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The General Circular No. 4/2011 Dated:- 4th March, 2011 issued by Ministry of Corporate Affairs is welcome. Some grey areas in the provisions of Section 309 and Section 198 will now stand clarified with this circular. For the benefit of readers I have analyzed the provisions of the above two relevant Sections of the Companies Act,1956 herein below:-
Firstly readers may note that as per the recent circular companies do not require approval of the Central Government for making payment of remuneration by way of commission to its Non- Whole Time Director(s) in addition to the sitting fee if the total commission to be paid to all those Non-Whole Time Directors does not exceed 1% of the net profit of the company if it has a Whole Time Director(s) or 3% of the net profit of the company if does not have a Managing Director or Whole Time Director(s).
The provisions of Section 198 and 309 of the companies act,1956 are analysed below.
[(4) A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either-
Provided that the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed-
Provided further that the company in general meeting may, with the approval of the Central Government, authorizes the payment of such remuneration at a rate exceeding one per cent or, as the case may be, three per cent of its net profits.
The following emerge from the above:
[(4) Notwithstanding anything contained in sub-section (1) to (3), but subject to the provisions of Section 269, read with Schedule XIII, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole time director or manager, by way of remuneration any sum [exclusive of any fees payable to directors under sub-section (2) of section 309], except with the previous approval of the Central Government.28]
The following points emerge from the above:
Section 310 provides that any provision for increase in remuneration shall not have any effect unless it is approved by the Central Government. This section is totally contradictory to section 198 and 309 which permits payment of commission to non whole time directors within ceilings provided a special resolution of the shareholders is passed. Any such resolution is valid for 5 years. When such controversy arises as to interpretation, we have to rely on judicial precedents.
In Fenner (
The plain language of the section does not postulate or cast an obligation on the petitioners that such a special resolution should be communicated to the Central Government for approval. The section is merely declaratory that such a resolution would not have any effect unless it is approved by the Central Government.. . . . . .
There cannot be any manner of doubt that before a person can be said to have contravened any provision of the Act, there must be a specific prohibition or direction thereunder.
Now this new circular removes the doubts one may have in interpreting the above sections.