Remuneration of Directors

Directors are not the servants of the company and in the absence of a specific agreement are not entitled to remuneration for their services. As said in Lindley L.J. Book, Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company’s assets, unless authorized so to do by the instrument which regulates the company or by the shareholders at a properly convened meeting. Simply said, directors are not entitled to payment in the absence of expense provisions. The remuneration paid to directors is subject to the provisions of section 198, 309 and schedule 13 of the Companies Act, 1956.

remuneration

The term managerial remuneration has not been defined in the above act, a reference to sections 198, 309 to 311 and 387 suggests that directors of the company and manager, if any, constitute managerial personnel and naturally includes a managing director or a whole time director and they are entitled to receive managerial remuneration. Even a person carrying administrative designation of manager like general manager as an executive will not be included as managerial personnel.

Managerial Remuneration

Remunerate means to pay, recompensate, or reward for their work in organization. It may be anything like a salary or bonus. Managerial remuneration may take the form of monthly payments, say, salary or a specified percentage of net profits or a commission and or by way of a fee for each meeting of the Board. It is called something like a sitting fee. As per the Explanation of section 198(4), the expression remuneration shall also include:

  • Any expenditure provided by the company to directors or managerial personnel like rent free accommodation, or any other benefits, amenity in respect of accommodation free of  charge.
  • Any expenditure provided by the company to directors or managerial personnel like any other benefit or amenity free of charge or at a concessional rate.
  • Any benefits provided by the company in respect of any obligation or service, which but for such expenditure by the company, would have been incurred by any of the pension, annuity or gratuity for any of the respected person or his spouse or child.

Again, payment received by a director for holding an office or place of profit under the company is not managerial remuneration. This has been made clear by the specific provision of sub-section (1) of section 309.

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Section 198(1) lays down 11% of the net profits as the overall ceiling on the total managerial remuneration payable by a public company or a private company, which is a subsidiary of a public company, to its directors (which means all directors including managing an d whole time directors) and the manager. Section 309(1) provides that the remuneration payable to the directors of a company, including any managing or whole time director shall be determined in accordance with and subject to the provisions of section 198 and this section either by the articles of the company or by a resolution or, if the articles so require by a special resolution passed by the company in general meeting and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. According to Sub-section (3) of Section 309, a director which 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 other.

Remuneration to Non-Executive Directors

Sub-section (4) provides that neither a director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either:

  1. By way of a monthly, quarterly or annual payment with the approval of the Central Government; or
  2. By way of commission, if the company by special resolution authorizes such payment.

Provided that in either case, the remuneration paid to such director, or where there are more than one such directors, to all of them together shall not exceed: One percent of the net profits of the company, if the company has managing or whole-time director, and three percent of the net profits of the company in any other case.

remuneration

The company in general meeting may, with the approval of the Central Government, authorize the payment of commission at a rate higher than one percent or, three percent of its net profits as the case may be. The special resolution by which payment is sanctioned will remain in operation in operation for not more than five years, but may be renewed  for five years term form time to time provided the renewal is made in the last year of the previous term. However, the approval of Central Government will be necessary for payment of any remuneration to non-executive director in terms of section 310.

A director may receive remuneration by way of a fee for each meeting of the Board, or a committee thereof attached by him (section 309(2)). This is known as sitting fee is not taken into account for computing the overall managerial remuneration under section 198.

Sitting fee and travelling expenses for attending Board meeting

Where the articles contain a provision identical with Article 65 of Table A in Schedule 1 to the Act, the directors may be paid travelling, hotel or other expenses provided by them in attending meetings of the Board or any committee thereof or general meetings of the company or in connection with the business of the company. Expenses on travelling are generally reimbursed and nay excessive unreasonable payment may make the directors liable for breach of fiduciary duty. In the absence of such an article in the articles of association of a company, travelling expenses cannot be paid. Expenses may even be authorized by the company in general meeting. As seen earlier, section 309 (2) of the Companies Act provides that a director may receive remuneration by way of fee for each meeting of the Board of directors or for a Committee thereof attended by him. The emphasis in this regard is on ‘attending’ the meeting and not on the actual holding of the meeting. If the meeting of the Board could not be held for want of quorum or for any other reason not within the control of the director concerned, that does not mean that the director did not attend the meeting. In view of the above, sitting fees, travelling allowances etc. are payable to a director who was present at the meeting of the Board with a view to participating in its proceedings though no business could be transacted at that meeting for want or quorum.

Meeting of two or more companies on same day and same premises

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Whether a director attending the Board meetings of two or three companies on the same day and in same building was entitled to draw travelling allowances from all the companies or from one of them only. It was clarified that since the travelling allowance should not be a source of profit, the director concerned should claim only as much as would cover his actual expenses  and, if he so chooses, he may reimburse himself from each of the companies proportionately so that the total amount drawn by him from all the companies put together does not exceed the expenses actually incurred by him. He may, however, draw the sitting fee from each of the companies in full.

Unauthorized Remuneration

Sub-section (5A) of section 309, which was inserted by the companies (Amendment) Act, 1960, provides that if any director draws or receives directly or indirectly by way of remuneration any sums in excess of the limits prescribed by that section or without prior sanction of the Central Government where it is required he shall such sums to the company and until such sums is refunded, hold it in trust for the company. This sub-section refers to remuneration received by a director directly or indirectly. Indirect remuneration can include remuneration paid to a director for any office held by him such as technical advisor.

Remuneration for non-managerial services of directors

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Section 309, provides that subject to the general provisions of Section 198, the remuneration be determined by the Articles, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting. The remuneration so payable shall be inclusive of the remuneration payable for services rendered by a director in any other capacity except where:

  • The services are of a professional nature, and
  • In the opinion of the Central Government, the director possesses the requisite qualification for the practice of the profession.

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