Salary to non - executive director of private company

Yes. Salary can be paid to the Non-Executive Director. No compliance required to be made.

Thanks for your prompt reply..

If you pay salary to non-executive director, he will become whole time director and you will have to file Form 32 for change of designation from 'Director' to 'WTD'.

Kindly refer the section or proviso or explanation for your intrepretation ?

Members please reply

A private company may pay salary/ remuneration to its non-executive director subject to the provisions of its articles.

Payment of salary to a person presupposes existence of employer-employee relationship.  Such employment could be either on whole time basis or part time basis.  Relevant provisions of Companies Act are reproduced below:

Section 198(3):

"Within the limits of maximum remuneration specified in sub-section (1), a company may pay a monthly remuneration to its managing or whole-time director in accordance with the provisions of section 309 or to its manager in accordance with the provisions of section 387."

Section 309(3):

"A director who is either in the whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other:"

Section 309(4):

"A director who is neither in the whole time employment of the company nor a managing director may be paid remuneration---

either

(a) by way of a monthly, quarterly or annual payment with the approval of the Central Government; or

(b) by way of commission if the company by special resolution authorises such payment."

Although these provisions may not be applicable to a private company, the intention of the Act is to provide for payment of remuneration by way of monthly salary to MD/WTD and commission to other directors. 

As per the provisions of  section 309 (4) (a) as mentioned above by Mr. P C Agrawal, remuneration may be paid to non whole time director with the approval of Central Government.  It was understood from this provision that if a public company wants to remunerate its non whole time director then it can do so with the approval of central govermnment. Therefore an independent  private company may  also remunerate its non whole time director  without CG approval since the section is not applicable on a private company unless it is a subsidiary of public company. 

I agree that in case of private company restrictive provisions for payment of remuneration to directors are not applicable and it can pay remuneration to any director.  Remuneration paid by public companies u/s 309(4)(a) can ony be in the form of 'commission' and not 'salary'.  Hence if a private company pays monthly remuneration in the form of 'commission', there is no issue.  However, if a private company pays monthly 'salary' to a director, the following questions will arise: 

1. Whether the designation of the director needs to be changed to 'WTD' or not?

2. If not, in which circumstances a director of a private company who is paid monthly salary will be deemed to be a WTD and not a director?

Members may please enlighten on this issue.

I never came across any provision in which a director of a private company who is paid monthly salary will be deemed to be a WTD

Dear Mr. Agrawal

Provision of section 309(4)(a) is very clear. It talks about remuneration by way of monthly, quarterly  or annual payment and as far as commission is concerned, the same has been covered in clause (b) and not in clause (a). As a general practice a company can't pay remuneration to its non whole time directors but if it wants to pay, the same can be done with the approval of CG. The intention of the legislature has been clear that if a company wants to remunerate its non whole time director it can do so by obtaining CG approval because it does not happen generally. As the section does not apply on a private company so it may also remunerate its non whole time director without CG approval, provided the articles of the company shall provide for the same.

As far as your other query is concerned i don't think that change of designation will happen. Further  the provisions of section 309 (4) are for part time director and not for WTD.

I hope i am able clarify.

Thanks

Dear friends,

A very interesting discussion has started on this thread.  This gives impression that the concept of WTD is not applicable in case of private company.  This however may not be the fact.  Such impression might be based on wrong interpretation of Section 269 dealing with appointment of MD/WTD which is not applicable to private company.  As per Section 269 WTD includes a director in the whole time employment of the company.  It may be noted that Section 269 does not prohibit voluntary appointment of MD/WTD by private companies.  Following points need consideration:

1. Section 267 of the Act reads as under:

“Certain persons not to be appointed managing directors.

267. No company shall, after the commencement of this Act, appoint or employ, or continue the appointment or employment of, any person as its managing or whole-time director who—

          (a)  is an undischarged insolvent, or has at any time been adjudged an insolvent;

          (b)  suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, a composition with them; or

          (c)  is, or has at any time been, convicted by a Court of an offence involving moral turpitude.”

This Section is applicable to both private and public companies.  It shows that if a private company appoints a person as MD/WTD on voluntary basis, it has to follow applicable provisions in this regard.

2. Appointment of a director as a WTD constitutes a ‘change’ within the meaning of Section 303(2) and a return in Form 32 needs to be filed.

3. We all know that a WTD cannot draw remuneration from more than one company at the same time.  This is true for private company also.  Form 32 also shows ‘Director’ and ‘WTD’ as different positions.  The idea might be that any one could check whether or not applicable provisions for appointment of WTD have been followed.  

4. Suppose a private company having paid up capital of Rs.10 crores is paying monthly salary to a director and filed Form 32 as WTD.  The company does not have any MD.  Subsequently the company is converted into a public company.  After conversion, data of MCA will show that the company has complied with Section 269(1) since the designation of the director is WTD.  [In case the designation is shown as ‘Director’ only, the company will be in default of Sec.269(1).]  Further, as clarified by the Department vide its letter No. 8/11/43A/61-PR, dated 25-1‑1961, restrictive provisions of Sections 198, 255, 309, 310 and 311 will apply from the date of conversion.

5. MD/WTD drawing remuneration from the company should not be paid sitting fee for attending Board meetings.

6. Subject to the provisions in the Articles, a director may resign by giving notice to the company.   However, resignation of WTD should be accepted by the Board.

7. In case of an offence by a company which does not have MD/WTD, all directors may be deemed to be officers in default u/s 5.

Learned members may further deliberate on this issue.

Dear Mr Sarvesh,

With reference to your observations, I am reproducing para from commentary on Section 309 by Ramaiya (17th Edition 2010 - Page 3841):

"Under sub-section (4) a person who is not a wholtime or managing director cannot be paid any remuneration otherwise than by way of commission.  He can be paid a commission without the approval of the Central Government if the company authorises it by a special resolution and if the commission is within the ceilings laid down in the proviso to sub-section (4)."

In any case, the question here is not whether a private company can pay monthly salary to a director or not.  The question is whether a director who receives monthly salary will become WTD or not and hence whether Form 32 needs to be filed for change of designation or not.

Thanks

Dear Sneha,

Paying salary to non-executive would attract all the provisions of WTD as he would loose the status of being non-executive. However, if you want to remunerate him while maintaining his non-executive status that would require 309(4) CG approval.