PAYMENT TO DIRECTORS FOR LOSS OF OFFICE

PAYMENT TO DIRECTORS FOR LOSS OF OFFICE, ETC. IN CONNECTION WITH TRANSFER OF UNDERTAKING, PROPERTY OR SHARES [SECTION 191]

Section 191 of Act, applicable to all companies, contains provisions which regulate payment to the directors for loss of office, etc., in connection with transfer of undertaking, property or shares by a company. These provisions are discussed as under:

(i) No compensation except after specific disclosures and after approval of payment proposal by members: Section 191(1) enumerates happening of certain specific events in relation to a company and also states, inter-alia, whether or not any director of that company shall receive compensation, etc. on happening of such events. These events are given as under:

(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—

(i) an offer made to the general body of shareholders.

(ii) 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;

(iii) 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 1/3 of the total voting power at any general meeting of the company; or

(iv) any other offer which is conditional on acceptance to a given extent.

Disclosure of particulars and approval in general meeting: In connection with above events, a director of a company shall not receive any payment unless particulars as may be prescribed (refer Rule 17 below) with respect to the payment proposed to be made by the 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.

Subject to the conditions of disclosure and approval as mentioned above, a director of a company may receive 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.

According to Rule 17 (1) of the Companies (Meetings of Board and its Powers) Rules, 2014, the specified particulars which need to be disclosed to the members of the company for approving the proposal by passing a resolution at a general meeting are as under:

• name of the director;
• amount proposed to be paid;
• event due to which compensation becomes payable;
• date of Board meeting recommending such payment;
• basis for the amount determined;
• reason or justification for the payment;
• manner of payment – whether payable in cash or otherwise and how;
• sources of payment; and
• any other relevant particulars as the Board may think fit.

(ii) Payment lawful if within prescribed limits [Section 191 (2)]: Any payment made by a company to a MD or WTD or manager 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 shall be considered as lawful if it is subject to limits or priorities as prescribed in Rule 17 (2) of the Companies (Meetings of Board and its Powers) Rules, 2014.

According to Rule 17 (2), such payment, to be lawful, shall not exceed the limit as set out under Section 202.

(iii) No compensation payable under specific circumstances: According to Rule 17 (3), no compensation shall be paid to the MD or WTD or manager of the company for the loss of office or as consideration for retirement from office (except ‘notice pay’ and ‘statutory payments’ according to the terms of their appointment) 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.

(iv) Payment proposal cannot be taken as approved if no quorum present [Section 191 (3)]: If the payment is not approved for want of quorum either in a meeting or an adjourned meeting, the proposal shall not be deemed to have been approved.

(v) Receipt of payment in contravention of Section 191 (1) [Section 191 (3)]: In case a director of a company receives payment of any amount in contravention of Section 191 (1) or the proposed payment is made before it is approved in the meeting, the amount so received by the director shall be deemed to have been received by him in trust for the company.

In other words, the director shall not own such amount but keep it as trustee of the company.

(vi) Penalty for non-compliance [Section 191 (5)]: If a director of the company makes any default in complying with the provisions of Section 191, he shall be liable to a penalty of one lakh rupees.

(vii) No effect on disclosures[Section 191 (6)]: Section 191 shall not be taken to prejudice the operation of any law requiring disclosure to be made with respect to any payment received under Section 191 or such other like payments made to a director. In other words, if required by any law, the disclosures regarding any payment of compensation shall be made.

Note: Due to the notifying of Section 247 (1) w.e.f. 18-10-2017, the valuation of stocks, shares, debentures, securities, etc. will be conducted by a Registered Valuer as appointed by the Audit Committee or in its absence by the Board of Directors. Before this, it was being conducted by an independent merchant banker registered with SEBI or an independent chartered accountant in practice having a minimum experience of ten years.