COMPENSATION TO DIRECTOR FOR LOSS OF OFFICE

Section 191 of the Companies Act 2013 discusses payment of compensation for Director for loss of office. 

According to sub – section (1) of section 191, no director of a company shall, in connection with—

(a) the transfer of the whole or any part of any undertaking or property of the company; or

(b) the transfer to any person 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 a company becoming a subsidiary company of such body corporate or a subsidiary company 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 meeting 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 from such company or from the transferee of such undertaking or property, or from the transferees of shares or from any other person, not being such company, unless particulars as may be prescribed 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.

In addition to other sub – sections discussed earlier, Rule 17 of the Companies (Meetings of Boards and its Powers) Rules 2014 supplement this provision.

No director of a company shall receive any payment by way of compensation in connection with any event mentioned in sub-section (1) of section 191 unless the following particulars are disclosed to the members of the company and they pass a resolution at a general meeting approving the payment of such amount —

(a) name of the director;

(b) amount proposed to be paid;

(c) event due to which compensation become payable;

(d) date of Board meeting recommending such payment;

(e) basis for the amount determined;

(f) reason or justification for the payment;

(g) manner of payment – whether payable in cash or otherwise and how;

(h) sources of payment; and

(i) any other relevant particulars as the Board may think fit. [Rule 17(1)]

Any payment made by a company by way of compensation for the loss of office or as a consideration for retirement from office or in connection with such loss or retirement, to a managing director or whole time director or manager of the company shall not exceed the limit as set out under section 202. [Rule 17(2)]

No payment shall be made to the managing director or whole time director or manager of the company by way of compensation for the loss of office or as consideration for retirement from office (other than notice pay and statutory payments in accordance with the terms of appointment of such director or manager, as applicable) or in connection with such loss or retirement if —

(a) the company is in default in repayment of public deposits or payment of interest thereon;

(b) the company is in default in redemption of debentures or payment of interest thereon;

(c) the company is in default in repayment of any liability, secured or unsecured, payable to any bank, public financial institution or any other financial institution;

(d) the company is in default in payment of any dues towards income tax, VAT, excise duty, service tax or any other tax or duty, by whatever name called, payable to the Central Government or any State Government, statutory authority or local authority (other than in cases where the company has disputed the liability to pay such dues);

(e) there are outstanding statutory dues to the employees or workmen of the company which have not been paid by the company (other than in cases where the company has disputed the liability to pay such dues); and

(f) the company has not paid dividend on preference shares or not redeemed preference shares on due date.

This is permitted for a company to pay compensation to a managing director or whole time director or manager for loss of office or a consideration for retirement from office subject to limits or priorities. [Section 191(2)]

These payments under this section should be approved by a general meeting or adjourned meeting with proper quorum. [Section 191(3)]

Any amount received by a director before the approval or received in contravention of this section shall be deemed to have been received by the director in trust for the company.[Section 191(4)}

If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees