Guarantee commission to managing director

Ruchie Khanna (Company Secretary) (123 Points)

26 March 2012  

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:

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

Please help!!

Thanks & Regards

Ruchie