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Unit 4: Section 226, 314 and Code of Ethics

This query arises with reference to public companies to which the said section 269 applies Notes
and, strictly, will have to be answered in the affirmative. But in the interests of administrative
convenience, it has been decided that the approval of the Central Government once again,
under section 314(1B) will not be necessary in the cases where the Central Government’s
approval has already been taken under sections 198, 269, 309, 310 and 311, as the case may
be. Irrespective of the question of Central Government’s approval, the special resolution
required under section 314(1B) will have to be passed whether by a public company or a
private company.
Another question raised is whether approval of the general meeting and of the Central
Government is necessary for an employee drawing salary exceeding ` 3,000 per month
who is a relative of an existing director but the appointment of such employee was made
before his relative became a director i.e. whether the exemption under section 314(1A)
ensures under section 314(1B) as well. It is considered that sub-section (1) and sub-section
(1A) should be read together before applying sub-section (1B) and inasmuch as there is
nothing in sub-section (1B) to affect the operation of the principle underlying sub-section
(1A), the exemption under sub-section (1A), continues to apply even with reference to a
case concurrently falling under sub-section (1B).

In the case of a private company (not governed by section 269, etc. of the Companies Act,
1956) a question has arisen whether the appointment of a person as a Managing Director
who is related to a director of the company will attract the provisions of section 314(1B)
where the remuneration payable to such managing director is in excess of the limit
envisaged in sub-section (1B). This question is answered in the affirmative. The
circumstances that for the purpose of sub-section (1), which deals with appointments to an
office of profit carrying less than a total monthly remuneration of ` 500 or more (i.e. up to
` 3,000), an exception is made in respect of an appointment of managing director or
manager is not considered relevant because sub-section (1B) expressly overrides sub-
section (1) and call for the exercise of a greater vigilance against the likelihood of the
abuse of patronage in a case where the remuneration proposed is of the order of ` 3,000 per
month and more.
A question has also been raised whether provisions of section 314(1B) are applicable
where a company proposes to appoint a firm of solicitors and advocates, etc. to help the
company in its work. It is considered that an advocate or solicitor appears in a court of law
as an officer of the court in pleading the cause of justice and hence, such appearance and
receiving fees of that account cannot lead to an inference of an offence or place of profit in
or under the company under section 314 of the Act. However, if such a solicitor/advocate,
etc. is appointed on a regular retainer basis from rendering legal advice other than
appearance in courts, the provisions of section 314 will be applicable.
A question has also been raised whether provisions of section 314(1B) will be applicable to
selling arrangements entered into by the company with a partner or relative of directors
or with private companies of which such a partner or relative is a director or member. It
is considered that these arrangements represent contracts, which fall under section 297
and so far as selling arrangements are concerned they may also attract section 294AA if the
conditions for its operation are attracted; but section 314(1B) is not attracted.

Few cases of appointment of relatives of directors as statutory auditors of the company managed
by such directors have come to the notice of the Department. It is conceded that there is no legal
bar to such appointments so long as the provisions of section 314 and those relating to appointment
of auditor are complied with the appointments are to be regarded as legally valid. It is, however,
felt that it would be in the large interests of the profession, if the auditors were to avoid any
conflict between their duties as statutory auditors of companies and their personal interest in

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