NCLAT holds applicability of Section 203 of Companies Act in appointment of CFO of a private company

While setting aside the order NCLT of appointment of CFO in RattanIndia Finance Private Limited (RFPL), the NCLAT, principal bench in the appeal filed by Hamlin Trust and others (50% shareholders of RFPL), held that even in the case of appointment of CFO in a private company which otherwise is exempt to appoint a CFO but if chooses to appoint a CFO, the provisions of Section 203 of Companies Act, 2013 are required to be followed.

The NCLT, Bench-III, New Delhi, had earlier this year in the company application filed by LSF 10 Investment S.a.r.l (50% shareholder of RFPL/Rose Investment) in its ongoing oppression and mismanagement petition, held that as the Articles of Association (AoA) of RFPL does not stipulate any procedure or eligibility conditions for appointment of CFO and since RFPL is a private limited company, therefore, anybody can be appointed as CFO even if such person will not be a full-time employee of the RFPL after appointment or such person is appointed with some precondition.

It is to be noted that as per AoA of RFPL, the right to appoint CFO is with Rose Investments, however, the other 50% of shareholders have the right to reject two such candidates nominated by LSF and then finally the third candidate so proposed by Rose Investment has to be accepted by all for the post of CFO.

The CFO candidates which were proposed by Rose Investment were those individuals who were associated with other entities and were not full-time available for RFPL.

As the remaining 50% of shareholders were objecting to the nomination on the ground that same is contrary to the provisions of Section 203 of the Companies Act, 2013.

Against the same, Rose Investment had filed an interim application before NCLT, which was already seized off with the oppression and mismanagement petitions filed by both groups of shareholders against each other.

The NCLAT after hearing the arguments of the counsel for appellant held that even if RFPL is a private company, however, the provisions of Section 203 shall apply to a company that voluntarily appoints a CFO, like RFPL since the CFO is a key managerial personnel in terms of Section 2(51) of Companies Act, 2013, directed that eligibility for appointment of CFO as enshrined in Section 203 of the Companies Act, 2013 would apply dehors agreement between the parties to the contrary.

The appellant tribunal further held that 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.

Earlier, the NCLT had directed the appointment of a person as CFO, who does not meet the criteria provided under Section 203 of the Companies Act, 2013 on the ground that the AoA of RFPL does not prescribe any criteria.

The NCLAT held that 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 even by a private company, in the selection and appointment of CFO, as Section 203 prescribes the appointment of key managerial persons, which includes a Chief Financial Officer of the company.

The appellants (Hamlin Trust & Ors) in the company appeal before NCLAT, principal bench was represented by S&A Law Offices and Respondent No. 1 (Rose Investment) was represented by AZB & Partners.

20220907-190004

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