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Remuneration of Directors

law ArticlesRemuneration of Directors - Prevention of Oppression and Mismanagement

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The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance the provisions given below either by the articles of the company, or by a resolution ( special resolution if the articles so require ), passed by the company in general meeting and the remuneration payable to any such director determined as per the said provisions shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services will not be so included if the services are of a professional nature and in the opinion of the Central Government, the director possesses the requisite qualifications.

A director may receive remuneration by way of fees for attending each meeting of the Board or of any committee thereof ( Sitting Fees ).

A director who is in whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of net profits of the company or partly by one and partly by the other. Such remuneration cannot exceed 5 % of the net profits of the company, except with the approval of the Central Government in case of one director and 10 % for all such directors.

The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors and its manager in any financial year must not exceed 11 % of the net profits of the company calculated in accordance with the provisions of section 349, 350 and 351.

In the case of a director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the Central Government or by way of commission if the company by special resolution authorises such payment. Such special resolution to in sub-section (4) shall not remain in force for a period of more than five years; but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time. Remuneration payable to such directors cannot exceed :-

  1. if the company has a managing or whole-time director or a manager, one per cent, of the net profits of the company;
  2. in any other case, three percent of the net profits of the company.

If any director earns remuneration from a company in excess of the above limits without prior approval of the Central Government, he shall refund the excess to the company and until such repayment, hold the money in trust with him.

The Company cannot waive recovery of such sum due from the director unless approved by the Central Government.

No approval of the Central Government is required in case the remuneration is within the limits mentioned in Schedule XIII to the Companies Act, 1956.

No director of a company who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.

The above provisions pertaining to remuneration do not apply to a private company unless it is a subsidiary of a public company.

Provision for increase in remuneration to require Government sanction
In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount of remuneration shall not have any effect unless :-

  1. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or
  2. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Increase in remuneration of managing director on reappointment or appointment after Act to require government sanction
In the case of a public company, or a private company, which is a subsidiary of a public company, if the terms of any re-appointment or appointment of a managing or whole-time director, purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration which the managing or whole-time director or the previous managing or whole-time director, as the case may be, was receiving immediately before such appointment, the or appointment shall not have any effect unless :-

  1. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or
  2. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Director cannot to hold office or place of profit
Except with the previous consent of the company accorded by a special resolution :-

  1. No director of a company can hold any office or place of profit in that company
  2. No partner or relative of such a director ( i.e. a director holding an office or place of profit in the company ), no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, and no director, or manger of such a private company can hold any office or place of profit carrying monthly remuneration in excess of the prescribed amount ( Rs. 10000/-).

However, the above restrictions are not applicable to the office of managing director, manager, banker, or trustee for the holders of debentures of the company either :-

  1. in the company ; or
  2. in any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place is paid over to the company or its holding company.

The special resolution required for the above purpose may be passed at the first general meeting after the appointment. Such special resolutions will required at subsequent re-appointments also on a higher remuneration not covered by the earlier special resolution.

However, if the monthly remuneration is not less than Rs. 20000/- per month, the special resolution mentioned above has to be obtained prior to the appointment and in addition to the special resolution, approval of the Central Government will also be required for the appointment.

If any office or place of profit under the company or a subsidiary thereof is held in contravention of the above provisions, the director, partner, relative, firm, private company or, manager shall be deemed to have vacated his office, with effect from the day following the date of general meeting mentioned above. Such person will also be liable to refund to the company any remuneration received, or the monetary equivalent of any perquisites or advantage enjoyed by him, in respect of such office or place of profit. The company will not be able to waive recovery of such amounts, except with the approval of the Central Government.

Any office or place in a company shall be deemed to be an office or place or profit under the company for these provisions :-

  1. in case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise;
  2. in case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.

None of the above provisions apply to a director appointed by the Central Government u/s 408 of the Companies Act, 1956

Compensation for loss of office
Payment may be made by a company, except in the cases specified below and subject to the limit specified, to a managing director or a director holding the office of manager or in the whole time employment of the company, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement.

However, such payment cannot be made by the company to any other director.

No payment shall be made to a managing or other director in the following cases :-

  1. where the director resigns his office in view of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
  2. where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
  3. where the office of the director is vacated
  4. where the company is being wound up, whether by or subject to the supervision of the Court or voluntarily, provided the winding up was due to the negligence or default of the director;
  5. where the director has been guilty of fraud or breach of trust in relation to, or gross negligence in or gross mismanagement or, the conduct of the affairs of the company or any subsidiary or holding company thereof;
  6. whether the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Any such payment made to a managing or other director shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately proceeding the date on which he ceased to hold the office, or where he held the office for a lesser period than three years, during such period.

No such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before, or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof , are not sufficient to repay to the share-holders the share capital (including the premiums, if any) contributed by them.

These provisions do not prohibit the payment to a managing director or a director holding the office of manager, of any remuneration for services rendered by him to the company in any other capacity.

Payment to director for loss of office in connection with transfer of undertaking or property
No director of a company shall, in connection with the transfer of the whole or any part of any undertaking of property of the company, receive any payment, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement

  1. from such company; or
  2. from the transferee of such undertaking or property or from any other person, unless particulars with respect to the payment proposed to be made by such transferee or person (including the amount thereof) have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.

Where a director of a company receives payment of any amount in contravention of the above provisions, the amount shall be deemed to have been received by him in trust for the company.

Payment to director for loss of office, etc., in connection with transfer of shares
No director of a company shall, in connection with the transfer to any persons of all or any of the shares in a company, being a transfer resulting from-

  1. an offer made to the general body of shareholders;
  2. an offer made by or on behalf of some other body corporate with a view to the company becoming a subsidiary of such body corporate or a subsidiary of its holding company;
  3. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meetings of the company; or
  4. any other offer which is conditional on acceptance to a given extent;

receive any payment by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement,-

  1. from such company; or

  2. from the transferees of the shares or from any other person except as provided below.

It shall be the duty of the director concerned to take all reasonable steps to secure that details with respect to the payment proposed to be made by the transferees or other person (including the amount thereof) are sent with, any notice of the offer made for their shares which is given to any shareholders.

If :-

  1. any such director fails to take reasonable steps as aforesaid; or
  2. any person who has been properly required by any such director to include the said details in the aforesaid notice fails so to do;

he shall be punishable with fine which may extend to two hundred and fifty rupees.

If-

  1. the above provisions are not complied with ; or
  2. the making of the proposed payment is not, before the transfer of any shares in pursuance of the offer, approved by a meeting, called for the purpose ,of the concerned shareholders

any sum received by the director on account of the payment shall be deemed to have been received by him in trust for any persons who have sold their shares as a result of the offer made, and the expenses incurred by him in distributing that sum amongst those persons shall be borne by him and not retained out of that sum.

If at a meeting called for the purpose of approving any payment, a quorum is not present and, after the meeting has been adjourned to a later date, a quorum is again not present, the payment shall, be deemed to have been approved.

Directors with unlimited liability in limited company
In a limited company, the liability of the directors or of any director or of the manager may ie generally limited to the amount of investment in shares of that company. However, if so provided by the memorandum, it may become unlimited.

In a limited company in which the liability of a director or manager is unlimited, the directors, and the manager of the company, and the member who proposes a person for appointment, to the office of director or manager, shall add to that proposal a statement that the liability of the person holding that office will be unlimited and before the person accepts the office or acts therein, notice in writing that his liability will be unlimited, shall be given to him.

If any director, manager or proposer makes default in adding such a statement, or if any promoter, director, manager or officer of the company makes default in giving such a notice, he shall be punishable with fine which may extend to one thousand rupees and shall also be liable for any damage which the person so appointed may sustain from the default; but the liability of the person appointed shall continue to remain unlimited.

Special resolution of limited company making liability of directors unlimited
A limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or of any director or of its manager.

However no alteration of the memorandum making the liability of any of the officers unlimited shall apply to such officer, if he was holding the office from before the date of the alteration, until the expiry of his then term, unless he has accorded his consent to his liability becoming unlimited.

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Prevention of Oppression and Mismanagement

Application to the Company Law Board for relief in cases of oppression
Any members of a company who complain that the affairs of the company are being conducted in a manner prejudical to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order for relief, provided such members have a right so to apply as given below.

If, on any application, the Company Law Board is of the opinion :-

  1. that the company's affairs are being conducted in a manner oppressive to any member or members; and
  2. that to wind up the company would unfairly prejudice such member or members and would be a very serious step, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be would up;

the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Application to Court for relief in cases of mismanagement
Any members of a company who complain :-

  1. that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
  2. that a material change has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;

may apply to the Company Law Board for an order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Right to apply
The following members of a company shall have the right to apply as above:-

  1. in the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
  2. in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

Where any share or shares are held by two or more persons jointly, they shall be counted only as one number.

Where any members of a company, are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board, notwithstanding that the above requirements for application are not fulfilled.

The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

If the managing director or any other director, or the manager, of a company or any other person, who has not been impleaded as a respondent to any application applies to be added as a respondent thereto, the Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.

Notice to be given to Central Government of application
The Company Law Board must give notice of every application made to it as above to the Central government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order.

Right of Central Government to apply
The Central Government may itself apply to the Company law Board for an order, or cause an application to be made to the Company Law Board for such an order by any person authorised be it in this behalf.

Powers of Company Law Board on application
Without prejudice to the generality of the powers of the Company Law Board, any under either section may provide for :-

  1. the regulation of the conduct of the company's affairs in future;
  2. the purchase of the shares or interests of any members of the company by other members thereof or by the company;
  3. in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
  4. the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely:-
    1. the managing director,
    2. any other director,
    3. the manager,

upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case;

  1. the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;
  2. the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;
  3. any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.

Interim order by the Company Law Board
Pending the making by it of a final order, the Company Law Board may, on the application of any party to the proceedings, make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable.

Effect of alteration of memorandum or articles of company by order
Where an order makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any permitted in the order, to make without the leave of the Company Law Board, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

The alterations made by the order shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act.

A certified copy of every order altering or giving leave to alter, a company's memorandum or articles, must within thirty days after the making thereof, be filed by the company with the Registrar who shall registrar the same.

If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

Consequences of termination or modification of certain agreements
Where an order terminates, sets aside or modifies an agreement :-

  1. the order shall not give rise to any claim whatever against the company by any person for damages or for compensation for loss of office or in any respect, either in pursuance of the agreement or otherwise;
  2. no managing or other director or manager whose agreement is so terminated or set aside, shall for a period of five years from the date of the order terminating the agreement, without the leave of the Company Law Board, be appointed, or act, as the managing or other director or manager of the company.

Any person who knowingly acts as a managing or other director or manager of a company in contravention of the above provision, every director of the company, who is knowingly a party to such contravention shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both.

The Company Law Board will not grant leave for appointment as managing director or director or manager of the company unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given an opportunity of being heard in the matter.

Powers of Central Government to prevent oppression or mismanagement
The Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or public interests, to act as directors thereof for such period not exceeding 3 years on any one occasion as it deems fit if the Company Law Board :-

  1. on a reference being made to it by the Central Government ; or
  2. on an application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power therein,

is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest.

However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it of proportional representation to minority shareholders on the Board of the company, direct the company to amend its articles in the manner provided section 265 and make fresh appointments of directors in pursuance of the articles as so amended within such time as may be specified in that behalf by the Company Law Board.

In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, not more than two members of the company specified by the Company law Board shall hold office as additional directors of the company. The Central Government shall appoint such additional directors on such directions.

The person appointed as a director by the Central Government in accordance with the above provisions, need not hold any qualification shares nor need to retire by rotation. However, his office as director may be terminated at any time by the Central Government and another person appointed in his place.

No change in the constitution of the Board of Directors can take place after an additional director is appointed by the Central Government in accordance with these provisions unless approved by the Company Law Board.

The Central Government in such cases may also issue such directions to the company as it may consider necessary or appropriate in regard to its affairs.

Power of the Company Law Board to prevent change in Board of directors likely to affect company prejudicially
Where a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that, as a result of a change which has taken place or is likely to take place in ownership or any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board.

Any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the Board of directors or, the company.

The Company Law Board shall have power when any such complaint is received by it, to make an interim order to the effect set out above, before making or completing the inquiry aforesaid.

Nothing contained above shall apply to a private company, unless it is a subsidiary of a public company

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