the limits of the Act. According to the second proviso of Section 291(1), the Board’s use of its authority is likewise constrained by the rules outlined in the Articles. The Board or the General Body cannot interfere with or change any powers granted by the Articles to a Director or Managing Director (MD) without modifying the Articles.

Managing Director’s authority to file suit

Since this capacity is required and incidental to managing the day-to-day activities and business of the firm, the institution of a lawsuit on behalf of the Company by the managing director is considered to fall under the definition of “substantial powers of management.” Certain actions are expressly excluded from its scope by the phrase “major powers of management.” Therefore, it was held in Wasava Tyres v. Printers (Mysore) Ltd. that, except for the forbidden acts, the managing director has the authority and privilege to manage the Company’s affairs in line with the Company’s memorandum and articles of incorporation of the Company.

Dual Role of a Managing Director: A Managing Director may work in a dual capacity. He can be both an employee and a Director as well. Depending on the nature of his/ her work and the conditions of his/ her employment, a managing director may be viewed as having the personas of an employee, an agent, or a director. The articles of incorporation of a company and/or any agreement, if any, that created a contractual relationship between the director and the Company may specify the nature of his employment.

A managing director serves as a trustee for the Company and is responsible for protecting both the interests of the shareholders and the business. Managing Director as an agent of the Company, does not have all the powers to act for and on behalf of the Company and may derive his powers of management to act for and on behalf of the Company only on the basis of one of the modes provided in the definition or the Articles of the Company.

For instance, in G. Subba Rao v. Rasmi Die-Castings Ltd., the managing director lacked the actual authority or power to affix the Company’s common seal to any documents by reaching any sort of settlement on the organisation’s behalf. He lacked any “actual” authority or power to act on the Company’s behalf; and hence, the MoU or settlement that was entered into did not create any binding agreement.

Other duties of a Managing Director

Apart from the statutory duties, the Managing Director has to handle the budget and resource allocation for the Company and create marketing campaigns, research initiatives, and public relations plans to advance the business. She/ he has to draft strategic business plans to achieve the organisation’s objectives and encourage research and development to accelerate business growth. She/ he has to stay competitive by keeping an eye on technological trends and advancements. Interacting with customers and stockholders of the business, and taking part in marketing initiatives to further the interests of the Company, is a crucial role of a Managing Director.

A Managing Director’s role also extends to ensuring that the Company’s policies adhere to applicable statutory and regulatory requirements and speaking on behalf of the business during negotiations with suppliers, customers, vendors, other businesses, and government representatives. Further, to ensure efficient operation and control department heads and managers, the Managing Director directs, plans, controls, and supervises the departments of the Company’s business operations. Finally, she/ he keeps the Board and CEO updated on company strategies, financial goals, and market developments.

Conclusion

As seen throughout this Article, the role of a Managing Director is very crucial in the overall functioning of the Company. The growth and development of a company rely heavily on the kind of work effort and coordination managed by the Managing Director. Hence, it becomes immensely important to choose the right person for that role who is efficient, trustworthy and acts for the welfare of the Company and the employees.

References

  • A Ramaiya: Guide to The Companies Act [Box 1], 19th ed., Vol 1
  • CR Datta: Company Law, 7th ed.
  • Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. (1983) 53 Comp Cas 883 (Cal.).
  • Shantav Kumar v. Printer (Mysore) Ltd., (2007) 81 CLA 281.
  • Wasava Tyres v. Printers (Mysore) Ltd, (2007) 139 COMP CASES 446 (Karn.).
  • G. Subba Rao v. Rasmi Die-Castings Ltd, (1998) 93 COMP CASES 797 (AP).
  • Cleartax, https://cleartax.in/s/company-managing-director (Last visited on 19th October, 2022).

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