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Auditing Theory

Notes director as a director of the company. It is pertinent to note that this relaxation is available only
in cases where either a relative of a director or a firm in which such relative of a director is a
partner.
4.2.3 Prior Approval of Shareholders and Central Government

Sub-section (1B) of Section 314 lists persons who shall not hold office or place of profit carrying
such remuneration as has been prescribed except with the prior approval of shareholders in
general meeting and approval of Central Government. These persons include :
1. Partner in a firm in which a director of the company is a partner.
2. Relative of a director
3. Firm in which such director or his relative is a partner.

4. Firm in which such manager or relative is a partner.
5. Private company in which such director or his relative is a director or member.
6. Private company in which the manager or relative is a member.
Sub-section (1B) does not cover a director holding an office or place of profit and also a director
or manager of a private company in which the director is a director or member. It also does not
exclude the offices exempted under sub-section (1) i.e. Managing Director, manager, banker or
trustee for the debenture holder. However, the Dept. of Company Affairs has clarified that the
provisions of sub-section (1A) shall apply to cases falling under sub-section (1B) of the Act. A
director receiving only sitting fee for attending meetings is not holding an ‘office or Place of
profit’ [(A. R. Sudarasanan v Madras Pursawalkam Hindu Janokara Saswatha Nidhi Ltd., (1985) 57
Comp. Cas. 776 (Mad)].
The Director’s Relatives (Office or Place of Profit) Rules, 2003 provides that approval of Central
Government shall now be required for cases where the remuneration exceeds ` 50,000 p.m. The
application shall be made in form 24B to the secretary, Government of India, Department of
Company Affairs accompanied by treasury challan for the payment of the requisite fee. Form 23
together with a certified true copy of the special resolution will be filed with the Registrar of
Companies with in thirty days of the general meeting.
The Companies (Amendment) Bill, 2003 has omitted the provisions of sub-section (1B). It has,
however, inserted a clause providing that the appointment of a relative of a director holding
more than two percent of the equity of the company shall require the approval of Central
Government if the remuneration exceeds such sums or percentage of profits or turn over as may
be prescribed.

4.2.4 Vacation of Office

The office or Place of Profit held in contravention of the provisions of this section will become
vacant and the director, partner, relative, firm, private company or the manager concerned,
shall be deemed to have vacated his office as such on and from the date next following the
general meeting and shall be liable to refund to the company any remuneration received or the
monetary equivalent or advantage taken in respect of the office or place of profit.

Did u know? A question has been raised whether a special resolution under section 314(1B)
is necessary for the appointment of managerial persons who may be relatives of directors
and whose appointments are already regulated by section 269, etc. of the Act.

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