In the year 2005 the government of India constituted an expert committee headed by Dr J.J. Irani to bring changes in the Companies Act, 1956. Pursuant to the recommendations in the JJ Irani report[1], the Companies Act 2013 included the concept of Key Managerial Personnel (KMP).

Under the earlier Companies Act, 1965, it provided for the appointment of key managerial personnel (KMP) only in certain cases however with the advent of the Companies Act 2013 it recognized the concept of KMP and for the first time provided an exhaustive definition of KMP along provisions with respect to their appointment.

Key Managerial Personnel (KMP) play an integral role in the administration, management and supervising the overall day to day functioning of the companies[2]. They act like the backbone of the company and through their expertise, extraordinary acumen, they overcome the barriers and thereby aid in the company's success. Key managerial personnel help in identification, recruitment and retain qualified talent in order to achieve the entities goals.

They build strategies, provide resources and support needs to in order to make the organization successful. The KMPs are responsible for signing contracts, cheques and other important documents authorized by the board of directors on behalf of the company.

Section 2(51) of the Companies Act 2013[3] mentions Key managerial personnel (KMP) in a company.

The Key managerial personnel would constitute of the following members:

1. Chief Executive Officer (CEO) or Managing Director (MD
2. Chief Financial Officer (CFO),
3. Manager,
4. Company Secretary,
5. Whole-Time Director,

According to the Companies Act 2013, it does not mandate a private company to appoint a managing director, whole-time director or manager. It also does not prohibit voluntary appointment of such designations by private companies for the efficient management and supervision of the business entity.

Section 203 of the Companies Act deals with the appointment of KMP, limited to:

1. Managing director or CEO or manager and in their absence, a whole-time director;
2. Company secretary; and
3. CFO and applied only to a specific class of companies.

It also states that the KMP shall not hold the office in more than one company at the same time expect in its subsidiary company. Private companies were excluded, the exception being Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 which requires that every private company having a paid-up share capital of ten core rupees or more to have a whole-time company secretary.

Compliance of Section 203 of the Companies Act 2013 by Private Companies

As stated in Section 203 of the Companies Act, 2013, every listed company and every other public company with a paid-up share capital of ten crore rupees must have a CFO as a whole-time key managerial personnel. It is also states that a whole-time key managerial personnel cannot hold an office in more than one company at the same time exception of its subsidiary company. However, the act does not mention anything with regards to private companies.

It is pertinent to note that section 203 does not require private companies to appoint a KMP nor prohibits voluntary appointment of KMP. Hence the question which arises is that whether section 203 applies to private companies appointing a KMP on voluntary basis?

This was answered by in the case of "Hamlin Trust & Ors vs LSF 10 Rose Investments & Ors"[4]whereby NCLAT held that section 203 of the Companies Act shall apply to private companies in cases where it voluntarily chooses to appoint KMPs.

Facts of the Case
Hamlin Trust and LSF 10 Rose Investment each were 50% shareholders respectively in Rattan India Finance Private Limited. As per the Article of Association (AOA) of the company, the right to appoint a CFO rest with Rose Investments however the other 50% of the shareholders have the right to reject two candidates but the third candidate so proposed by Rose Investments has to be accepted by all.

The candidates for the designation of CFO so proposed were individuals who were already associated with other entities and not available full time for Rattan Finance. The remaining 50% of the shareholders objecting the nomination on the ground that the same is contrary to section 203 of the Companies Act, 2013.

The NCLT in a company petition filed by LSF 10 Rose Investment (50% shareholder of Rattan India Finance Private Limited) in its ongoing Oppression and Mismanagement petition held that since the AOA of Rattan Finance do not stipulate any criteria for appointment of CFO and Rattan Finance being a private company can therefore appoint anybody as the CFO even if such person is not a full-time employee of such company.

The NCLAT set aside the order of NCLT for the appointment of CFO of Rattan Finance. It was contended that the AOA of Rattan Finance did not stipulate any prerequisites for the appointment of the CFO. The NLCAT held that if a private company which is exempted from appointing a CFO chooses to appoint a CFO, then the CFO being a KMP would have to comply with section 203 of the Companies Act. It also laid down that the CFO is a whole- time KMP and is prohibited from holding office in more than one company except in its subsidiary company at the same time.

The NCLAT order also stated that in the absence of any eligibility criteria and method of selection of the CFO in the AOA, it would be logical to take recourse to Section 203 of the Companies Act in appointment of the CFO and thereby also take into consideration the other provisions, Section 184 and 189 of the Companies Act with regards to the eligibility of the KPM.

Therefore, the provisions of the AOA cannot override the provisions of the Act and since the provisions of AOA are silent it is logical to consider the provisions of the Act with regards to the eligibility criteria in appointment of the KMPs. Hence directing the shareholders of the company to appoint a CFO in accordance with the AOA while also complying with section 203 of the Companies Act 2013.

Hence if any company including private companies voluntarily appoints an individual as a KMP then they will have to comply with the provisions applicable to KMP according to the Companies Act.

Through this judgement passed by the NCLAT, it casted an onerous task resulting in increased compliances and costs on private companies who voluntarily deemed to appoint a KMP will hereby have to comply with the provisions of the Companies Act for the same.

It was observed earlier in the Registrar of Companies (ROC) order on Landomus Realty Private Limited[5] dated February 7, 2022. It was found that a director had filed a return by signing it in the capacity of the chairman and CEO. However, there was no resolution passed nor the Form DIR-12 filed for change in such designation. Hence it was held that even though Landomus did not fall under the class of companies requiring to appoint a KMP, the designation of a CEO without proper compliances is in violation of the Companies Act.

Conclusion
The ROC order on Landomus and the NCLAT order on Rattan Finance will have a significant impact on private companies who deem to appoint a Finance Information Officer, Chief Risk Officer, Chief Financial Officer, Managing Director, Chief Executive Officer etc.

Thus, it appears that through this NCLAT order, private companies who seek to appoint or continue the appointment of KMP on voluntary basis shall now comply with section 203 of the Companies Act and thereby also take action to comply with the requisite approvals, disclosures and other provisions pertaining to KMP in accordance with the Companies Act. This might have an impact on numerous companies who wish to avail appointment of such designations, they now will have to reconsider the same.

End-Notes:

1. Dr. Jamshed. J. Irani, Report on Company Law (May 31st, 2005), http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf
2. Key managerial personnel under the Companies Act, 2013 (June 13th 2016), https://www.corporateprofessionals.com/articles/key-managerial-personnel-under-the-companies-act-2013/
3. The Companies Act 2013
4. Hamlin Trust & Ors vs LSF 10 Rose Investments & Ors, 2022 SCC Online NCLAT 462
5. Landomus Realty Private Limited, No. ROCB/Adj. Order/Sec.454/Section 170(2) r/w 203/Co.No.081640/2021/ 5818