The Landmark Judgement for section 203 w.r.t CFO of company
Glancing through various latest case laws of companies Act 2013, this case law caught my eye.
It was one of most interesting case laws with respect to a section 203 of companies Act which deals with CFO of the company.
This case made me understand how companies Act is not merely words but more than that and the deadly consequences, A mere direct applicability of articles of association would have!
So let’s look at this interesting case law which needs to be taken into consideration by every company secretary while inferring articles of association.
A Quick background:
Hamlin Trust had entered into a joint venture with a strange clause for CFO appointment with Rose investments.
The article in Articles of association in relation to KMP stated as follows:
I.???CFO was considered a KMP.
II.?Rose Investments?has the right to nominate a person for the position of CFO, and in the event the JV Partners/ Hamlin Trust reject the appointment of such nominee to the position of CFO, Rose Investments shall have the right to nominate another person, and if nomination of the second person is also rejected or at least 45 days has lapsed since the position of CFO is vacant (whichever is earlier), Rose Investments shall have the right to nominate any person and the JV Partners shall support the appointment of such person as CFO.
So, Rose investments had nominated two CFO which were rejected by Hamlin Trust and then Rose investments went to NCLT and got the appointment of third nominated person as CFO confirmed.
But here is the crux of the case:
The first two suggested names, viz. Mr. Devendra Mehta and Mr. Venkataraman Subramanian, which Rose investments nominated were clearly ineligible for appointment as CFO as they contravene sub-section (3) of section 203 of the Companies Act.
However still Rose investments was able to appoint the third person nominated as CFO on following grounds:
So Hamlin trust was really aggrieved by the NCLT order. However it had a strong legal counsel and thus appealed against the impugned order of NCLT in NCLAT.
Here the tides changed, and it was the turn for Rose investments to be shocked.
NCLAT set aside the NCLT order and ordered the parties to take necessary action for appointment of CFO of the Rose investments company as per article 140 of the AOA, after making valid nominations keeping in view section 203 of the Companies Act, 2013 and completing the appointment of CFO within a period of sixty days from the date of the order.
# But on what grounds did NCLAT pass such an order?
?i.??position of CFO is included as a KMP in subsection 51 of section 2 of the Companies Act, 2013.
ii.??Section 6 of the Companies Act provides that the provisions of this Act shall override anything to the contrary contained in the memorandum or articles of association of the company.
?iii.?Sections 184, 189 and 203 of the Companies Act, 2013 provide rational and reasonable norms and standards regarding eligibility of a KMP (CFO in the present case) and which are quite relevant and useful in conducting the affairs of the company in a transparent, independent and unbiased manner keeping the interest of the company foremost.
iv. A whole-time?key managerial personnel?shall not hold office in more than one?company?except in its?subsidiary company?at the same time. [ section 203(3)]
# Analysis/Logical reasoning of Hon’ble NCLAT:
While the right of Rose Investments has been made primary the text of this article does not imply that any person, even if ineligible by the normal standard of eligibility given in section 203 of the Companies Act and the requirement of the CFO to be a whole- time KMP, can be considered a valid candidate for the position of CFO.
?In the absence of any specific mention regarding eligibility and the method of selection of the CFO in the AOA, it would be logical to take recourse to section 203 of the Companies Act, 2013 in the selection and appointment of CFO, and also keep in view sections 184 and 189 in adjudging the eligibility of the KMP.
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?Key insight:
Company is a private limited company, and the provisions of the Companies Act, 2013 do not apply thereto, the principles governing the appointment and qualification of the KMP under section 203 can be taken for guidance de hors Article 140 of the AOA.
Letter and spirit of interpretation of articles of association:
The import of article 140 of the AOA is certainly not that the first two suggestions could be of ineligible candidates so that the Appellants would be forced to accept the name of the third candidate who may be, for some reason, not acceptable to them.
CRUX of case(NCLAT View)
?i.?Section203(3) is applicable to private companies.
?ii.?All the suggested candidates should satisfy the basic conditions of eligibility as required under section 203 of the Companies Act, 2013 so that the Appellants can exercise their right of selecting the most appropriate and suitable candidate in the true letter and spirit of the article 140 of the AOA.
NCLT mistake:
NCLT committed error in inferring that provision in article 140 of the AOA ‘does not contemplate that a person’s nomination can be considered to be valid or invalid for any particular reason’.
Had NCLT view been accepted:
If the view that only article 140 of the AOA were to be relevant and applicable in the appointment of CFO, and there was no need to look at the ineligibility of the suggested names, there could be a situation where all the three suggested names are ineligible, or at least unsuitable, and not fit to carry out the duties of CFO properly and professionally, and the other person?would be bound to accept the third nomination even though he may also be unfit or unsuitable to hold office as CFO of the Company. Such a situation could only exacerbate the situation of mismanagement in the company
Last but not the least the case law is:
Hamlin Trust & Ors (Appellant)
v.s
Rose investments S.? R.L. & Ors(Respondents)
?
Hope these small efforts were of some value.????????????????????????????????????????????????????
With warm regards,
Keep Smiling,
Saeed Shaikh
FOOTNOTES
3. Hamlin Trust & Ors(Appellant)v. Rose investments S.? R.L. Ors(Respondents) Company Appeal (AT) No.77 of 2022 of NCLAT