SECTION 202: COMPENSATION FOR LOSS OF OFFICE OF MANAGING OR WHOLE-TIME DIRECTOR OR MANAGER
Section 202 of the Act contains provisions for compensation for loss of office of Managing Director or Whole-time director or Manager as under:
When payment to be made:
A company may make payment to a Managing Director (MD) or Whole-time director (WTD) or Manager
(but not to any other director) by means of:
Prohibition on payment of compensation:
No payment of compensation shall be made in the following cases-
Quantum of compensation payable
To such Managing Director or Whole-time director or manager.
- Compensation for loss of office, or
- As consideration for retirement from office, or
- In connection with such loss or retirement.
- Where the director resigns from his office as a result of the reconstruction of the company, or of its amalgamation and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation.
- Where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation (i.e., resigns on his own).
- Where the office of the director is vacated under section 167(1).
- Where the company is being wound up (by an order of the Tribunal or voluntarily) due to the negligence or default of the director.
- Where the director has been guilty of fraud, breach of trust, gross negligence, or gross mismanagement in relation to the conduct of the affairs of the company or any subsidiary company or holding company thereof; and
- where the director has instigated/ has taken part directly or indirectly in bringing about, the termination of his office
The compensation shall not exceed the remuneration he would have earned if he had remained in office for the remainder of his term or three years, whichever is shorter.
In other words, if the remaining period of his term in office is more than three years, the compensation shall be restricted to three years only; otherwise, it is to be paid for the remainder of his term.
Further, Rule 17 of the Companies (Meeting of Board and its Power) Rules, 2014 provides that a company will not make payment as compensation for loss of office to a KMP in the following cases: -
The Company defaults in repayment of public deposits or payments of its interests.
The Company defaults in redemption of debentures or payments of its interests.
The Company defaults in repaying any liability (secured or unsecured) payable to any public financial institution, bank, or other financial institution.
The Company has outstanding statutory dues which have not been paid towards its workmen or employees.
The Company has not paid dividends on preference shares or not redeemed preference shares on the due dates.
Calculation of compensation: The compensation shall be calculated on the basis of the average remuneration earned by him during a period of three years immediately preceding the date on which he ceased to hold such office, or where he held the office of less than three years, then for such shorter period.
No compensation if company is being wound up: No such payment of compensation can be made if winding up of the company is commenced whether:
. before the date on which he has ceased to hold office; or
.within 12 months after the date on which he has ceased to hold office
If the assets on winding up (after deducting expenses on winding up) are not sufficient to repay the shareholders the share capital, including premiums if any, contributed by them.
Note: Section 202 does not prohibit the payment to a managing director or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity.
PROCEDURE FOR PAYMENT OF COMPENSATION:
As per Rule 17 of the Companies (Meeting of Board and its Powers) Rules, 2014. A company’s director will receive any payment as compensation only after passing a resolution at a general meeting approving the payment of such amount. The resolution shall disclose the following details.
The Name of the director.
The amount proposed to be paid.
The event due to which compensation is payable.
Date of board meeting recommending the payment.
The basis for the determined payment amount.
The Justification or reason of the payment.
The manner of Payment, i.e. payable in cash or any other mode.
