Remuneration

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C.A Chirag

C.A Chirag (Querist)
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04 May 2012 Which is limit of director's remuneration in deemed ltd co?

Ajay Mishra

Ajay Mishra (Expert)
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04 May 2012 Hi

Section 198 will apply to a deemed public company.

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]

Ajay Mishra

Ajay Mishra (Expert)
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04 May 2012 Limits on remuneration

It may be noted that the remuneration of directors can be determined only by the arti¬cles of a company or a resolution of the general body or a special resolution if the arti¬cles 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 ap¬proval 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 remu¬neration 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 sec¬tion 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].

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