Guarantee commission to managing director

A closely held public limited has three Directors on its Board – One Managing Director (MD) and 2 Whole-time Directors. Both the Whole-time Directors (WTD) are paid remuneration from Midco in compliance with the provisions of the Companies Act. The MD is not paid any remuneration.

Further, Midco is enjoying credit facility from a Bank and the MD and one WTD have given their personal guarantee for the said facility .The Board is now proposing to give guarantee commission to the MD and one WTD as a percentage of the Bank facility. The MD has also mortgaged his property to secure the said facility.

My query is:

The above guarantee commission can be paid to the MD and WTD under section 198, 309 of the Companies Act, 1956.
If yes, will the guarantee commission be treated as remuneration under Section 309;
Does it have to be paid as a percentage of Net profit or can we pay as percentage of the Credit facility?
Can the company pay this as a one-time commission only for FY 2011-12?

Please help!!

Thanks & Regards

Ruchie

As per decision of the Hon’ble Delhi High Court in the case of Sussen Textile Bearings Ltd. Vs. Union of India, [(1984)55 Com Cases 492] guarantee commission paid to directors for giving surety against loans and credit facilities taken by the company from financial institutions is not a remuneration for any services rendered and therefore, permission of Central Government as envisaged under Section 309 of the Companies Act, 1956 is not necessary. The director giving guarantee does not render manual, clerical, technical, supervisory or administrative services. He gets the guarantee commission for the risk which he bears and that has nothing to do with his directorship. After the said decision, the then Department of Company