Section 314 of the Companies Act, 1956 deals with the provisions of office or place of profit. It does not prohibit the holding of such office but only regulates the holding of such office. The section seeks to impose certain restrictions to ensure that Directors of the company does not misuse their position directly or indirectly for their own self without the consent of shareholders to whom they owe fiduciary duties.
As per sub-section (3) of section 314, any office or place shall be deemed to be an office or place of profit under the company –
· In case of Director, if he obtains from the company anything by way of remuneration to which he is entitled as a Director whether as salary, fees, commission, perquisites etc.
· In case of relative / partner / firm / Private Company, if it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites etc.
Applicability:
Ø Applies to both private as well as public companies.
Ø Applies to all types of Directors including Nominee Directors
Cases in which special resolution is required:
Special resolution is required for the appointment of following persons to the office or place of profit -
1. Director
2. Any partner of firm in which a director is partner
3. Relative of director
4. Partnership firm in which a director / relative is partner
5. Pvt. Company in which director is director / member.
6. Director / manager of a pvt. Company of which a director is a director or member
The provisions of sec.314 (1) is not applicable for persons mentions in 2 to 6 above, if the total monthly remuneration is less than Rs.10,000/-
If relative / firm in which relative is partner is appointed to place of profit without the knowledge of Director, then consent should be obtained in the general meeting aforesaid or within 3 months from the date of appointment, whichever is later. This relaxation is not available for re-appointment.
However If relative /firm in which relative is partner appointed to the office / place of profit before the director becomes the director in the company, then the provision of sub-section (1) of section 314 shall not be applicable..
Even if appointment to office / place of profit made in subsidiary company, special resolution has to be passed in Holding Company.
Special resolution under section 314 not required for payment of guarantee commission and interest on loan obtained from the director.
Cases outside the purview of Sec. 314(1):
1. Managing Director
2. Manager
3. Banker
4. Trustees for the debenture holders of the Company.
Following persons covering u/s. 314 (1B) read with Director’s Relatives (Office or place of Profit) Rules, 2003:
1. Partner of Director / Manager
2. Relative of Director / Manager
3. Firm in which Director / Manager / their relative is a partner
4. Pvt. Company in which Director / Manager / their relative is a Director / Member, which carries a monthly remuneration of Rs.50,000 p.m. or more
Sec.314(1B) does not cover holding of office / place of profit in subsidiary company
Sub-section (1B) does not exclude the four offices, which are outside the scope of sub-section (1) viz, Managing Director, Manager, Banker and Trustee for Debenture holders.
Prior consent of shareholders by way of special resolution is necessary before a person is appointed to hold any office or place of profit. Rule 3 of the Director’s Relatives (Office or Place of Profit) Rules, 2003 requires the approval of the Central government where monthly remuneration in respect of sub-section (1B) exceeds Rs.50,000/-. Application for that purpose should be filed in e-form 24B.
Bonus, Leave encashment, reimbursement of medical expenditure etc. are not to be included as they are not part of the monthly remuneration (Ravindra Kumar Sanghal vAuto Lamps Ltd, 1984)
Remuneration for services of professional nature:
DCA in a circular clarified that provisions of section 314(1B) not applicable where a company proposes to appoint a firm of solicitors and advocates etc. to appear before the court of law on case to case basis. However if such a solicitor, advocate etc appointed on a regular retainer basis then the provisions of section 314 will be applicable.
Vacation of office for contravention of section 314:
According to sub-section (2) of section 314, if any office or place of profit is held in contravention of the provisions of sub-section (1), the director, partner, relative, firm, private company or the manager concerned, shall be deemed to have vacated the office as such on and from the date next following the date of the general meeting of the company and shall also be liable to refund all the remuneration received or monetary equivalent of any perquisite or advantage enjoyed by him or it till the date of vacation.
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