Author Name:   mohanroy

Regulation of directors' remuneration becomes necessary for several reasons, prominent among them being the prevention of diversion of corporate funds for personal use and the impact which the unduly high executive reward has upon the rest of the society...

The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance with the provisions of Companies Act 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.

Regulation of directors' remuneration becomes necessary for several reasons, prominent among them being the prevention of diversion of corporate funds for personal use and the impact which the unduly high executive reward has upon the rest of the society.

Sections 309 and 198 deals with remuneration of partners. Section 309 provides that remuneration payable to directors shall be determined either by the articles of the company or by a resolution of the company in general meeting. The resolution may be ordinary or special, as the articles may require.[1] But whatever amount or mode of payment may be so determined, it shall be subject to the provisions of Sections 198 and 309.

Section 198 lays down the overall maximum of managerial remuneration which can be paid by public company or a subsidiary of a public company. The total managerial remuneration payable to directors or manager in respect of a financial year shall not exceed eleven per cent of the net profits of the company. But sometimes a company may make no or inadequate profits in a financial year. This does not mean that its directors shall remain unpaid. In such a case, the company may, with the previous approval of the Central Government, pay by way of minimum remuneration any sum as may be authorised.

The Central Government has to exercise its discretion judiciously and not arbitrarily. The Company Law Board refused to sanction minimum remuneration to the ordinary directors of a company under the policy that part-time directors should be paid only when there are profits. The Calcutta High Court held that ordinary directors cannot be described as part-time directors. It was an irrelevant label and the Board should have proceeded by taking into account the present and future profitability of the company.[2]

In order to make this limit effective and to prevent directors from drawing more money in the guise of collateral benefits, the explanation to Section 198 provides that the word "remuneration" shall include the following:
1. any expenditure incurred in providing free accommodation and other amenities connected therewith;
2. any expenditure incurred in providing any other amenity either absolutely free or at a concessional rate;
3. any expenditure incurred in providing any obligation or service which, in the absence of provision by the company, would have to be incurred by that person;
4. any expenditure incurred in providing life insurance, pension, annuity or gratuity for any such person, his spouse or child.

Section 198 provides that the total managerial remuneration payable to the directors and managing agent or manager must not exceed eleven percent of the net profits of the company in the financial year. In years of inadequate profits, however, a sum not exceeding Rs. 50,000 may be paid to all the managerial personnel with the approval of the Central Government. The percentage mentioned in the section is exclusive of the fees paid to the directors.

A whole-time director or managing director cannot receive remuneration (either on a monthly basis or as a percentage of profits) exceeding 5% of the net profits for one such director and 10% for all of them together. The part-time directors who do not receive any monthly sum as remuneration may be paid 1% of the net profits of the company if the company has a managing agent, 'secretaries and treasurers' or manager. If a company has none of these, such a director or directors can get in all 3% of the net profits of the company. These rats may be exceeded by a resolution of the general meeting of the company with the approval of the Central Government. A recent amendment in the companies Act permits companies to make monthly payment to director with Central Government approval and also to pay remuneration over one percent, or three per cent, as the case may be, with the sanction of the general meeting and the approval of the Government.

The purpose of the section 309 is to control the cost of management and therefore only managerial remuneration and not remuneration paid for any other purpose can be considered. “Even on principle this seems to be the correct view because it is difficult to understand why a company could employ a technical expert and pay him whatever amount it thinks proper and there should be no control with regard to it and yet the company should be prohibited from making use of the technical knowledge of a director and pay him a proper remuneration”[3]

Limits on remuneration
It may be noted that the remuneration of directors can be determined only by the arti­cles of a company or a resolution of the general body or a special resolution if the arti­cles so require. The directors cannot themselves fix the remuneration of all or any one of themselves.

A managing or whole time director may be paid either on a monthly basis or a specified percentage of the net profits of the company or partly by one way and partly by the other. But a managing director or whole-time director is not entitled to draw more than five per cent or where there is more than one such director, ten per cent of net profits by way of remuneration, except subject to conditions specified in Schedule XIII or with the ap­proval of the Central Government.

The provisions of this section have no application when consideration is paid to any director for abstaining from doing a specified act which is not a part of the duty of the director concerned, e.g., compensation payable to the ex-managing director under an agreement restraining him from carrying on a comparing business as the one carried on by the company for a reasonable period after cessation will not be considered as remu­neration to such director.

One important point to be noted is that as per sub-section (5-A) any amounts illegally paid to or illegally received by any director in excess of the limit prescribed by the sec­tion will have to be refunded by him to the company as an express trustee and cannot be waived by the company except with the approval of the Central Government.

It had been held by the Delhi High Court in Upper Doab Sugar Mills Ltd v Company Law Board[4] that the Government could not by administrative action reduce the ceiling on remuneration fixed by Sections 198 and 309. In that case the Company Law Board granted approval to appointment of a managing director subject to the condition that his salary be reduced to a ceiling below that imposed by the above sections. The court held that the Board could not do so as Section 637-A permits only such conditions to be imposed as are not contrary to the express provisions of the Act, This aspect of the decision was overruled by the Supreme Court[5]. Section 637-AA added in 1974, expressly empowers the Government to impose a lower ceiling on remuneration while approving a candidate for managing directorship[6]. But in reference to other directors the decision of the Delhi High Court still holds good.

In the case of a director who is neither whole time nor managing director, remuneration may be paid to him by way of monthly, quarterly or annual payment, but with the approval of the Central Government, or by way of commission if the company by special resolution authorises such payment[7].

The Central Government by a notification had reduced the administrative ceiling imposed upon directors' remuneration in 1960 from 1.80 lakhs to 1.35 lakhs. The new ceiling on the remuneration payable to managing directors, whole or part-time directors and managers in public limited companies was Rs 90,000 annually or Rs 7500 monthly. This allowed incentive commission of one per cent on net profits subject to a maximum of Rs 45,000 or per cent of the approved salary. Where remuneration was paid by way of commission on net profits, the ceiling was Rs 1.35 lakhs. Perquisites may be allowed up to Rs 30,000 or 1/3 of the remuneration payable. This will not include: (1) contribution to provident or superannuation funds to the extent these are not tenable: (2) reimbursement of medical expenses actually incurred subject to the limit of Rs 5000 or one month's salary whichever is less. These ceilings had been held to be void.[8]

But the amount of payment to all directors of this category should not exceed one per cent of the net profits of the company, if the company, has a managing or whole time director, or manager, and three per cent in other cases. However the company may in general meeting and with approval of the Central Government, sanction more.

Remuneration to be authorised by articles or general meeting
Remuneration can be paid either in terms of the company's articles or in accordance with a resolution of the general meeting. A director can sue for remuneration which has been agreed to be paid to him[9]. He can prove his claim in the winding up like an ordinary creditor but he is not entitled to the preference accorded to workers under section 530[10]. Where the articles leave it to the Board to resolve as to the way in which an aggregate' remuneration is to be divided among the directors there is no right of action till such resolution is passed[11].

A provision in the articles as to directors' remuneration does not constitute an express contract between the directors and the company[12]. The result is that a director has no contractual claim for remunera­tion merely on the ground that the articles authorise a fixed sum. But where a director has been serving on the basis of the articles the courts will infer an implied contract-of payment of remuneration in terms of the articles[13].

A director can renounce his right to remuneration and his renunciation will bind him[14]. Directors may also agree with each other to accept less remuneration in the future than they are entitled to, and even though the company gives no consideration for the reduction, it is binding on each director be­cause of the mutuality of the directors' agreement between themselves, and no director may recover his full original remuneration from the company[15]. A mere statement by a director that he will waive his right to the whole or part of his remuneration does not amount to a contract binding him to do so. However, it will prevent the director from claiming remuneration if the company acts on the statement, as it may do by incurring liabilities or extending its business in a way which it would not otherwise have done. The waiver is revocable by the director at any time, and the director's normal remuneration will be payable to him for periods after he notifies the company that he intends to claim it in the future[16].

Where the articles provide that the directors shall be entitled to such remuneration as may be voted to them in general meeting, there is no right until a resolution is duly passed. A remuneration approved by all the shareholders entitled to attend and vote at a general meeting, has the same effect as a resolution duly passed[17]. The restrictions upon direc­tors' tenure and remuneration packages imposed by section 319 of the (English) Compa­nies Act, 1985 could be waived by unanimous assent of shareholders under the Duomatic principle. An agreement under which directors were to receive remuneration for life un­less they agreed to waive that entitlement might therefore be enforceable[18].

Sitting Fee and Traveling expenses for attending Board Meeting
Section 309 (2) of the companies Act provides that a director may receive remuneration by way of fee for each meeting of the Board of Directors or for a committee thereof attended by him. The usual accepted meaning of the word ‘attend’ in the aforesaid section of the Companies Act is ‘to present at a meeting of the board with a view to participating in its proceedings’. The emphasis in this regard is on ‘attending’ the meeting and not on the ‘actual holding’ of the meeting. If the meeting of the Board could not be held for want of quorum or for any other reason not within the control of the Director concerned, that does not mean that the director did not attend the meeting. So even though no business was transacted at the meeting for want of quorum, sitting fees, travelling allowance etc is payable to the director[19].

The limit of eleven per cent does not include any fee that may be payable to directors for attending meetings of the board or of committees of the board.[20]

Remuneration for professional service [S. 309(1)]
An amendment introduced in 1965 provides that the remuneration payable to a director as determined according to the above rules shall include any remuneration payable to him for services rendered by him in any other capacity. But where the services of a professional nature have been rendered and, in the opinion of the Central Government, the director rendering them possesses the requisite qualifications for the practice of that profession, extra remuneration may be paid for such services.59

As to what are services of a professional nature, sub-clause (b) of the proviso to sub­section (1) leaves it to the opinion of the Central Government to say whether a director rendering any professional services possesses the qualifications necessary for the profession. As the opinion of the Central Government will have to proceed on a rational basis, it may be useful to note here what is meant by a profession.

"Profession" involves the idea of an occupation requiring purely intellectual skill or manual skill, controlled, as in painting and sculpture or surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially concerned with the production or sale or arrangements for the production or sale of commodi­ties. A journalist, whose contributions have any literary form, exercises a profession, whereas the proprietor of a newspaper or periodical controlling the printing, publishing, etc., does not exercise a profession, but a trade or business.[21]"

According to the Oxford Dictionary, a profession is the occupation which one pro­fesses to be skilled in and to follow a vocation in which a professed knowledge of some department of learning or science is used in its application to the affairs of life or in the practice of an art founded upon it.

Analytically considered, the attributes which characterize profession are the applica­tion of an intellectual technique to one or other aspects of the affairs of life. Originally, teaching law and medicine were the chief professions, but with the increasing complex­ity of our social organization, newer intellectual techniques have been evolving leading to the growth of newer professions such as engineering, journalism, accountancy, bank­ing etc. And in the U.S.A. and other industrially advanced countries intellectual tech­niques are already being evolved in relation to business management, thus bringing it also to the level of a profession.

In the case of a profession the emphasis is more on service than on profit and in the case of a learned profession the emphasis is solely on service, irrespective of profit, while the dominant motive in the case of business and finance is the making of pecuniary gain. In the ethical Code of the American Bar Association it is stated "A profession has for its prime object the service it can render to humanity, reward or financial gain being a subordinate consideration".

For paying remuneration to a director for services of a professional nature, the previ­ous sanction of the Central Government under s. 310 is not necessary since such remu­neration is excluded from total remuneration under s. 309(l)(a)[22]. Once the Central Government has given its affirmative opinion in a reference by the company that payment can be made for professional services rendered by a director who is solicitor, it is not entitled to re­quire the company to obtain any further approval before making any such payment[23]. The company can seek the opinion of the Central Government as to whether a director in question (Civil Engi­neer in this case) is qualified for payment of professional remuneration. The Central Government is bound to express its opinion on the point in response to the query[24]. Same will be true of a technical advisor[25].

Once the Central Government is satisfied that the director in question possesses the requisite qualification to render professional services, it is not then open to the Govern­ment to put any restriction on the amount of remuneration payable to him for his professional work. A restriction so imposed would be liable to be set aside[26].

Although the special resolution referred to in section 309(4) remains in force for five years at a time, there is nothing which prohibits increase of remuneration during that period. Any increase must have sanction under S. 310[27]. Apart from this no extra remuneration can be paid to directors for doing what is a part of their duty[28].

Payment of Commission to officers [s. 199]
Where any commission or other remuneration payable to any officer or employee (other than directors) or a manager of the company is fixed by way of percentage or otherwise based on the net profits of the company, the net profits for this purpose have to be calculated in the manner set out in Sections 349 and 350. Raising of remuneration of a director by way of commission constitutes an increase which would require Central government’s approval under section 310 entitling the central government to impose restrictions and conditions in the exercise of its powers under sections 637 A and 637 AA.[29]

Payment of guarantee commission
In Suessen Textile Bearings Ltd v. Union of India[30], the court held that guarantee commission paid to directors for giving surety against loans on credit facilities taken by the company from financial institutions is not remuneration for any professional services within the meaning of S. 309 and therefore, approval of central government is not required. The directors rendering guarantee does not render manual, clerical, technical, supervisory or administrative service. He gets the commission for the risk which he bears and that has nothing to do with his directorship.

Excess Payment [S. 309(5)]
A director cannot be paid anything beyond the limits specified in the Companies Act or within those limits which may be specified in the articles or in general body resolutions. A director cannot claim anything extra even on the ground that he has performed substantial extra services unless they qualify as professional services[31]. If any director has been paid in excess of the above limits, he shall hold the excess amount in trust for the company and shall be bound to refund it. The company shall not waive the recovery of any such sum. In the case of a shareholder-director who did no other work than merely holding the office of a director, a remuneration of £30 a week was viewed as excessive, the court saying that £10 a week has been considered reasonable in such cases, and that, therefore, the extra payment was ultra vires and recoverable by the company[32]. These restrictions do not apply to a private company, unless it is a subsidiary of a public company.

Quantum meruit remuneration
Where a director performs services without any agreement about how he is to be remunerated, no remuneration is awarded even on a quantum meruit basis[33].Where a director was validly appointed on terms that his remuneration should be fixed by the Board and the Board never did so, it was held that his claim for a quantum meruit failed[34]. Where a director's service contract entitled him to remuneration only if he served for a full year and he vacated office during the year, it was held that he was entitled neither to remuneration nor to a quantum meruit for the period during which he had served[35]. Where a director was irregularly awarded additional remuneration by a committee of the Board which by the articles had no power to award it, and in expectation of receiving that remuneration the director performed services for the company which he would not otherwise have done, it was held that the director was not entitled to payment of the value of his services as a quantum meruit or as an equitable allowance, because such a payment would be remuneration which the articles permitted only if awarded by the Board or a general meeting[36]. But where a person was appointed as a managing director by the directors who had vacated their office but continued, to act and who made a contract with him for his remuneration, it was held that the appointment was not proper but the managing director was allowed remuneration for his actual working period on quantum meruit basis[37].

Apportionment of directors’ remuneration
Where, under the articles, a director is to be paid a particular sum per annum, and he vacates office before the end of a current year, the question has to be considered whether he can maintain a claim for an apportioned part, of the remuneration for that year. If the articles or the contract of the director with the company provide as does Article 82 of English Act, that remuneration shall accrue "From day to day," there is no doubt that he may maintain such a claim. Article 65 under the Companies Act, 1956 is also to the same effect. The Article is as under: "Remuneration of directors shall, in so far as it consists of a monthly payment be deemed to accrue from day to day." Thus, it transpires that only monthly payments accrue day to day and not other payments to directors. Hence, it is important to state in the articles or agreement with the directors or in the resolution approving the remuneration that remuneration to directors consisting of payment not on monthly basis shall accrue from day to day. In the absence of such a provision there would be a legal impediment to pay directors who are in receipt of remuneration which are not monthly payments if they cease to be directors mid-term.

In Swabey v. Port Darwin Gold Mining Co. Ltd[38]., the articles provided that "the directors shall each receive by way of remuneration out of funds of the company in each year the sum of £200, and the chairman in addition £100 per annum," A director resigned in the course of a current year, and he was held entitled to an apportioned part of the remuneration for that year. Lord Halsbury L.C. said: 'There was a reciprocal right to put an end to the service at an earlier period than the end of the year. It follows from that, as a necessary consequence, that both parties must have contemplated that, as this was a service for hire and reward, a proportionate part of the remuneration agreed upon should be paid if the service was determined at an earlier period than the full year."

In Salton v. New Beeston Cycle Co. (No. I)[39], it was held that where the article provided that "directors shall be entitled to receive by way of remuneration in each year £5,000," a director who vacated office in a current year was not entitled to any apportionment: and this was followed in Mc-Connell's Claims, London and Northern Bank, Re[40], where the words were "each director shall be paid…. the sum of £300 per annum"; and by the Court of Appeal in Inman v. Ackroyd and Best[41], where the words were "the sum off 300 per annum per director."

In most of these cases the court proceeded on the erroneous assumption that, in Swabey v. Port Darwin Gold Mining Co. Ltd.[42], the Court of Appeal was dealing with a case in which the articles provided that the remuneration to be paid to the directors should be "at the rate of £200 per annum," as stated in the head note to that judgment. But on this point the head note in Swabey v. Port Darwin Gold Mining Co. is incorrect. The remuneration clause did not contain the words "at the rate." The terms of the clause taken from the registered articles are set out above, and the above decisions, grounded on this inaccuracy, therefore require reconsideration, as noted in the appeal in Inman v. Ackroyd.[43]

Increase in Remuneration [S. 310]
In the case of a public company or its subsidiaries, the remuneration of directors cannot be increased in any way without approval of the Central Government.60 However, the fee payable to directors for attending meetings of the board or a committee thereof may be increased without approval as long as it does not exceed an amount which may be prescribed. Increase in remuneration of any director including managing or whole time director, requires Central government sanction so long the same is not in consonance with Schedule XIII. An increase can be effected only by amending some provisions or other, or passing some resolution, for a company cannot act except by resolutions passed by the Board or in general meetings.

Increase in remuneration can thus be validly made by the resolution of the Board of Directors, to be ratified in the next general meeting of the company. Clause 1 of Part III of Schedule XIII does not require prior approval of the shareholders in general meeting.

Although the special resolution referred to in section 309 (4) remains in force for five years at a time, there is nothing which prohibits increase of remuneration during that period. Any increase must have sanction under section 310[44].

Any increase in the remuneration of directors will have no effect (a) in cases where Schedule XIII is applicable, unless such increase is in accordance with the conditions specified in that schedule; (b) in any other case, unless it is approved by the Central Government. In the case of a private company which converts itself into a public company or becomes a public company under Section 43-A, any provision as to sitting fee in excess of the prescribed amount would be deemed to be an increase in remuneration.

References
Ramaiya A., Guide to the Companies Act, 16 ed, vol 1 & 2, 2004, Wadwa, Nagpur
Singh Avtar, Company Law, 15 ed, 2007, Eastern Book Company, Lucknow
http://www.caclubindia.com/experts/managerial-remuneration-338615.asp
http://vlex.in/vid/company-board-upper-doab-sugar-mills-29687595
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[1] It has recently been held in Radhey Shyam v Official Liquidator, AIR 1968 Raj 220: [1968] 2 Comp LJ 77, that unless there is a clear provision to that effect in the articles, the remuneration cannot be determined at a meeting of the directors themselves.
[2] Hind Ceramics Ltd. V. Company Law Board. (1972) 42 Comp Cas 610 Cal.
[3] Ramaben A. Thanawala v. Jyoti Ltd, (1957) 27 Com Cases 105.
[4] (1971) 41 Comp Cas 643 Del
[5] Company Law Board v Upper Doab Sugar Mills Ltd, (1977) 2 SCC 198: (1977) 47 Comp Cas 173.
[6] Even in reference to managing directors etc., the decision is of very little value because since the amendment of 1988, normally no approval is required if the appointment is in accordance with Sch. XIII
[7] Section. 309(4).
[8] Upper Doab Sugar Mills Ltd v Company Law Board, (1971) 41 Comp Cas 643 Del
[9] Ganesa Aiyar (R.) v. Lakshmi Building Coperative Society, (1937) 7 Comp Cases 145 (Mad)
[10] Beckwith Exp., (1898) 1 Ch 324
[11] Morrell v. Oxford Portland Cement Co. Ltd, (1910) 26 TLR 682; Joseph v. Sonora (Mexico) Land and Timber Co. Ltd, .(1918)34 TLR 220.
[12] Richmond Gate Property Co. Ltd., Re, (1964) 3 All ER 936
[13] Swabey v. Port Darwin Gold Mining Co., (1889) 1 Meg 385 (CA); Isaacs' case, (1892) 2 Ch 158; Re, Peruvian Guano Co., (1894) 3 Ch 690; Re, New British Iron Co., (1898) 1 Ch 324.
[14] McConnell's Claim, Re, London and Northern Bank, (1903) 1 Ch 728; West Yorkshire Darracq Agency v. Coleridge, (3911) 2 KB 326
[15] Re, William Porter & Co. Ltd., (1937) 2 All ER 361
[16] Re, Consolidated Nickel Mines Ltd., (1914) 1 Ch 883.
[17] Re, Duomatic Ltd., (1969) 1 All ER 161; Cane v. Jones, (1981) 1 All ER 533
[18] Wright v. Atlas Wright (Europe) Ltd. (1999) 2 BCLC 301 (CA)
[19] Circular No.1 of 1972 dated 2-2-1972
[20] The Maximum sitting fee has been prescribed by Rule 10-B, w.e.f. 15 -6-1988; GSR 559 (E)
[21] IRC v. Maxse, (1919) 1 KB 647 (CA).
[22] R. Gac Electrodes Ltd. v. Union of India, (1982) 52 Com Cases 288 (Ker)
[23] Ruby Mills Ltd. v. Union of India, (1985) 57 Com Cases 193 (Bom)
[24] Stup Consultants Ltd. v Union of India, (1987) 61 Com Cases 784 (Del).
[25] Canara Workshop Ltd. v, Union of India. (1966) 36 Com Cases 63 (Mys).
[26] Sree Gajanana Motor Transport Co. Ltd. v. Union of India, (1992) 73 Com Cases 348 (Kar).
[27] Sudarsanam (A.R.) v. Madras Purasawalkam Hindu Janopkara Saswatha Nidhi Ltd., (1986) 60 Com. Cases 281 (Mad)(DB).
[28] Dikshit & Co. Ltd. v. Mathura Prasad, AIR 1925 All 71.
[29] National Engineering industries Ltd v. Secretary, Ministry of Law, justice and Company Affairs, (1990 -91) 95 CWN 1112 (Cal)
[30] (1984) 55 Com Cases 492, 496, 497 (Del)
[31] Nelberg v. Woking Shipping Co. Ltd., (1958) 2 Lloyd's Rep 560.
[32] Halt Garage 1964 Ltd, Re, [1982] 3 All ER 1016 
[33] Woolf v. East Nigel Gold Mining Co. Ltd., (1905)21 TLR 660.
[34] Richmond Gate Property Co. Ltd., Re, (1964) 3 All ER 936.
[35] London and Northern Bank, McConnell's Claim, Re, (1901) 1 Ch 728.
[36] Guinness plc. v. Sounders, (1990) 1 All ER 652 : (1990) BCLC 402 (HL).
[37] Craven Ellis v. Cannons Ltd., (1936) 2 KB 403
[38] (1899) 1 Meg 385
[39] (1899) 1 Ch 775
[40] (1901) 1 Ch 728
[41] (1901) 1 KB 613
[42] (1899) 1 Meg 385
[43] (1901) 1 KB 613.
[44] Sudarsanam (A.R.) v. Madras Purasawalkam Hindu Janopkara Saswatha Nidhi Ltd., (1986) 60 Com. Cases 281 (Mad) (DB)

The  author can be reached at: mohanroy@legalserviceindia.com

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