2022 (9) TMI 396 - AT - Companies Law

Tribunal requires CFO candidates to meet eligibility criteria under Companies Act, 2013. NCLT decision set aside.

The Hamlin Trust, Anjali Nashier alias Anjali Rattan, Rajiv Rattan Versus LSFIO Rose Investments S.A.R.I., Rattan India Finance Private Limited, Ram Kumar, Gaurav Toskhani, Manish Chitnis, Rattan India Power Limited, IIC Limited, Caitlin Infrastructure Private Limited, IIFL Wealth Finance Ltd., Bajaj Finance Ltd., Deutsche Investments India Pvt. Ltd., BNP Paribas Asset Management India Pvt. Ltd., Sharma A & Co., K. Kumra & Co., Kumra Bhatia & Co., Mr. Rahul Gochhwal

The tribunal concluded that all CFO candidates must meet the eligibility criteria under section 203 of the Companies Act, 2013. It found the NCLT erred in ... Appointment of Chief Financial Officer - Whether Article 140 of AoA is the only provision which is applicable with regard to appointment of CFO in R-2 Company and no reference to and compliance of any provision of the Companies Act, 2013, particularly sections 203, 184 and 189 therein is necessary? - If reference to section 203 is found to be necessary for looking at eligibility of a suggested nomination, whether R-1’s suggestions of the names of Mr. Devendra Mehta and Mr. Venkataraman Subramanian as first and second nominations complies with the requirement of article 140 of the AoA for appointment of CFO? HELD THAT:- A reading of the section on KMP in the AoA, under which Article 140 is included, indicates that the CFO is considered a KMP, and Rose Investments (R-1) has the right to nominate a person for the position of CFO, and in the event the JV Partners/Appellants 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. The position of CFO is included as a KMP in sub-section 51 of section 2 of the Act. 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 - the provisions under sections 184, 169 and 203 of the Act 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. Section 203 of the Act lays 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. There are other elements of conduct that are provided in the Act as being relevant to the functioning of a KMP. A perusal of Article 140 of AoA makes it clear that in case JV Partners/appellants reject appointment of two suggested candidates, it has to accept the nomination of the third candidate - 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. Only article 140 of the AoA were to be relevant and applicable in the appointment of CFO, and there is no need to look at the ineligibility of the suggested names, we could have 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 Appellant 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 that is already beset with issues of mismanagement of its operations. Such a situation could prove to be detrimental for the company’s management and should not be allowed to happen - The suggested candidates should be eligible as per the provision of section 203 of the Companies Act, while applying article 140 of the AoA. The Impugned Order is, therefore, set aside and the parties are directed to take necessary action for appointment of CFO of the R-2 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 this order. Application disposed off. Issues Involved:1. Applicability of Article 140 of the Articles of Association (AoA) versus the Companies Act, 2013 in the appointment of the Chief Financial Officer (CFO).2. Eligibility of the nominated candidates for the position of CFO under the Companies Act, 2013.Issue-Wise Detailed Analysis:1. Applicability of Article 140 of the AoA versus the Companies Act, 2013:The primary issue revolves around whether Article 140 of the AoA is the sole provision governing the appointment of the CFO in the R-2 Company, or if the provisions of the Companies Act, 2013, particularly sections 203, 184, and 189, must also be considered.The tribunal noted that Article 140 of the AoA allows Rose Investments (R-1) to nominate a person for the position of CFO. If the Joint Venture (JV) partners reject the first and second nominations, they must accept the third nomination. However, Article 140 does not specify eligibility criteria for the CFO position.The tribunal emphasized that section 6 of the Companies Act, 2013, stipulates that the provisions of the Act shall override any contrary provisions in the AoA. Sections 184, 189, and 203 of the Act provide rational and reasonable norms for the eligibility of Key Managerial Personnel (KMP), including the CFO, ensuring transparency and unbiased management.2. Eligibility of the Nominated Candidates for CFO:The eligibility of the nominated candidates, Mr. Devendra Mehta and Mr. Venkataraman Subramanian, was questioned based on their employment status with their parent companies, Alvarez and Marsal India Private Limited (A&M) and Deloitte Touche Tohmatsu India LLP (DTT), respectively. The tribunal found that both candidates were proposed under 'secondment' arrangements, where they would continue to be employed by their parent companies and not be whole-time employees of R-2 Company, contravening section 203(3) of the Companies Act, 2013, which requires the CFO to be a whole-time KMP.The third candidate, Mr. Bipin Kabra, was also scrutinized. The tribunal noted that Mr. Kabra held directorships in multiple companies and was the Managing Director of Eunoia Financial Services Private Limited. The tribunal pointed out that Mr. Kabra's affidavit did not explicitly state his resignation from these positions, which could contravene section 203(3) of the Act.Conclusion:The tribunal concluded that all suggested candidates must satisfy the basic eligibility conditions under section 203 of the Companies Act, 2013, to ensure the proper and professional appointment of the CFO. The tribunal found that the NCLT erred in interpreting Article 140 of the AoA without considering the eligibility criteria under the Companies Act. Consequently, the tribunal set aside the Impugned Order and directed the parties to make valid nominations for the CFO position, keeping in view section 203 of the Companies Act, 2013, and complete the appointment within sixty days from the date of the order.Clarification:The tribunal clarified that any comments or views in this judgment should not affect the main company petition pending before the NCLT. There was no order regarding costs.