Section 309
REMUNERATION
TO DIRECTORS
[1957]
27 COMP. CAS. 105 (BOM.)
HIGH COURT OF BOMBAY
V.
Jyoti Limited.
CHAGLA,
C.J.
AND
DESAI, J.
O.C.J.
Suit No. 201 of 1965
OCTOBER
10,1956
CHAGLA,
C.J. - This is a special case
submitted to us under section 90 of the Civil Procedure Code and it raises
questions of construction of certain sections of the new Companies Act, 1956.
Counsel have drawn our attention to the extremely unsatisfactorily drafting of
this Act and we must confess that many of its provisions do not suffer from
lucidity. We have been told that the new Act has raised many problem for those
who have anything to do with the management or running of companies, and the
problems brought before us are only a few of those which have arise in
practice. It seems to us unfortunate that a law which is intended to held in
the development of companies in our country and also to put down abuses which
were noticed in the working of companies and especially in the institution of
the managing agency which is peculiar to our country, should not have been
couched in clear and more precise language. That, however, is a matter for
Parliament. Our concern is to take the law as we find it and do the best we
can.
The plaintiff
in this case is a shareholder of defendant No. 1 company and defendants No. 2
are the managing agents. They were appointed managing agents by an agreement
dated April 10, 1951. Defendant No. 3 is a partner of defendant No. 2 firm, the
other partner being one Dinubhai Amin. Defendant No. 3 is also a director of
defendant No. 1 company and he was also appointed a technical advisor, he being
qualified as an electrical and mechanical engineer, on a salary of Rs. 3,000 on
January 1, 1944. His appointment as director came subsequently, he being
appointed in April, 1944, and the questions which call for a construction at
our hands relate to the remuneration to be paid to the managing agents and the
remuneration also to be paid to a defendant No. 3. Under the agreement the
managing agents were to receive 10 per cent. of the annual net profits and
under certain circumstances. also a further one-third share in the balance of
net profits after making certain deductions as provided in the managing agency
agreement.
The first
relevant section that we have to consider in this connection is section 309.
That section deals with the remuneration of directors and sub-section (1)
provides :
"(1) 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."
Therefore,
section 309 and 198 are overriding sections notwithstanding the articles or any
resolution with regard to the remuneration to be paid to a director.
Sub-section (2) provides for a director receiving remuneration either by way of
a monthly payment, or by way of a fee for each meeting attended, or partly by
the one way and partly by the other. It is clear that as far as this
remuneration is concerned, the remuneration is paid to a director as a director
managing the affairs of the company. Then sub-sections (3) provides :
"(3) In
lieu of or in addition to the remuneration specified in sub- section (2),
remuneration may be paid to a director who is either in the whole-time
employment of the company or a managing director, at a specified percentage of
the net profits of the company :
Provided that
such percentage shall not exceed five for any one such director, or where there
is more than one such director, ten for all of them together."
The
controversy centres round this question as to whether the remuneration referred
to in this sub-section is confined to the remuneration paid to the director in
his capacity as a director, or whether the sub-section extends to the
remuneration paid to a director in any capacity whatsoever. In other words,
when Rs. 3,000 are being paid to defendant No. 3 as a technical adviser, is
that amount to be considered in deciding whether the amount paid to him exceeds
the 5 per cent. of net profits referred to in the proviso ? In the first place,
it will be noticed that sub-section (3) refers to remuneration in lieu of or in
addition to the remuneration mentioned in sub-section (2), and as we have just
pointed out, the remuneration referred to in sub-section (2) is clearly the
remuneration paid to the director in his capacity as a director and in no other
capacity. Further, sub-section (3) speaks of a director in the whole-time
employment of the company, and that expression is put in juxtaposition to the
alternative case of a managing director. If the remuneration was with reference
to the managing director, then it is clear that the remuneration of a managing
director is with reference to the work done by the director as a director for
the purpose of managing the company. The expression "whole-time director"
also occurs in section 310 and section 311. Under section 310 in order to
increase the remuneration the sanction of Government is required, and section
311 also deals with increase in remuneration of a managing director or a
whole-time director appointed after the Act and such increase require the
sanction of Government, In the context it seems to us that the expression
"whole-time director" must refer to a director who spends his whole
time in the management of the company in the same sense as a managing director
does. It will also be noticed that if it was intended by the Legislature that
the remuneration referred to in sub- section (3) should include not only the
remuneration paid to the director as a director but also remuneration paid to
him in any capacity whatsoever, appropriate language could have been used for
that purpose, and, as we shall presently point out, in other sections where the
Legislature wanted to convey that meaning proper language has been used. For
instance, in section 318 which deals with compensation for loss of office of a
director or a whole-time director, sub-section (5) provides :
"(5)
Nothing in this section shall be deemed to prohibit the payment to a managing director,
or a director holding the office of manager, of any remuneration for services
rendered by him to the company in any other capacity."
Therefore, the
Legislature clearly indicated that a director may receive remuneration as a
director and he may also get it in a capacity other than that of director. But
the position is made even clearer when we come to section 348 which deals with
the remuneration of a managing agent, and that section clearly provides that
the remuneration to be paid to the managing agent must not exceed the
remuneration laid down in that section, whether the remuneration is in the
respect of the managing agent's services as managing agent or in any other
capacity. We will deal with that section at greater length when we deal with the
question of the remuneration of managing agents, but the contrast between the
language of sub-section (3) of section 309 and section 348 is apparent. The
other sub-sections of this section to which reference might be made is
sub-section (8) and that provides :
"(8) The
provisions of this section shall come into force immediately on the
commencement of this Act or, where such commencement does not coincide with the
end of a financial year of the company with effect from the expiry of the
financial year immediately succeeding such commencement."
The financial
year of this company is the calendar year and therefore by reason of the
provisions of this sub-section, this section would apply to this company only
from January 1, 1957, the new Act having come into force on April, 1956.
Now, section
309(1) also refers to section 198 and the remuneration payable to a director is
not only subject to section 309 but also to section 198, and when we turn to
that section it deals with, as the head note indicates, managerial
remuneration, and sub-section (1) provides :
"(I) Save
as otherwise expressly provided in this Act, in the case of a public company or
a private company which is a subsidiary of a public company, the total
remuneration payable by the company to its director, its managing agent or
secretaries and treasurers, if any, its manager, if any, shall not exceed
eleven per cent of the net profits of the company, computed in the manner laid
down in sections 349,350 and 351, except that the remuneration of the directors
shall not be deducted from the gross profits."
The question
that is raised is whether the amount of Rs. 3,000 paid to defendant No. 3 as a
technical adviser and not as a director is included in the limit of 11 per
cent. fixed by section 198. One possible view of section 198 is that we must
calculate the total amount which the company pays to its directors, managing
agent or secretaries and treasurers and the manager and such total amount must
not exceed 11 per cent. of the net profits of the company, and it may be
suggested that what the Legislature intended was that there should be some
limit put upon the company paying out sums to the various authorities mentioned
in this section, and from that point of view it may be said that inasmuch as
Rs.3,000 a month is being paid to the director, defendant No. 3, that sum
should be included for the purpose of computing the 11 per cent. mentioned in
section 198. But, in our opinion, although the heading of a section or a
marginal note cannot control the clear language of the section, in this case we
must consider the heading and the marginal note for the purpose of arriving at
a conclusion as to what according to the Legislature was the purpose of
enacting this section, and in our opinion the marginal note correctly indicates
what the Legislature aimed at in enacting this section. What was sought to be
controlled was the cost of management, and if what was sought to be controlled
was the cost of management, then what had to be considered was managerial remuneration
and not remuneration paid for any other purpose. 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. It may be said that if this view were to be accepted,
large amounts may be paid to a director in the guise of these amounts being
remuneration for the technical or expert knowledge of the director. Now, the
Legislature has provided a safeguard and that safeguard is to be found in
section 314 and that section debars a director from holding any office or place
of profit except with the previous consent of the company accorded by a special
resolution and in the case of defendant No. 3 a special resolution was
necessary in order to enable him to hold this place of profit. In the absence
of any such resolution a director would have vacated his office as a director.
The other
interesting question that arises with regard to the construction of section 198
is as to when that section comes into force. As in section 309 there is no
indication as to when the Legislature intended that this particular section
would become operative, and therefore it was urged that the section must come
into force when the Act came into force and the managerial remuneration paid by
a company should be considered for the purpose of section 198 from April1,
1956, and therefore, it is said that this section would apply to this company
with regard to the net profits made by it and the amount expended by it for
management for the financial year 1956. Now, that contention cannot be accepted
because section 198 provides that the net profit have to be computed in the
manner laid down in sections 349, 350 and 351, and when we turn to section 349,
the net profits of the company have to be computed in any financial year. It is
truism well known to taxing law that net profits of a business cannot be
ascertained till the end of the year of account or a financial year of the
business, and therefore, in the case of defendant No. 1 company the net profits
could not be ascertained till December 31, 1956. But in ascertaining those
profits the period from January 1, 1956, to March 31, 1956, would have to be
taken into consideration because what has to be ascertained is the net profits
of the whole financial year, and if that were done, then a period antecedent to
the coming into force of the Act would have to be taken into consideration.
That, as was rightly pointed out, would be giving to the section a
retrospective effect and that would require the working of the company to be
considered before the Act came into force. Now, section 198 does not purport to
be retrospective, and, therefore, the better view with regard to the operation
of section 198 seems to be that as far as this company is concerned it would
come into operation from January 1, 1957.
Turning to
section 348, which deals with the remuneration of management agents, it is not
open to a managing agent after the Act comes into force to receive by way of
remuneration, whether in respect of his services as managing agent or in any
other capacity, any sum in excess of 10 per cent. of the net profits of the
company for the financial year, and Mr. Desai appearing for the defendants
concedes that as far as defendants No. 2 are concerned they cannot receive as
remuneration anything more than 10 per cent. of the net profits, but he
strongly contests the position that the amount of Rs. 3,000 paid to defendant
No. 3 as a technical adviser should be included in the computation of 10 per
cent. What is argued is that the managing agent is the firm and defendant No. 3
is a separate entity from the firm, and when Rs. 3,000 are paid to the
defendant No.3, they are not paid to the managing agent but they are paid to
the defendant No.3 who may be a director but certainly not the managing agent.
The argument when analysed has a curious ring because what is seriously urged
is that although the company cannot pay to the firm of managing agents more
than a certain amount it could pay one of the partners of that firm an amount
exceeding that certain sum. Now, a firm has no legal existence ; it is not a
legal entity : it is merely a compendious manner of describing partners
carrying on a business. Therefore, the argument of Mr. Desai comes to this that
although the company in law could not pay A and B jointly, it could pay A and B
separately and individually. In our opinion, full effect must be given to the
clear and emphatic language used by the Legislature in section 348 that a
managing agent cannot receive more than 10 per cent. of the net profits either
in his capacity as managing agent or in any other capacity. The whole object of
the Legislature would be defeated and the mischief aimed at would not be
overcome if we were to take the view that although the company had paid up to
10 per cent. of the net profits to the managing agents, it could further pay
extra amounts to each one of the partners of the managing agents if the
managing agency happened to be a firm. That would put a firm in an infinitely
more advantageous position than an individual. If the managing agent was an
individual, he would have to content himself with the remuneration fixed under
section 348, but if he showed the wisdom and the foresight of having a partner
and starting a partnership firm, then he and his partner individually could get
out of the limitation placed in section 348 and each seperately and
individually could receive from the company any amount without any limit
whatsoever. It is said by Mr. Desai that although in the managing agency
commission which defendant No.2 firm receives defendant No.3 has a share and
interest, the firm has no share or interest in the sum of Rs. 3,000 paid to
defendant No. 3 as a director. In our opinion, that is not correct way to look
at the matter. The correct way is that defendant No.3 not only receives a share
in the managing agency commission as a partner in defendant No. 2 firm, but
over and above the commission he receives a sum of Rs. 3,000, and the law says
that he cannot receive in any capacity a sum exceeding the sum mentioned in
section 348.
It is then
said that if the intention of the Legislature was to prohibit not only the
managing agency firm as such but every partner of that firm from receiving
anything more than the remuneration fixed under section 348, the Legislature
could have used appropriate language as it has done in sections 356, 357, 359
and 360. Now, in those sections the prohibition contained in those sections not
only apply to a managing agent but also to an associate of a managing agent,
and undoubtedly an associate as defined includes a partner. But what is
overlooked in advancing this argument is that 'associate" covers many more
relationships according to the definition than the mere relationship of a
partner, and the intention of the Legislature was to make the prohibition in
these sections much more stringent then the prohibition in section 348.
Therefore, the expression "associate" could not have been used in
section 348 because it would have covered not merely a partner, as just said,
but persons holding other relationships according to the definition of the
expression "associate" in the Act. It is, therefore, not a valid
argument to suggest that the absence of the expression "associate" in
section 348 should lead the court to the inference that a partner of a managing
agent was permitted to receive a remuneration exceeding the remuneration
mentioned in section 348.
Therefore, in
our opinion, although defendant No. 3 is permitted to receive Rs. 3,000 as a
technical expert and although that amount may not fall within the mischief of
section 309 and even though that amount may not be taken into consideration for
the purpose of section 198, that amount must be taken into consideration for
the purpose of limiting the remuneration of the managing agents defendants No.
2 to the 10 per cent. mentioned in section 348. Section 348, as section 309,
lays down the time when the section should come into operation and that is in
respect of any financial year beginning at or after the commencement of the
Act, and therefore as far as this company is concerned the section would come
into force from January 1, 1957.
Mr. Rege has
drawn our attention to a rather curious anomaly in the Act by pointing out
section 331 which says :
"All
provisions of this Act, other than those relating to the term for which the
office can be held, shall apply to every managing agent holding office at the
commencement of this Act, with effect from such commencement."
Me. Rege says
that there seems to be a clear inconsistency between sections 331 and 348 as to
when the provisions of section 348 should come into operation. Section 331
applies the various provisions of the Act with effect from the commencement of
the Act, but we have to turn to the provisions themselves to find out what they
are, and although section 348 may apply to the managing agent from the
commencement of the Act, the provisions of the section make it clear in respect
of what remuneration and from when the limitation is to apply. It may be that
the Legislature overlooked section 331 when it enacted section 348 or it
overlooked the fact when it enacted section 331 that it was going to enact
section 348. But the language of section 348 is clear and that language cannot
be controlled by the language of section 331.
Therefore we
answer the question as follows :
The following
questions were submitted for the opinion of the High Court :
"(1) Whether section 309
of the Companies Act, 1956, covers remuneration paid or payable to a director
of the company in his capacity as a technical employee of the company or in any
other capacity ?
(2) Whether the said
section 309 applies to the remuneration referred to in question No. 1 for the
calendar year 1956 ?
(3) Whether in any event
the said section 309 applies for the period 1st January, 1956, to 31st March,
1956, in so far as remuneration referred to in question No. 1 is concerned ?
(4) Whether sections 348,
349 and 350 of the said Act or any, if so which, of these applies to the
remuneration of the second defendants as managing agents for the year 1956 to
be received from the first defendants ?
(5) Whether in any event
the said sections 348, 349 and 350 or any of these applies to the remuneration
of the second defendants to be received from the first defendants for the
period 1st January, 1956, to 31st March, 1956 ?
(6) Whether the monthly
salary paid to the third defendant as a technical employees who is also a
director of the first defendants is to be included in the overall managerial
remuneration of 11 per cent. of the net profits referred to in section 198(1)
of the said Act and whether in any event the said overall limit applies for the
year 1956 or any part thereof and if so which ?
(1)
In the negative.
(2)
Does not arise.
(3) Does not arise.
(4)
In the negative, after deleting sections
349 and 350.
(5) Unnecessary.
(6) In the negative. The
question to stop at the words "....... referred to in section 198(1) of
the said Act." The further question "whether in any event the said
overall limit applies for the year 1956 or any part thereof and if so which
?" - does not apply to the year 1956.
(7)
In the negative.
We
will frame another question in the light of the judgment, viz.,
"(8) Whether the
remuneration of Rs. 3,000 paid to the third defendant as technical adviser is
to be included in the limit of 10 per cent. laid down in section 348 ?"
and answer it
in the affirmative. To the further question "If so from when?", the
answers is "From and after the 1st of January, 1957." No order as to
costs.
[1984] 55 COMP. CAS. 492 (DELHI)
v.
G.C. JAIN J.
NOVEMBER 14, 1983
Anil
B. Diwan, Shiavax, B.J. Vazefdar, Ravinder Narain, Aditya Narain and Miss Rainu
Walia, for the petitioners.
Miss
Rekha Sharma for the respondents.
Jain
J.—Petitioner
No. 1, Suessen Textile Bearings Ltd. (for short "the company"), is a
public company incorporated under the Companies Act, 1956 (for short "the
Act"). Manherlal Dwarkadas Mehta, Suresh Manherlal Mehta and Chempaklal
Jivraj Mehta, petitioners Nos. 2 to 4, are some of its present directors. The
company manufactures textile equipment. For its business it took loans and
arranged credit facilities, which were provided, inter alia, by the Gujarat State
Financial Corporation, Bank of India and Central Bank of India to the tune of
Rs. 42.5 lakhs to Rs. 95.85 lakhs during the relevant years, i.e., year ending
September 30, 1965, up to September 30, 1971. While allowing these loans and
credit facilities these financial institutions insisted on personal guarantees
and the personal guarantees were furnished by petitioners Nos. 2 to 4 and
Hansmukhlal Gordhandas Dalai and Shantilal Jivraj Mehta, respondents Nos. 3 and
4 herein.
On February 24, 1965, the
board of directors of the company adopted a resolution authorising the payment
of guarantee commission to the persons who had stood surety for the loans and
credit facilities advanced to the company by the financial institutions (but
excluding managing directors) at the rate of 06 per cent, in all per annum on
the amounts so guaranteed for a period of one year. Another resolution was
passed on November 1, 1966, authorising the payment at the rate of one per
cent, per annum on the amounts guaranteed by the guarantors other than the
joint managing directors for the period October 1, 1965, onwards. The payment
of the guarantee commission was approved by the company at its eleventh annual
general meeting held on April 27, 1969. In pursuance of the resolution dated
February 24, 1965, the company paid a sum of Rs. 21,269.41 as guarantee
commission for the financial year ending September 30, 1965, to petitioners
Nos. 3 and 4 and respondents Nos. 3 and 4, who had furnished their personal
guarantees to the financial institutions. For the year ending September 30,
1966, a sum of Rs. 44,662.27 was paid to petitioners Nos. 2, 3 and 4 and
respondents Nos. 3 and 4. For a certain period during this year, petitioners
Nos. 2 and 3 were joint-managing directors and, consequently, no commission was
paid to them for that period. The amounts of guarantee commission paid and the
balance payable to the guarantors for the financial year ending September 30,
1965, to September 30, 1971, have been shown in annexure "I" to the
petition.
The company by its letter
dated March 13, 1968, requested the company Law Board (for short "the
Board") for increasing the minimum remuneration payable to petitioner No.
3 as joint-managing director. The Board, vide its letter dated March 1, 1968,
raised certain queries and asked the company to intimate the Board about the
circumstances in which the approval of the Board was not obtained for payment
of the guarantee commission to certain directors of the company. The company,
by its letter dated June 15, 1968, explained that the guarantee commission
could not be regarded as remuneration within the meaning of s. 309 of the Act.
The Board, however, by its letter dated August 2, 1968, took the stand that the
provisions contained in s. 309 were attracted to the payment of guarantee
commission and advised the company to seek its approval. The company's attorney
by their letter dated August 21, 1968, informed the Board that without
admitting the correctness of the contention of the Board they had asked the
company to prefer the necessary application for its approval. Ultimately, the
company, by its letter dated January 28, 1971, approached the Board for the
approval of the payment of the guarantee commission to its directors, This was
without prejudice to its contention that no such approval was required. The
request of the company was rejected by the Board, vide letter dated May 5, 1971
(annexure "K"), on the ground of the present policy being followed by
the Board in this behalf. The company, by its letter dated May 21, 1971,
requested the Board to reconsider its decision. The Board, however, did not
give any reply.
Ultimately, on January 24,
1972, the petitioner filed the present petition under art. 226 of the
Constitution seeking declaration that the approval of the Central Govt. or the
Board was not required for the payment of the guarantee commission by the
company to its directors, who had guaranteed the loans and credit facilities
and for issuing appropriate writ quashing the impugned order dated May 5, 1971
(annexure "K"), and restraining respondents Nos. 1 and 2 from taking
any action against the company for not obtaining the approval of the Central
Govt. or the Board for the payment of the guarantee commission.
It was averred that the
guarantee commission paid to the directors, who had stood surety for the
company prior to the coming into force of the Amending Act, XXXI of 1965, was
outside the purview and ambit of s. 309(1) or s. 310. The guarantee commission
paid or payable to the guarantor-directors was not remuneration payable to
directors for services rendered by them within the meaning of the amended s.
309. It was not covered by the term "remuneration of any director"
within the meaning of s. 310 and, consequently, the company was entitled to pay
the guarantee commission to the guarantor-directors without the approval of the
Central Govt. or the Board. It was also averred that the impugned order dated
May 5, 1971, had been passed without affording any opportunity of hearing to
petitioners Nos. 2, 3 and 4 and respondents Nos. 3 and 4, who were vitally
affected by the order. It was based on the policy of the Govt., which was never
disclosed and was not a speaking order.
The petition was opposed
and an affidavit in opposition was filed by Shri. C.R.D. Menon, Under-Secretary
to the Govt. of India and the Board. It was averred that when a director
guarantees a loan granted by the bank to the company he renders some service to
the company. Any commission paid or payable to him for the purpose was,
therefore, remuneration payable for services rendered by him in any other
capacity within the meaning of s. 309(1) of the Act. The position was the same
even prior to the amendment of s. 309. It was also averred that the order dated
May 5, 1971, was not required to be a speaking order as the Board was
performing administrative duties and quasi-judicial functions and the order was
valid in law and had been passed after keeping the provisions of the Act in
view and after taking into consideration the facts and circumstances of the case.
Petitioners Nos. 2 to 4 and respondents Nos. 3 and 4 were not entitled to be
heard.
The main question which
requires determination is whether the guarantee commission paid or payable to
the directors of the company was remuneration for services rendered by them in
any other capacity within the meaning of s. 309 of the Act.
A "contract of
guarantee" as defined in s. 126 of the Indian Contract Act, is a contract
to perform the promise, or discharge the liability, of a third person in case
of his default. It is, in essence, a contract whereby the guarantor/surety
agrees to be answerable for some liability of the principal debtor to the
creditor. The assumption of personal liability is a necessary element in a
contract of guarantee. The liability of the surety is co-extensive with that of
the principal debtor, unless it is otherwise provided by the contract (s. 128
of the Indian Contract Act). In the absence of some special equity the surety
has no right to restrain an action against him on the ground that the principal
debtor is solvent or that the creditor may have relief against the principal
debtor in some other proceedings. Where a creditor obtains a decree against the
principal debtor as well as the surety, the same can be executed against the
surety without exhausting the remedies against the principal debtor.
Normally, a guarantee is
entered into at the request of the principal debtor. The principal debtor would
furnish guarantee only when forced or insisted upon by the creditor. Why does a
creditor insist on getting a guarantee ? The answer is obvious. Sometimes the
creditor feels that the principal debtor may not be able to perform his part of
the agreement and fail to return the amount advanced. In that situation, for
the due performance of the contract, he insists on getting a guarantee. In the
circumstances, only a person of sufficient substance would be accepted as a
guarantor. Otherwise, the entire exercise would be a futility. A surety thus
pledges his credit or his trustworthiness, while assuming the liability of the
principal debtor. The guarantee commission is the consideration agreed to be
paid by the principal debtor to the guarantor for pledging his credit by
agreeing to be answerable for his (principal debtor's) liability to the
creditor.
Having examined the nature
of the contract of guarantee it requires to be determined whether the guarantee
commission payable to a director for his having stood as a surety for the
company, the principal debtor, is remuneration for services rendered by him for
the company within the meaning of s. 309 of the Act. According to Stroud's
Judicial Dictionary, Fourth Edition "Director", inter alia, means:
"the directors of a company are the persons having the direction, conduct,
management, or superintendence" of its affairs. Under s. 291 of the Act,
subject to the provisions of the Act, the board of directors of a company shall
be entitled to exercise all such powers and to do all such acts and things as
the company is authorised to do so. It is thus apparent that the management and
superintendence of the affairs of the company vests in the board of directors.
A director thus acting with other directors manages and supervises the affairs
of the company. This is the service he ordinarily renders. In other words, a director
renders supervisory or administrative service for which he is entitled and is
generally paid remuneration.
Section 309 of the Act
imposes restrictions on the remuneration payable to the directors. The
restriction was some time sought to be evaded by directors holding technical or
other appointments in addition to their directorship. Section 309 was amended
by Act 31 of 1965 to plug these loopholes. The amended section made the
remuneration payable to a director inclusive of the remuneration payable to him
for services rendered by him in any other capacity. The word
"service", according to New Webster's Dictionary, Delux Encyclopaedia Edition,
inter alia, means: "an act of helpful
activity". Any act which is helpful to the company can be service. But the
widest interpretation so as to include each and every act helpful to the
company cannot be given, keeping in view the purport of s. 309. The meaning of
the word "service" would have to be limited to manual, clerical,
technical and supervisory/administrative service only. In any case, any act
done by a director, though helpful to the company, but involving his financial
liability would not amount to service rendered within the meaning of s. 309. A
company is in great need of finances to meet its immediate obligations. The
directors supply the necessary funds on the company's agreeing to pay normal
interest. In a way the directors supplying the funds render assistance to the
company but the payment of interest cannot be said to be remuneration paid for services
rendered by him. The Board has itself taken a decision that payment of interest
to directors for the amounts advanced by them would not be attracted by s.
309(1). The payment of guarantee commission, in my view, stands on the same
footing. Here the company is in need of finances. The financial institutions
are not prepared to advance money on the credit of the company. It agrees to
advance the amount on the condition that the director/directors stand surety
for the amount. In other words, it is prepared to advance the money and
advances the money on the credit of the company plus the credit of the
director/directors. The directors thus assume the liability of the principal
debtor, which liability, as observed earlier, is co-extensive. He pledges his credit.
The payment in consideration of the pledging of the credit or assuming the
financial liability would not be remuneration paid for services rendered within
the meaning of s. 309. A director by entering into a contract of guarantee does
not do any manual, clerical, technical, supervisory or administrative work. He
gets the commission for the pledge of his credit and not for any services
rendered. The guarantee commission payable to a director, therefore, is not
remuneration for the services rendered and, consequently, no approval of the
Board was required.
Because of my finding that
the guarantee commission was not remuneration for services rendered, I need not
go into the other pleas raised by the petitioners.
In conclusion, I accept the writ petition and quash the impugned order dated May 5, 1971 (annexure 'K'). It is declared that the approval of the Central Govt. or the Board was not required for payment of guarantee commission to the directors under resolutions of the company dated February 24, 1965, and February 1, 1966. The respondents are restrained from taking any action against the petitioner company for not obtaining the said approval. No order as to costs.
[1985] 57 COMP. CAS. 193 (BOM.)
HIGH COURT BOMBAY
v.
S. C. PRATAP, J.
WRIT PETITION NO. 1165 OF 1980.
JUNE 29, 1984
F.H.J.
Talyarkhan and E.P. Bharucha for the Petitioners.
S.S. Parkar
and S. Sankararamakrishnan for the Respondents.
Pratap, J.—This petition under article 226 of the Constitution
raises a short but interesting question relating to interpretation of sections
309(1) and 310 of the Companies Act, 1956, viz:
"Do the professional fees and charges payable by
a company to an advocate and solicitor, who also happens to be its director,
continue to constitute 'remuneration' within the meaning thereof in sections
309(1) and 310 of the Companies Act even after the Central Govt. expresses its
opinion affirmatively in terms of the proviso to section 309(1) ?"
Facts, abbreviated to the relevant minimum, are as
below.
The second petitioner, J.D. Masani, is a qualified
advocate and solicitor and has been practising as such since about 1965. He
joined M/s. N.C. Dalai & Co., a firm of advocates and solicitors
(hereinafter "the said firm"), as a partner and later from February,
1977, became its sole proprietor. This firm has been rendering professional
services to the first petitioner, the Ruby Mills Ltd. (hereinafter "the
company") for more than the last twenty-five years.
In March, 1977, the second petitioner was appointed
director of the company and was later elected and subsequently re-elected as
director and continued to be so at all relevant times. However, since long
before he became such director as also thereafter, he has been, in his capacity
as advocate and solicitor, rendering to the company professional services for
which professional fees and charges became payable to him against bills of cost
submitted in that behalf.
To exclude such fees and charges from the total
remuneration payable to the second petitioner by the company, it became
necessary to obtain, under the proviso to section 309(1) of the Act, opinion of
the Central Govt. to the effect that he possesses the requisite qualifications
for the practice of the profession of law. Application was accordingly made. By
its order dated June 28, 1980 (Exhibit F), the Central Govt. intimated its
opinion affirmatively, i.e., the second petitioner, a director of the company,
has the requisite qualifications for functioning as legal adviser of the
company. This opinion was, however, hedged in by a condition, viz:
"I have to add that if any payment is to be made
to Shri Masani for rendering legal services, it should be subject to prior
approval of the Government under section 310 of the Act".
Representation to the Government to reconsider this
condition and delete the same was rejected. Hence, this petition challenging
the legality and validity of this condition (hereinafter "the impugned
condition").
Contention of Mr. Talyarkhan, learned counsel for the
petitioners, is that once an affirmative opinion is given by the Central Govt.
under the proviso to section 309(1), the professional fees and charges
payable to the second petitioner, Masani, as an advocate and solicitor would
cease to be remuneration under the Companies Act and it was, thereafter, not
open to attach to the said opinion, a condition such as the one impugned
herein. The said condition was not legal and valid. Mr. Parkar, learned counsel
for the respondents, seeks to support the impugned condition and asks for
dismissal of this petition.
Before proceeding further, sections 309(1) and 310 of
the Companies Act, 1956 (hereinafter "the Act"). may be noted:
"309(1). Remuneration of directors.—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 for services rendered by him in any other
capacity:
Provided that any remuneration for services rendered
by any such director in any other capacity shall not be so included if—
(a) the services rendered are of a professional nature, and
(b) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession.
310.
Provision for increase in remuneration to require Government sanction.—In
the case of a public company, or a private company which is a subsidiary of a public
company, any provision relating to the remuneration of any director including a
managing or wholetime director, or any amendment thereof, which purports to
increase or has the effect of increasing, whether directly or indirectly, the
amount thereof, whether that provision be contained in the company's memorandum
or articles, or in an agreement entered into by it, or in any resolution passed
by the company in general meeting or by its board of directors, shall not have
any effect unless approved by the Central Government; and the amendment shall
become void if, and in so far as, it is disapproved by that Government:
Provided that the approval of the Central Government
shall not be required where any such provision or any amendment thereof
purports to increase, or has the effect of increasing, the amount of such
remuneration only by way of a fee for each meeting of the board or a committee
thereof attended by any such director and the amount of such fee after such
increase does not exceed two hundred and fifty rupees".
Though these two provisions read with section 198 of
the Act take in their sweep the concept of "remuneration" in its
various facets, the first proviso to section 309(1) carves out, categorically
and expressly, a specific exception in the case of remuneration for services
rendered by an advocate and/or solicitor who also happens to be a director of a
company provided, however, the Central Govt. expressed its affirmative opinion
that he possesses the requisite qualifications for functioning as legal adviser
of the company. Now, here, the Central Govt. did express its affirmative
opinion accordingly. Having done so, there was then no legal warrant or
justification for nevertheless imposing the impugned condition that even so,
any payment to be made to him, the second petitioner, even for rendering
professional legal services, should be subject to prior approval under section
310 of the Act. The impugned condition in effect seeks to include, albeit
indirectly, professional fees and charges in "remuneration" though
the same stand directly excluded therefrom by virtue of the Central Govt.'s
affirmative opinion. The said condition also runs contrary to the fair and just
compliance of section 309(1) and the proviso thereto and virtually negates the
intended consequence of the opinion in question and, in the process, renders
the same infructuous or ineffective. If such condition was to be imposed, to
what purpose then was the opinion of the Central Govt. ? This opinion was
surely not intended to be an innocuous exercise in futility. It has a definite
significance. It has a certain value and from it flows certain consequences.
The impugned condition, however, nullifies the very purpose and raison d' etre
of this opinion of the Central Govt. and renders it bereft of any practical
utility.
If a director renders professional services not as a
director but as a qualified professional, such professional services would be
de hors his directorship and de hors his directorial or managerial services.
Section 314 of the Act does contemplate discharge, albeit by a director, of
functions other than directorial or managerial in character. And if his
qualified professional capacity is firstly duly certified by the Central Govt.
by its affirmative opinion in terms of the proviso to s 309(1), the
professional fees and charges payable to him as a qualified professional would
then stand excluded and exempted from and would no longer form part of the
managerial remuneration, which remuneration alone is limited by the ceiling under
section 198 of the Act. The crux under section 198 is managerial remuneration
and not remuneration. In this context, it may be relevant to note that the
Companies Act Amendment Committee (The Shastri Committee) had in its report
stated:
"Having given our careful thought to this
matter, we have come to the conclusion that section 198 was intended to apply
to remuneration for managerial services and, therefore, we have recommended the
addition of the word 'managerial' between the words 'total' and 'remuneration'
in sub-section (1)".
This recommendation was accepted and by the Companies
(Amendment) Act, 1960, the words
"total remuneration" in section 198(1) were substituted by the
words "total managerial remuneration". This thus accords legislative
sanction to the distinction maintained between "remuneration" and
"managerial remuneration".
Again, if the term "remuneration" in
section 309(1) and section 310 of the Act is the same—as is indeed the stand of
the respondents, vide para 13 of their affidavit-in-reply—then, once
affirmative opinion in terms of the proviso to section 309(1) is given by the
Central Govt. then the exception carved out by virtue of the said proviso takes
effect ipso facto and excludes fees and charges for professional services from
the said term "remuneration" in relation to not only section 309 but
also section 310 of the Act. There is a vital difference between the stage
prior to the Central Govt's. affirmative opinion supra and the stage
thereafter. The fulfillment of the conditions attracting the legislative
exception embodied in the proviso to section 309 frees the company as also the
concerned qualified professional (who is also a director of such company) from
the statutory control over managerial remuneration or remuneration by virtue of
sections 198,309 and 310 of the Act. Besides, as observed by Chagla C.J., in
Ramaben Thanawala v. Jyoti Ltd. [1957] 27 Comp Cas 105, 110 (Bom):
".......it is difficult to understand why a
company should 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".
These observations made in 1956 acquire greater force
after the enactment of the proviso to section 309(1) by the Companies
(Amendment) Act, 1965.
Indeed, to hold otherwise, would lead to rather
startling results and unintended consequences and become akin to obtaining
professional services free of charge. To illustrate, one may well visualise a
qualified surgeon also being a director of a company. Could it be the, object
of the Act that even after the Central Govt. expressed its opinion in terms of
the proviso to section 309(1), the professional charges payable to him in
respect of his professional services, e.g., surgical operations performed by
him qua employees of the company, would still constitute
"remuneration" within the meaning of sections 309 and 310 of the Act?
Unhesitating answer would be in the negative. Take also for instance a
qualified chartered accountant who also happens to be a director of a company.
Was it the intention of the Act that even after the Central Govt. expressed its
opinion in question, the professional fees and charges payable to him would
still constitute "remuneration" within the meaning of sections 309
and 310 of the Act? Once again the answer would be in the negative. Indeed, one
can well visualise further such
instances, e.g., a professionally qualified engineer or architect. It is not
the object of the Companies Act to regulate and control the practice or the
fees of qualified professionals. That jurisdiction vests elsewhere. And, what
is more, but for the conditional legislative exception under the proviso to
sections 309(1) which, on compliance, exempts professional fees and charges
from "remuneration", the restriction de hors the said proviso may
well become unreasonable and absolute in its effect and consequently render
itself vulnerable to a constitutional challenge as violating one's fundamental
right to practice his profession merely on becoming a company director
simpliciter. It may, however, be observed that the position is not likely to be
the same and would perhaps be different in the case of management, investment,
financial or other consultants not professionally qualified and not belonging
to any recognized profession as such.
Mr. Talyarkhan invited my attention to a decision of
the Kerala High Court in R. Gac
Electrodes Ltd. v. Union of India [1952] 52 Comp Cas 288, where, under
facts and circumstances similar hereto, relief to the same effect as prayed for
herein was granted. I find myself in agreement with the reasoning and
conclusion therein.
In this view of the matter, this petition succeeds
and is allowed. The order dated July 31, 1980 (exhibit "H"), is set
aside and quashed. The impugned condition embodied in para 4 of the order dated
June 26, 1980 (exhibit "P"), is also set aside and quashed. The
petitioners will be entitled to the benefit of the said order dated June 26,
1980, with the impugned condition deleted therefrom.
Rule is made absolute in terms aforesaid. In the
circumstances of the case, however, there will be no order as to costs.
[1987]
61 Comp. Cas. 784 (Delhi)
v.
Union of India
Mahinder Narain, J.
July 9, 1986
S. Rao and Anil Kumar for
the petitioner.
S.P. Sharma, for the respondent.
Mahinder Narain, J.—The petitioner company has filed this writ petition as the
Central Government by its letter dated January 14, 1983, annexure "K"
to the writ petition, has not given an expression of opinion regarding the
professional status of Shri C.R. Alimchandani, who was appointed as its senior
chief consultant, by a resolution dated July 20, 1982, in its general meeting.
It is stated in the writ
petition that Shri C.R. Alimchandani is one of the outstanding professionals in
the field of structural design and diverse applications of pre-stressed
concrete technology. This is stated in paragraph No. 6 of the petition which
reads as under :
"6. Shri C. R.
Alimchandani holds the technical post of senior chief consultant and has
attained the topmost level on the technical side of the company by dint of
professional merit acquired by him ever since his graduation in civil
engineering from Poona University, at the age of 22, in 1957, ranking first in
the University. He proceeded to France under a French Government scholarship for
advanced studies and training in pre-stressed design construction and secured
the D.C.T. He was awarded the ACTIM MEDAL for the most outstanding professional
among 35,000 renowned experts trained by ACTIM (French Government agency) over
a period of 20 years. He is a recognised expert on structural design and
diverse applications of pre-stressed concrete. He is editor of the Stup
Bulletin of Information, a quarterly journal priced at Rs. 6 per issue, which
enjoys considerable circulation in the professional circles concerned with
civil engineering. He has been the vice-president from India of the Federation
International FIP Congress, (FIP) and as such vice-President brought out a
report to the Ninth International FIP Congress, Stockholm 1982, a report which
has been published by the Institution of Engineers (India). The said report
contains not only his foreword as vice-president of FIP from India, but also
contains an article by him and another professional named Shri P. C. Bhasin and
Shri N. V. Merani belonging to the Government of India and the Government of
Maharashtra respectively as engineers of experience and this article contains
reference to some of the projects undertaken by the company. A copy of the said
report will be referred to and relied upon by the petitioner at the hearing as
may be required by the Hon'ble Court. The standing of Shri Alimchandani in the
profession of civil engineering is further evident from the lectures delivered
by him on November 30, 1973, at the Bengal Centre of the Institution of
Engineers (India) at Calcutta, styled the Institution of Structural Engineers
(London) Lecture for the year 1973. He has also distinguished himself as the
author of several articles on the subject in which he has specialised for a
whole lifetime so far. A complete chart of the senior technical personnel of
the company in charge of various projects in which the company is interested,
for the designs sponsored by it and for removing technical impediments in the
execution of the said projects is annexed hereto and marked annexure
"D". The said chart includes all the directors of the company one of
whom only happens to be an advocate. These senior persons guide and direct
other technical personnel with engineering qualifications working under them in
several teams and the technical personnel as a whole numbering about 250 as
aforesaid give validity and justification to the name by which the company is
known, namely, STUP Consultants Ltd. Shri C. R. Alimchandani is in overall
charge of the work of the various teams of experts who constitute, as it were,
the soul-force of the company and Shri Alimchandani constitutes the moving
spirit of the company in this respect. His primary role consists in this
respect and for the professional services involved in this role, he takes
remuneration from the company, the services being rendered to the clients of
the company rather than the company itself as for any project that it owns.
Shri Alimchandani is also expected by the company to continue as chairman and
managing director of the company with no additional remuneration, vide letter
of the company to Shri Alimchandani dated June 25, 1982. A copy of the said
letter is annexed hereto and marked as annexure "E". The capacity of
managing director is a capacity distinct and different from Shri Alimchandani's
capacity as senior chief consultant of the company. As managing director of the
company, he is concerned with matters of several kinds which are essentially of
organisational nature as described already in paragraph 4 above. These matters
also involve their own peculiar responsibility but in view of the professional
services by which he is able to fulfil himself in relation to various clients
of the company, he is content to be an honorary managing director as resolved
by the company. The copies of the resolutions passed by the company in general
meeting in respect of the two capacities of Shri Alimchandani as managing
director and as senior chief consultant on the same date, namely, July 20,
1982, are annexed hereto and marked as annexure "F" and "G"
respectively."
In the counter-affidavit
that has been filed, there is no exception taken to the assertions in paragraph
6 of the writ petition that Shri C R. Alimchandani is one of the
"outstanding professionals". Reply to paragraph 6 is common with
other paragraphs of the writ petition, namely, paragraphs 1 to 6 and reads as
under :
"1-6. Paras. 1 to 6 of the petition filed
by the petitioner are matters of record and need no comments."
In view of this reply, it
is apparent that the Union of India does not contest the assertion that Shri
C.R. Alimchandani is a professional.
The refusal of the Central
Government which is the subject-matter of this writ petition is dated January
14, 1983, and the communication to the petitioner is annexed as annexure
"K" to the writ petition. The same reads as under :
"With reference to
your letter No. Accts./553/NVR/KVK/885, dated December 18, 1982, on the above
subject, I am directed to say that after careful reconsideration of the matter,
the Central Government is still of the opinion that Shri C. R. Alimchandani is
to be appointed as managing director and the remuneration allowed to him will
be in that capacity. The question of expression of opinion in his favour,
therefore, does not arise. You are, therefore, advised to please make a formal
application under sections 269 and 309 of the Companies Act, 1956 It may also
please be noted that without prior approval of the Central Government, the
continuance of managing director will not be in accordance with the law and the
remuneration, if any, paid to him in any capacity will be recoverable under
section 309(5A) of the Companies Act, 1956."
The relevant provision
which needs to be examined is section 309 of the Companies Act which reads as
under :
"309. Remuneration of
directors.—
(1) The remuneration payable to the
directors of a company, including any managing or wholetime 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 for services rendered by him
in any other capacity :
Provided
that any remuneration for services rendered by any such director in any other
capacity shall not be so included if—
(a) the
services rendered are of a professional nature, and
(b) in the opinion of the Central Government,
the director possesses the requisite qualifications for the practice of the
profession.
(2) A director may receive remuneration by way
of a fee for each meeting of the board, or a committee thereof, attended by him
:
Provided that where
immediately before the commencement of the Companies (Amendment) Act, 1960,
fees for meetings of the board and any committee thereof, attended by a director
are paid on a monthly basis, such fees may continue to be paid on that basis
for a period of two years after such commencement or for the remainder of the
term of office of such director, whichever is less, but no longer.
(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 :
Provided that except
with the approval of the Central Government such remuneration shall not exceed
five per cent, of the net profits for one such director, and if there is more
than one such director, ten per cent for all of them together.
(4) A director who is neither in the
wholetime 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
:
Provided that the
remuneration paid to such director, or where there is more than one such
director, to all of them together, shall not exceed—
(i) one per cent, of the net profits of the
company, if the company has a managing or wholetime director or a manager;
(ii) three
per cent, of the net profits of the company, in any other case :
Provided further that
the company in general meeting may, with the approval of the Central
Government, authorise the payment of such remuneration
at a rate exceeding one per cent, or, as the case may be, three per cent, of
its net profits.
(5) The net profits referred to in
sub-sections (3) and (4) shall be computed in the manner referred to in section
198, sub-section (1).
(5A) If any director draws or receives, directly or indirectly, by
way of remuneration any such sums in excess of the limit prescribed by this
section or without the prior sanction of the Central Government, where it is
required, he shall refund such sums to the company and until such sum is
refunded, hold it in trust for the company.
(5B) The company shall not waive the recovery of any sum refundable
to it under sub-section (5A) unless permitted by the Central Government.
(6) No director of a company who is in receipt of any commission
from the company and who is either in the wholetime employment of the company
or a managing director shall be entitled to receive any commission or other
remuneration from any subsidiary of such company.
(7) The special resolution referred to in sub-section (4) shall
not remain in force for a period of more than five years ; but may be renew ed,
from time to time, by special resolution for further periods of not more than
five years at a time :
Provided that no renewal
shall be effected earlier than one year from the date on which it is to come
into force.
(8) The provisions of this section shall come into force
immediately on the commencement of this Act or, where such commencement does
not coincide with the end of a financial year of the company, with effect from
the expiry of the financial year immediately succeeding such commencement.
(9) The provisions of this section shall not apply to a private
company unless it is a subsidiary of a public company."
A perusal of the above
provision shows that section 309 is meant to control remuneration of managing
directors or wholetime directors of any company. It is also clear that the
proviso to section 309(1) excludes certain remuneration which is received by
the directors covered by section 309. If the conditions in provisos (a) and (b)
are satisfied, then the remuneration receivable is not covered by the
provisions of section 309.
Proviso (a) to section 309(1)
postulates that if the services for which the director is remunerated are of a
professional nature, and if in the opinion of the Central Government the
director possesses the requisite qualifications for the practice of the
profession, then payments made or remuneration given for rendering of such
professional services does not need prior approval of the Central Government.
In view of the statutory
provisions of the proviso to section 309(1), any company can seek the opinion
of the Central Government regarding possessing of requisite qualifications.
This provision was invoked by the petitioner company. In their letter dated
September 10, 1982, annexure 'H', it was stated that :
"We would request the Government for
expression of such opinion in the case of C.R. Alimchandani. We may add that in
the case of a traditional profession like engineering and in the case of an
acknowledged expert in civil engineering line like Mr. C.R. Alimchandani, the
expression of opinion may be a pure formality. But even so, we make the request
out of deference for a possible statutory requirement in this behalf."
By another resolution in
general meeting of the company, annexure 'G', also dated July 20, 1982, C.R.
Alimchandani was reappointed as managing director of the company for a period
of 5 years with effect from 1982 subject to the approval of the Central
Government. C. R. Alimchandani was not to be paid any remuneration as managing
director of the company, but in view of his appointment as senior chief
consultant, it was resolved by the company in its general meeting as follows:
"Further resolved that
in view of his appointment as managing director, the remuneration payable to
him as senior chief consultant of the company be and is hereby sanctioned as
minimum remuneration to be paid to Mr. C.R. Alimchandani, as remuneration for
his services as senior chief consultant, in case of loss or inadequacy of
profit during the aforesaid period."
The "loss or
inadequacy of profit" mentioned in the resolution was for the purposes of
section 198 of the Companies Act.
Two resolutions have been
passed by the petitioner company in its general meeting, one resolving that
Shri C.R. Alimchandani be appointed as senior chief consultant and the other
reappointing him as managing director. Section 309 of the Companies Act itself
postulates that there can be professionals rendering service to a company. The
section in clear terms obviously contemplates that directors, managing
directors or whole-time directors shall be remunerated for being a director,
managing director or wholetime director of the company.
It is axiomatic that what
is not prohibited by law is permitted by law. Section 309 does not prohibit a
director from rendering professional service. In fact, it postulates that a
director may render professional service. The only condition which is placed on
such persons being remunerated for professional services rendered to their
company is that the Central Government should opine as to whether such a person
possesses the requisite qualifications for the practice of the profession in
question with respect to which the professional service is rendered by the
director.
Neither in the
counter-affidavit nor in the impugned letter dated January 14, 1983, is it
asserted by the respondents that C.R. Alimchan-dani does not have the requisite
qualifications for the practice of the profession of a civil engineer, and
specifically it is not asserted in the counter-affidavit that C. R.
Alimchandani should not be appointed as senior chief consultant for the reason
that he did not have the requisite experience in the field of pre-stressed
concrete design.
It is not disputed by the
respondents that section 309(1) enables a company to seek the opinion of the
Central Government regarding possession of requisite qualifications, as the
provision exists in the Companies Act. Upon the power being invoked by a
company it is necessary and incumbent upon the Central Government, indeed it is
its duty, to express an opinion thereon. The Central Government, in my view, cannot
sidetrack the issue by requiring compliance with another provision, or any
other aspect of company law as a pre-condition to the expression of opinion by
it. The Central Government in the instant case by the impugned order required
moving of an application under section 309 of the Companies Act for the purpose
of getting approval of the Central Government with respect to reappointment of
Shri C.R. Alimchandani as managing director of the company. The letter of the
petitioner company dated September 10, 1982, had also sought approval of the
Central Government for the reappointment of C.R. Alimchandani as managing
director. Merely because the two decisions of the Central Government were
required by the same document, the same could not be inextricably linked
together. One could be decided without the other.
In the facts of the case
there was no dispute that C.R. Alimchandani is a professional man. He holds a
degree in civil engineering from Poona University. Besides he has technical
qualifications which are mentioned in paragraph 6 which, as noted above, are
not disputed. In this view of the matter, there could have been no difficulty
for the Central Government expressing its opinion, relating to the
professional/technical qualifications of C.R. Alimchandani. It is not disputed
before me that C. R. Alimchandani is a civil engineer. Indeed, it is stated to
be a "matter of record" in the counter-affidavit and the fact could
not be disputed. It would have been but fair for the Central Government to have
expressed this opinion in its communication dated January 14, 1983, as they
have done in the counter-affidavit in this court.
In this view of the matter
whatever remuneration is receivable by C.R. Alimchandani as a senior chief
consultant of the petitioner company, the same would be for services of
professional nature rendered by him, as its senior chief consultant, to the
petitioner company.
It is urged by Mr. Sharma,
who appears for the respondents before me, that a perusal of the resolution
would show that what is being done is that C.R. Alimchandani is being paid a
monthly salary of Rs. 5,500 in the pay scale of Rs. 5,500—500—7,500. In this
view of the matter it is urged that C.R. Alimchandani is a wholetime employee
of the company and for this reason he cannot be termed as a senior chief
consultant. In spite of my asking, the respondents have not placed before me
any prohibition by a professional body like the Institution of Engineers which
prevents persons holding traditional qualifications of a civil engineer from
being an employee, whether as a consultant or otherwise, of any company or
person. Indeed, I doubt whether such a prohibition could exist, or could be
imposed by anybody like the Institution of Engineers, for the reason that it is
common knowledge that the Government of India has its public works department
which employs persons who have professional qualifications as civil engineers
and who are its wholetime employees. There being no such prohibition against
any person holding a professional qualification of a civil engineer from
becoming an employee of any person, in my view, it is not material whether the
consultation charges which are paid to a professional engineer are paid on
monthly basis, or on a case to case basis. Whatever may be the mode of payment
to a professional consultant, what is paid to such person is his professional
consultancy fee.
In any case, I do not see
any difficulty in bifurcating the two things which were required to be done by
the Central Government, (1) expression of opinion as to whether Shri C.R.
Alimchandani was a professional which opinion was not expressed in the letter
dated January 14, 1983 but was not disputed in the counter-affidavit, nor was
it disputed before me, and (2) approval of reappointment of C. R. Alimchandani
as managing director. In the absence of such dispute, I do not see any purpose
being served in directing the respondents to formally communicating their no
objection to the professional qualifications. The prayers in this writ petition
are wide enough to include a declaration, in view of the pleadings before me,
that Shri C.R. Alimchandani does possess the requisite qualifications for the
practice of the profession of civil engineering.
The memorandum of
association of the petitioner company which is filed as annexure "A"
refers to the objects for which the petitioner company was established, inter
alia, to be "to act as designers and consultants in the designing of
pre-stressed concrete structures and of produtcs, either pre-caste, pre-fabricated
or cast-in-situ…and construction work". This being the case, Shri C.R.
Alimchandani would be acting in accordance with the objects of the company in
rendering the professional service as consultant in designing pre-stressed
concrete structures, etc., and thus the company was entitled to the expression
of opinion from the Central Government, and in view of this admission in the
counter-affidavit this petition has to succeed.
Counsel for the petitioner
has cited Ruby Mills Ltd. v. Union of India [1985] 57 Comp Cas 193 (Bom) and R. Gac Electrodes
Ltd. v. Union of India [1982] 52 Comp Cas 288
(Ker) in support of this case. Both these judgments support the contentions of
the petitioner company. In both these cases, the persons who rendered
professional services were lawyers/solicitors. I do not see any difference
between the "professional" services being rendered by a solicitor or
a lawyer and the "professional" services rendered by a civil
engineer, as consultant of the company.
I make it clear that
whatever is stated hereinabove will not in any way affect the approval which is
to be given or not to be given by the Central Government with respect to an
application made by the company in connection with the reappointment of Mr.
C.R. Alimchandani as a managing director of the company.
During the course of the
arguments, reference was made to section 269 of the Companies Act, 1956,
regarding the approval to be given for appointment of any person as managing
director. Because I am confining myself in the instant case to the expression
of opinion regarding the professional qualifications, the contentions raised
with respect to section 269 of the Companies Act are not being decided by me.
As stated above, the respondents shall be entitled to proceed in accordance
with law with regard thereto.
In this view of the matter, this writ petition succeeds. The order dated January 14, 1983, in so far as it relates to non-expression of opinion regarding the professional qualifications of Shri Alimchandani is quashed, and it is declared that in view of the counter-affidavit filed by the respondents, Shri C.R. Alimchandani has to be treated as a person who has the requisite qualifications for practice of the profession of a civil engineer, and the petitioner is entitled to such opinion from the Central Government, which the respondent is directed to convey to the petitioner company within two months from today.
[1982] 52 COMP. CAS. 288 (KER)
HIGH COURT OF KERALA
v.
Union of India and
K. K. NARENDRAN, J.
O.P. NO. 2430 OF 1979-E.
APRIL 24, 1981
Ashok H.
Desai, T. L. Ananthasivan, P. K. Jose, Leelamma George, Jose Thettayil and
Sreelatha Devi for the petitioners.
T. R. Govinda Warrier for the Respondent.
Narendran, J.—A short point in company law arises
for consideration in this case. The point is, for payment of remuneration to a
director of a company for services of a professional nature rendered by him and
for excluding it from his managerial remuneration as a director, is it a
certificate of the Central Govt. under s. 309(1), prov. (b) of the companies
Act, 1956 (for short "the Act"), that is to be obtained or is it the
previous approval of the Central Govt., under s. 310 of the Act that is to be
applied for and got.
The 1st petitioner is a public limited company with
its registered office at Golf Links Road, Kowdiar, Trivandrum, and the 2nd
petitioner is a director and shareholder of the 1st petitioner. The 2nd
petitioner, who is a solicitor and advocate practising at Bombay, was appointed
as a director of the 1st petitioner in 1974. The 2nd petitioner began to render
professional services to the 1st petitioner from September, 1976, onwards. The
1st petitioner, through its advocates, by Ex. P-1(c) application, requested the
2nd respondent, Secretary, Company Law Board, for a certificate that the 2nd
petitioner possesses the requisite qualifications for the practice of the
profession as a solicitor. The 3rd respondent, Under-Sec-retary, by Ex. P-1(b)
letter dated May 10, 1977, informed the 1st petitioner that an application
under Form 26 of the Companies (Central Government's) General Rules and Forms,
1956, should be submitted, as s. 310 of the Companies Act, 1956, was attracted.
The 1st petitioner's advocate by Ex. P-1(a), letter dated May 18, 1977, pointed
out to the 3rd respondent that the application was under s. 309(1) of the Act
for the grant of a certificate and for the exclusion of the remuneration paid
to the 2nd petitioner for services rendered by him as a solicitor. The 3rd
respondent, however, by Ex. P-1 letter dated September 30, 1977, insisted that
a Form 26 application should be made to the Central Govt. By way of abundant
caution, and without prejudice to its contentions, the 1st petitioner filed the
application as insisted upon in Ex. P-1 letter. As insisted by the 3rd
respondent, the 1st petitioner got a resolution passed by the shareholders
sanctioning the said payment and forwarded the same to the 3rd respondent.
Later, the 1st petitioner reconsidered the matter and by Ex. P-2(a) letter
dated March 15, 1979, withdrew its application submitted under s. 310 of the
Act and contended that by the payments in question, no question of any increase
in the remuneration of the director within the meaning of s. 310 of the Act
arose. On May 31, 1979, Ex. P-2 reminder was also sent to the 3rd respondent.
The 2nd petitioner is a director of two other
companies and he has been rendering legal services to those companies from 1968
onwards. Exhibits P-3 and P-4 are certificates issued by the Central Govt.
under s. 309(1) of the Act to the said companies.
In spite of Ex. P-2 reminder, no sanction was
forthcoming from the respondents. It was under the above circumstances that the
petitioners approached this court with this original petition. The reliefs prayed
for in the original petition are: (1) for a writ in the nature of mandamus or
any other writ, direction or order to the respondents to issue a certificate
under s. 309(1) of the Act regarding the qualifications of the 2nd petitioner
to practise as a solicitor and advocate, and (2) for a writ of certiorari or
any other writ, direction or order to quash the orders, Exs. P-1 and P-1(b)
(instead of "P-1(b)" it is typewritten " P-1(a) ". This can
only be a typing mistake).
A counter-affidavit has been filed on behalf of
respondents Nos. 1 to 3. In the counter-affidavit, it is stated : The
respondents have not rejected the application submitted under s. 309(1) of the
Act. The powers under ss. 198, 309 and 310 of the Act can be exercised only by
the Central Govt. The term "remuneration" given in s. 310 includes
all remuneration received in any capacity and includes remuneration received
for services rendered of a professional nature. The petitioners should apply
under s. 310 of the Act in Form No. 26 if they want an opinion of the Central
Govt. under s. 309(1) of the Act. It cannot be denied that there is going to be
an increase in the total remuneration received by the director. The petitioners
were not justified in assuming that asking to make an application under s. 310
implies that the application under the proviso to s. 309(1) of the Act has been
rejected or is likely to be rejected.
The 2nd petitioner has filed a reply affidavit
answering the averments and controverting the contentions in the counter-affidavit.
Section 309(1) of the Companies Act, 1956, reads :
"309. (1) 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
for services rendered by him in any other capacity :
Provided that any remuneration for services rendered
by any such director in any other capacity shall not be so included if—
(a) the services rendered are of a professional nature, and
(b) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession."
Section 310 of the Act reads :
"310. In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director including a managing or whole-time director, or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount thereof, whether that provision be contained in the company's memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its board of directors, shall not have any effect unless approved by the Central Government; and the amendment shall become void if, and in so far as, it is disapproved by that Government...."
Section 309 of the Act as enacted in 1956 came up for
consideration in Ramaben A. Thanawala v. Jyoti Ltd. [1957] 27 Comp Cas 105 ;
AIR 1958 Bom 214. The Bombay High Court held (p. 108):
"It will also be noticed that if it was intended
by the Legislature that the remuneration referred to in sub-section (3) should
include not only the remuneration paid to the director as a director but also
remuneration paid to him in any capacity whatsoever, appropriate language could
have been used for that purpose, and, as we shall presently point out, in other
sections where the Legislature wanted to convey that meaning, proper language
has been used."
In this decision, the Bombay High Court also
considered the effect of s. 198(1) and held (p. 110):
"What was sought to be controlled was the cost
of management, and if what was sought to be controlled was the cost of
management, then what had to be considered was managerial remuneration and not
remuneration paid for any other purpose."
It was by the 1965 amendment that the words "and
the remuneration payable to any such director determined as aforesaid shall be
inclusive of the remuneration payable to such director for services rendered by
him in any other capacity" were inserted in s. 309(1).
Section 198 of the Act fixes a ceiling for managerial
remuneration. Section 309 provides for the determination of the remuneration of
directors. Section 309(1), as amended, ropes in the remuneration paid to a
director for services rendered by him in any other capacity also. The combined
effect of ss. 198 and 309 is that by the payment of remuneration for services
rendered by a director in any capacity other than that of a director his total
remuneration cannot go above the ceiling fixed by s. 198. In other words, no
remuneration can be paid to a director for services rendered by him in any
other capacity if he is getting the maximum managerial remuneration he is
entitled to under s. 198. But, it is to be noted that there is an exception to
the above rule. The exception is that if the services rendered are of a
professional nature, the remuneration payable to a director for that, will not
come within the restriction imposed by s. 309(1). Provision for this is there
in the proviso to s. 309(1), which was also inserted by the 1965 amendment. But
the exception is subject to a condition. The condition is that the Central
Govt. should certify that the director concerned possesses the requisite
qualifications to practise that profession. So, if a director renders
professional service not in his capacity as director and the Central Govt.
certifies that he is having the requisite qualifications to practise that
profession, the remuneration paid to him for that service will not form part of
the managerial remuneration to which he is entitled, and the payment of which
is to be limited to the ceiling fixed by s. 198. The net result is that the
remuneration for professional service rendered by a director will not be a
remuneration to be determined under s. 309 in accordance with s. 198. Then the
further question is whether s. 310 which provides for increase of remuneration
has anything to do with the payment of remuneration for professional services.
The increase can only be an increase of remuneration. As per s. 309, the
remuneration payable to a director takes in only managerial remuneration and
remuneration for services of a non-professional nature rendered by him in any
other capacity, and remuneration the increase for which permission is required
under s. 310 will take in only the above remuneration. As remuneration for
services of a professional nature will not be a remuneration determined under
s. 309(1) the payment of the same to a director will not increase the
remuneration he is entitled to under s. 309(1). So, it goes without saying that
for the payment of remuneration for services of a professional nature no
previous sanction of the Central Govt. under s. 310 is necessary. So, no Form
No. 26 application also need be filed. What is required is a certificate from
the Central Govt. as insisted by the proviso to s. 309(1).
For the reasons stated above, I hold that the Central
Govt. cannot insist that the 1st petitioner-company should apply for sanction
under s. 310 in Form No. 26 for the exclusion of the payments made to the 2nd
petitioner-director for services rendered in -his capacity as a solicitor and
advocate. It is a certificate under prov. (b) to s. 309(1) that is required.
The 1st petitioner has applied for the same by Ex. P-1(c) and that application
is pending. In view of Exs. P-3 and P-4, in the normal course, Ex. P-1(c)
cannot be rejected. But it is for the 1st respondent to consider Ex. P-l(c) and
take a decision. I direct the 1st respondent to consider Ex. P-l(c) and take a
decision as expeditiously as possible and, at any rate, within two months from
today. Exhibit P-1 is quashed. Exhibit P-1(b) to the extent it insists on the filing
of an application under s. 310 of the Act and for furnishing any information
not required under s. 309, is also quashed. If any more information is to be
furnished by the 1st petitioner, for that, one month's time from today is
given.
The original petition is allowed as above. No costs.
[1992] 73 COMP. CAS. 348
(KAR)
HIGH COURT of KARNATAKA
Sree Gajanana Motor Transport Co. Ltd.
v.
G.P.
SHIVAPRAKASH J.
OCTOBER
24, 1991
K.S. Ramabhadran for G.S. Sarangan
for the petitioners.
V. Mukunda Menon for the respondent.
G.P.
Shivaprakash J.—This
is a petition presented by a public limited company incorporated under the
Mysore Companies Act, 1938, having its registered office at Sagar, Shimoga District.
At
the annual general meeting of the company held on December 30, 1983, the
following resolution was passed:
"Resolved that pursuant to the provisions
of sections 309(1) and 310 and other applicable provisions (if any) of the
Companies Act, 1956, and subject to the approval of the Central Government
being obtained, and subject to such modifications as the Central Government may
direct and be agreed to by the Board (which the Board is hereby authorised to
agree to), the company hereby accords its approval to the payment for a period
of five years from July 1, 1983, of professional fees, as approved by the Board
subject to a maximum of Rs. 15,000 per year, to Sri Amarnath Kamath, director
of the company, for professional services being rendered by him to the
company".
The
second petitioner, who is a chartered accountant by profession, is a
shareholder of the company. He was appointed as a director of the company in
the year 1972. He has been rendering professional services also to the company
since July 1, 1973. With a view to secure his professional services for a
further period of five years from July 1, 1983, the aforesaid resolution was
passed at the annual general meeting held on December 30, 1983. The said
resolution was required to be passed in view of certain provisions of the
Companies Act, 1956, hereinafter referred to as "the Act". Section
193 of the Act prescribes an overall maximum managerial remuneration payable by
a public company or a private company which is a subsidiary of a public company,
to its directors, secretaries, treasurers, etc. Section 309 provides for
payment of remuneration to directors. The relevant part of section 309 is set
out below:
"309. (1) The
remuneration payable to the directors of a company including any managing or
wholetime 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 for services rendered by him in any other
capacity:
Provided
that any remuneration for service rendered by any such director in any other
capacity shall not be so included if —
(a) the
services rendered are of a professional nature, and
(b) in the opinion of the Central Government,
the director possesses the requisite qualification for the practice of the
profession . "..
After
the aforesaid resolution was passed, the same was forwarded to the respondent
requesting it to express its opinion in terms of the proviso to section 309(1) of
the Act indicating that the second petitioner possesses the requisite
qualifications for functioning as a legal adviser of the company. The
respondent after obtaining the necessary particulars from the company sent a
reply, copy of which is marked as annexure D, expressing its opinion in terms
of the proviso to sub-section (1) of section 309 of the Act, that the second
petitioner possessed the requisite qualifications for functioning as legal
adviser of the company for rendering professional services. However, the
respondent has further directed that the remuneration payable to the second
respondent shall not exceed Rs. 7,000 per annum for a period of five years with
effect from July 1, 1983.
Aggrieved
by the imposition of this restriction regarding payment of remuneration towards
the professional services to be rendered by the second petitioner to the
company this petition is presented.
Sri
K.S. Ramabhadran, learned counsel appearing for the petitioners, submitted that
in terms of the proviso to sub-section (1) of section 309, all that the
respondent is required to do is to express its opinion that the said director
possesses the requisite qualifications for the practice of the profession and
to render professional services to the company ; and when once the Central
Government is satisfied regarding the requisite qualifications possessed by the
director and expresses the opinion under the proviso to sub-section (1) of
section 309 of the Act that the second petitioner possesses the requisite
qualifications for functioning as a legal adviser of the company and render
professional services, the respondent cannot put a ceiling on the remuneration
payable to the said director for his professional services.
Learned
counsel submitted that the remuneration payable to the second petitioner for
the services rendered by him as a professional is independent of the
remuneration payable to him as a director. Therefore, the ceiling prescribed
under section 198 of the Act has no application to the remuneration payable to
the second petitioner towards his professional services.
The
proviso to section 309(1) of the Act makes it clear that the remuneration for
services rendered by a director in any other capacity shall not be included in
the remuneration payable to the director in that capacity, provided the
services so rendered by him are of a professional nature. In order to ensure
that the overall maximum on managerial remuneration payable to the directors
does not exceed the limit prescribed under section 198, the proviso to section
309(1) of the Act stipulates that the Central Government should express its
opinion regarding the requisite qualifications possessed by the director to
render such professional services. There is nothing in section 309 of the Act
which empowers the Central Government to restrict the remuneration payable to a
director for services rendered by him in a professional capacity. Once the
Central Government is satisfied that the director possessed the requisite
qualifications to render professional services, it is not permissible for the
Central Government to put any restriction on the remuneration payable to him by
the company in respect of the professional services.
The
decisions in Stup Consultants Ltd. v. Union of India [1987] 61 Comp Cas 784
(Delhi), Ruby Mills Ltd. v. Union of India [1985] 57 Comp Cas 193 (Bom) and
R.Gac Electrodes Ltd. v. Union of India [1982] 52 Comp Cas 288 (Ker), on which
learned counsel relied, support the submission made by him that the Central
Government acted beyond its powers in fixing an upper limit of Rs. 7,000 per
annum on the fee payable to a professional for services of a professional
nature rendered by a director, while expressing its opinion that the director
concerned possesses the requisite qualifications for the practice of the
profession.
This
petition, therefore, succeeds. In the result, I make the following order:
(i) Rule
made absolute.
(ii) That part of the impugned communication
certificate dated July 2, 1984, annexure D, which restricts the remuneration
payable to the second petitioner for rendering professional services to the
first petitioner-company, is quashed.
(iii) No costs.
[1969]
39 COMP CAS 340 (RAJ)
HIGH COURT OF RAJASTHAN
v.
P.N.
SHINGHAL, J.
OCTOBER 21, 1967
L.R.
Bhansali for the Appellant.
S.K.M.
Lodha for the Respondent.
These
three appeals arise from three different decisions of the official liquidator dated
September 3,1966, in respect of the proof of the claims preferred by the
appellants before him during the course of the winding-up of the Bharatpur Oil
Mills (Private) Limited. As common questions of fact and law arise in all these
three appeals, they have been heard together at the instance of the learned
counsel for the parties and will be disposed of by this common judgment. The
three appellants Radhey Shyam, Raghunath Prasad and Ramesh Chandra were three
out of the four directors of the company which, it is admitted, was registered
under the Indian Companies Act of 1913 (hereinafter referred to as the Act of
1913) as a private limited company. 11 is admitted that the company was not a
subsidiary of a public company. The company adopted the regulations contained
in Table A of the First Schedule to the Act of
1913 subject to certain regulations which were specified in the articles of
association. Regulation No. 8 is important and it runs as follows :
"8. The management of
the company shall be entirely in the hands of its directors who may pay all
such expenses of and preliminary and incidental to the promotion, formation,
establishment and registration of the company as they think fit and shall
discharge all their responsibilities and exercise all their powers and
privileges through their representatives appointed amongst themselves or from
outside upon such terms and conditions, subject to such powers and privileges
and for such period as they may determine. The business of the concern shall be
managed by the board of directors in majority".
Three resolutions were
passed by the company in respect of the remuneration or maintenance of its
directors. The first of these was the resolution dated June 22, 1952, by which
the directors took the decision that each director shall receive Rs. 250 a
month plus 2i per cent, out of the net profits as his "remuneration"
for managing the company and that, apart from this, the "maintenance
charges of the directors residing at the mills "shall be borne by the
company and that each director shall receive Rs. 10 "per attendance"
in the board of directors' meeting. This was followed by a resolution of the
board of directors dated May 20, 1957, to the effect that, for the purpose of
giving a better form to the business of the company, it was necessary that the
four directors should devote more time to its affairs and that the directors
who worked in the mill would receive a sum of Rs. 400 per mensem for their
daily expenses from the mill. The third relevant resolution is dated September
12, 1958, and it provided that the directors were unanimously of the opinion
that the amount of "remuneration" which had already been determined
for them should be kept as it was, but that only those directors would be
entitled to receive the "remuneration" who worked for the mill by
living in the premises or from outside.
It appears that the
directors did not draw any remuneration or allowance. The company unfortunately
went into liquidation by an order of this court dated October 4, 1960, and the
official liquidator was appointed to take it over. It was then that the present
appellants preferred their claims for what was styled by them as
"salary". Each of them claimed a sum of Rs. 14,750 for the period
June 22, 1952, to May 19, 1957, at the rate of Rs. 250 per mensem, and a sum of
Rs.16,000 for the period after May 20, 1957, at the rate of Rs. 400 per mensem,
making a total of Rs. 30,750. The official liquidator examined the proof and
reached the conclusion that the claims were wholly inadmissible because there
was no provision in the articles of association of the company for the payment
of remuneration to the directors and there was no sanction for the payment of
any remuneration by
any resolution of the company in its general meeting. In this view of the
matter, he rejected the claims of the three appellants by his three separate
decisions referred to above and this has given rise to the present three
appeals.
It
has been argued by Mr. Bhansali, learned counsel for the appellants, that
regulation 8 of the articles of association of the company, referred to above,
authorised the directors to determine their remuneration or allowances and that
after the coming into force of the Companies Act of 1956 (hereinafter referred
to as the Act of 1956) on April 1, 1956, there was no restriction at all on the
remuneration of the directors of a private company which was not a subsidiary
of a public company because of the provision contained in sub-section (9) of
section 309 of that Act. It has, therefore, been argued that the official
liquidator erred in rejecting the claims of the appellants.
As
the Act of 1913 was in force when the company was registered and for quite some
time thereafter, and the Act of 1956 came into force while the company was
still in existence, I shall examine the merits of these appeals separately
under each of those Acts.
I
shall first deal with the claims under the Act of 1913 for it was under that
Act that the company was registered in 1952. As has been mentioned, the
articles of association of the company provided that " subject as
hereinafter provided, the regulations contained in Table 'A' of the First
Schedule
to the Indian Companies Act........shall apply to the company". The
company, therefore, specifically adopted Table 'A' of the First Schedule to the
Act of 1913 and incorporated, among others, regulation 8 in its articles which
has been reproduced above. The other regulations in the articles of association
did not contain any provision regarding the mode of determination of the
remuneration or allowances of the directors. However, by virtue of section
17(2) of the Act of 1913, the articles of association of the company were
deemed to contain, inter alia, regulations identical with regulation 71
contained in Table 'A' of the First Schedule. That regulation provided that the
business of the company shall be managed by the directors who may exercise all
such powers of the company as were not "by the Indian Companies Act, 1913,
or any statutory modification thereof for the time being in force, or by these
articles, required to be exercised by the company in general meeting"
subject nevertheless to any regulation of the articles contained in Table 'A'
and the provisions of the Act, etc. It is, therefore, obvious that, by virtue
of the law which governed the company at the time of its registration the
directors were to exercise all such powers as did not, inter alia, require the
sanction of the general meeting of the company under any other regulations
contained in Table 'A' of the First Schedule. Regulation 69 of Table 'A'
providing that the remuneration of the directors shall " from time to time be determined by the company in
general meeting " became, therefore, applicable to the company. It is admitted
that no resolution was at all passed by the company in general meeting
providing for the payment of remuneration to the directors, and it cannot,
therefore, be said that there was a valid determination of the remuneration
under the resolution of the directors dated June 22, 1952. As such, the
rejection of the claims by the official liquidator cannot be said to be
unjustified.
The Act of 1956 came into
force on April 1, 1956, and the question is whether the other resolutions of
the directors dated May 20, 1957, and September12, 1958, were in order ?
It is admitted that the Act
of 1956 does not place any restriction regarding the mode of determination of
the remuneration of the directors in the case of a private company which is not
a subsidiary of a public company. Section 309 which deals with the remuneration
of the directors does not, by virtue of its sub-section (9), apply to a private
company like the present. None the less, it is well settled that, prima facie,
the directors of a company cannot claim any remuneration, and so the mere
absence of any statutory restriction in the case of a private company cannot
mean that its directors are, in all circumstances, entitled to remuneration
merely because of the coming into force of the Act of 1956. It is necessary
that there should be a provision in the articles of association of a company
for payment of remuneration to its directors before a claim therefor can be
entertained. So it has to be examined whether it can be said that there was any
such provision in the articles of association of the company after the
commencement of the Act of 1956. Mr. Bhansali has argued that, in the absence
of any restriction in the Act of 1956, regulation 8 of the articles of
association should be given full effect, without the requirement that the
remuneration should be determined in a general meeting of the company. This
argument cannot be accepted as correct because, as has been mentioned above,
the company having been registered before he commencement of the Act of 1956,
it was governed by regulation 71 of Table 'A' of the First Schedule to the Act
of 1913 which, in its turn, brought into application the requirement of
regulation 69 that the remuneration of the directors shall be determined by the
company in general meeting. When these restrictions are deemed to be contained
in the articles of the company in addition to regulation ft, it is futile to
contend that effect should be given to regulation 8 even though there was no
resolution at a general meeting of the company for the determination of the
remuneration suggested or fixed by the resolutions of the directors dated May
20, 1957, or September 12, 1958. It is admitted that these resolutions were not
sanctioned or approved at the general meeting of the company, and they cannot
be held to be sufficient for the purpose of sustaining the claims of the
appellants.
It
has been argued by Mr. Bhansali that by virtue of section 9 of the Act of 1956
any provision in the articles of the company contrary to that contained in the Act
would be rendered nugatory and that the provisions of the Act shall have
overriding effect. It has, therefore, been submitted that regulations 71 and 69
of Table 'A' of the Act of 1913 will not apply because the Act of 1956 does not
contain any such restrictions so far as the remuneration of the directors of a
private company is concerned. The argument cannot, however, be upheld because
the Act of 1956 does not provide that the remuneration of the directors of a
private company like the present shall be decided by the directors themselves,
or that it need not be determined in a general meeting of the company. There
is, therefore, nothing which can be said to be overridden by virtue of section
6 On the other hand, there is section 657(c) of the Act of 1956 which lays down
that nothing in that Act shall affect:
"(c)
Table A in the First Schedule to the Indian Companies Act, 1913 (VII of 1913),
either as originally contained in that Schedule or as altered in pursuance of
section 151 of that Act, so far as the same applies to any company existing at
the commencement of this Act".
So
when the requirement of regulation 71 and, thereby, of regulation 69, of Table
'A' of the First Schedule to the Act of 1913, continues to apply and govern the
articles of association of the company even after the commencement of the Act
of 1956, those restrictions shall continue to operate by virtue of a specific
provision contained in the Act of 1956.
An
argument has also been advanced with reference to sections 291 and 309(9) of the
Act of 1956 that when these sections deal with the general powers of the board
of directors and the remuneration payable to them, and do not place any
restriction of the nature contemplated by regulations 69 and 71 of Table 'A' of
the Act of 1913 in the case of private companies, it would be anomalous if
those restrictions are allowed to continue after April 1, 1956, when the new
Act came into force. It has been urged that any other interpretation would
defeat the purpose of the new scheme brought in force by the Act of 1956 and
that it would deny a benefit to an old company which is available to any new
company registered after April 1, 1956.
This
argument also does not bear scrutiny. As I have pointed out, all that
sub-section (9) of section 309 provides is that the restrictions imposed by the
section regarding the remuneration of directors shall not apply to a private
company unless it is a subsidiary of a public company. But that is far from
saying that a "post-1956" private company cannot make a regulation in
its articles of association, while providing for the remuneration of its
directors, that such remuneration would be payable only after the approval of
the general meeting of the company. In fact even the first proviso to section
291 lays down that the board of directors shall not exercise any power or do any act or thing which is directed or required,
whether by the Act of 1956 or any other Act or by the memorandum or articles of
the company or othervise, to be exercised or done by the company in general
meeting. On a closer examination of the argument of the learned counsel,
therefore, it appears that there is really no anomaly of the nature suggested
by him in taking the view that the restriction regarding the approve 1 of the
general meeting continued to apply in the case of the remuneration of the
directors even after the Act of 1956 came into force.
This does not, however,
conclude the controversy, for two more submissions have been made by Mr.
Bhansali. The learned counsel has argued that the claims preferred by the
appellants before the official liquidator were not in the nature of
remuneration and that the claim for the allowance of Rs. 400 was merely on
account of the daily expenses of the directors and it did not, therefore,
require the approval of the general meeting. The argument cannot be accepted as
correct for the simple reason that a perusal of the claims shows that the
appellants themselves styled the claims as those on account of
"salary". The word "salary" has been used in the claims
both in respect of the resolution dated June 22, 1952, and the resolution of
May 20, 1957, at a number of places. Moreover, the word
"remuneration" has also been used in the subsequent resolution dated
September 12, 1958, and it is quite clear that the argument that the claim was
not on account of any remuneration or salary but related to the recovery of
daily expenses is an after-thought and it did not deserve to be accepted in the
facts and circumstances of the case.
The remaining argument is
that regulation 69(1) of the articles of association of the company also
authorised the directors to pass the resolutions dated June 22, 1952, May 20,
1957, and September 12, 1958, authorising the payment of the remuneration or
allowances to them. I have gone through the regulation and I nave no doubt that
it has no such effect, for it refers to the other matters mentioned in it.
For the reasons mentioned
above, I see no force in the three appeals and they are dismissed with costs.
[2003]
46 scl 164 (pat.)
HIGH COURT OF PATNA
v.
SACHCHIDANAND
JHA AND P.N. YADAV, JJ.
JUNE 26,
2003
Section 309 of the Companies Act, 1956 -
Directors - Remuneration of - State Corporation was incorporated under
Companies Act and not under any statute and Governor could exercise his power
to fix terms and conditions of appointment of Chairman and his remuneration
under Companies Act read with articles of association only - Petitioner was
appointed as a Chairman of corporation under relevant provisions of articles of
association of corporation - Whether petitioner-chairman could place his claim
for payment of salary, allowances and/or other facilities, etc., before
corporation only and no direction could be issued against State Government -
Held, yes
Circulars and notifications : Bihar State
Government Resolution No. 885, dated 9-11-1987
The State corporation in question was a
company incorporated under the Companies Act. The petitioner was appointed as a
Chairman by the Governor, as per its memorandum and articles of association.
Prior to his appointment, the State Government had taken a general decision to
extend the facilities including salary and other allowances to the Chairman of
different Boards and corporations at par with the Cabinet Minister or Minister
of State, as the case may be. Consequently, after his removal, before his
tenure was over, he placed his claim for those benefits to concerned
authorities but without success. In the instant writ, he prayed for issuance of
necessary directions to the respondent-State to that effect. The State
Government contended that the said facilities were not automatically available
to any Chairman of Boards or corporations unless individual notification was
issued as per its memorandum and articles of association under the Companies
Act.
What stared at the face of the petitioner was
that the appointments of the directors or Chairman of the corporation were made
under the relevant provisions of the articles of association of the corporation
subject to such terms and conditions and upon such remunerations as the
Governor may fix under article 78(a) of the articles of association. No doubt,
decision of the Governor under article 78(a) or for that matter article 72 was
not his own decision; he acted on the aid and advice of the Council of
Ministers. Nevertheless the exercise of power was under the Companies Act read
with articles of association. The claim of the petitioner, if any, thus, was to
be considered within the parameters of the articles of association and the
Companies Act. [Para 8]
In the case of Mnikant Pathak v. State of
Bihar 1997 (1) PLJR 664, a Full Bench of the High Court has pointed out the
distinction between the Government companies created by statute and those
incorporated under the Act and observed that so far as the statutory
corporations are concerned, the question as to liability of the State in the
context of their employees would depend on the provisions of the statute
concerned. So far as the companies incorporated under the Companies Act are
concerned, the liability, if any, is of the concerned company or corporation
and not of the State Government. [Para 9]
In the light of the above, it would be clear
that no direction could be issued for payment of salary and allowances and/or
other facilities against the State. The claim, if any, could be made only
against the corporation.
The writ was, therefore, dismissed.
Mnikant Pathak v. State of Bihar 1997 (1) PLJR
664 (FB) (para 9) and Heavy Engg. Mazdoor Union v. State of Bihar AIR 1970 SC
82 (para 9).
S.K. Verma for the Petitioner. J.D. Singh and Shambhu Nath for the
Respondent.
S.N. Jha, J.—This writ petition has been filed for salary & allowances and
facilities in the light of the decision of the State Government contained in
Annexure 2 and 2/A.
2. The
petitioner during the relevant time was Chairman of the Bihar State Agro
Industries Development Corporation Limited. By Annexure 2 the Joint Secretary,
Parliamentary Affairs Department, Government of Bihar, communicated the
decision of the State Government to extend the facilities admissible to Cabinet
Minister/Ministers of State to those Chairman of different Boards and
Corporations, who had held the office of the Cabinet Minister or Minister of
State respectively in the past. Such of the Chairman who had not held the
office of Cabinet Minister or Minister of State in the past were also allowed
the facilities available to Ministers of State. Annexure 2/A specified the
particulars of the facilities of the Minister of State. The petitioner did not
hold the office of Cabinet Minister or Minister of State in the past. According
to him by virtue of the later part of the above decision contained in Annexure
2, he was entitled to the facilities etc. admissible to Ministers of State.
3. The case
of the petitioner is that under Notification No. 521 dated 15-1-1988 of the
Agriculture Department he was appointed as Chairman of the Bihar State Agro Industries
Development Corporation Limited (in short the Corporation) and he discharged
the duties and functions of the Chairman up to 17-5-1990 when the Chairman of
various Boards and Corporation including himself, were removed after change of
the Government, even though the petitioner had not completed his tenure of
three years. Before his appointment under Resolution No. 885 dated 9-11-1987,
the Government of Bihar had taken a general decision to extend the facilities
including salary and other allowances to the Chairman of different Boards and
Corporation at par with the Cabinet Minister or Minister of State as the case
may be, as indicated above. As a result of the said decision the petitioner was
entitled to the facilities available to a Minister of State including salary
and other allowances. After he was removed from the office of the Chairman he
filed various representations but payments were not made. In the circumstances
he has moved this Court for direction upon the respondents to pay him salary
& allowances, besides other facilities admissible to a Minister of State.
4. A counter
affidavit has been filed on behalf of the Corporation by its Managing Director
wherein it has been stated that the corporation is a Company registered under
the Companies Act, 1956 and governed by its Memorandum of Association and the
Articles of Association. Under Article 76 of the Articles of Association the
business of the Company is transacted/managed by the Board of Directors subject
to the control of the Government. Under Article 72(a), Subject to the
provisions of section 252 of the Companies Act, the Governor is required to
determine in writing, from time to time, the number of Directors not less than
three and more than nine in number. Under Article 72(d) the Governor appoints
such number of Directors as may be determined from time to time in accordance
with the maximum limit fixed under Article 72(a). The Directors hold the office
during the pleasure of the Governor subject to maximum term of three years, and
in the event of removal or in the event of any vacancy in the office of the
Directors caused by resignation, death or otherwise in terms of Article 84 or
section 283 of the Companies Act, the vacancies are filled by fresh appointment
in place of the previous incumbent. Article 78(a) refers to the terms and
conditions of appointment and it would be useful to quote the same for the sake
of ready reference, as under:—
“The Governor
shall appoint, from amongst the members of the Board for the time being a
Chairman of the Board and a Managing Director for such period and subject to
such terms and conditions and upon such remuneration (subject to the provisions
of section 314 of the Act) as he thinks fit. Any such Chairman or Managing
Director appointed to any such office shall, if be ceases to hold the post of
Director for any cause, ipso facto immediately cease to be such
Chairman/Managing Director.
Provided that.....”
The respondents have accordingly taken the
stand that in view of the above provisions of the Articles of Association the
Chairman does not have any fixed tenure. His appointment as Chairman is
co-terminus with his office as Director. And further, he holds the office on
the pleasure of the Governor subject to maximum period of three years.
5. As regards
the payment of salary and other allowances and facilities at par with Ministers
of State, the stand of the respondents is that Resolution No. 885 dated
9-11-1987 has no automatic application. The resolution only lays down the
details of the facilities besides salary and allowances admissible to the
Chairman of Boards and Corporation but without individual notification in
respect of particular Chairman or Chairmen they are not entitled to the same.
The buttress the point reference has been made to Notification No. 909 dated
19-11-1991 in respect of the then Chairman of the Corporation Shri Vishwanath
Singh. No such notification was issued in the case of the petitioner and,
therefore, he cannot claim the benefits in terms of Annexures 2 and 2/A.
6. The
counter affidavit also sets out details of the facilities provided to the
predecessor Chairman prior to the petitioner and the petitioner as well. They
include the services of two Assistants, one Typist and two Peons, staff Car
with free petrol consumed on journey, its repairs and maintenance, two
telephones - one in the office and the other at the residence, honorarium for
the sittings and Travelling Allowance, House Rent Allowance, Furniture and the
Medical Allowance. It has been stated that the petitioner was aware of the
facilities made available to his predecessor. Between 15-1-1988 and 17-4-1990
seven meetings of the Board of Directors were held and the petitioner never
claimed the facilities or salary and allowances at par with Ministers of State
except those provided to his predecessor in office. In one of the meetings held
on 24-3-1990 one of the Directors, Smt. Banarasi Devi, wanted to know whether
any direction regarding additional facilities for Chairman and the Directors
had been received from the Government. The Managing Director informed the Board
of Directors that till date no instruction had been received from the
Agriculture Department i.e. Administrative Department. The Chairman i.e. the
petitioner, in course of discussions informed that his claim was pending since
long and the Board should take a decision on receipt of instructions from the
Government. After deliberations the Board decided that on receipt of the
instructions from the Government it will be proper to place the matter in the
Board’s meeting before the payment process starts.
7. The
stand of the respondents thus is that the facilities specified in Annexure 2/A
at par with the Minister of State are not automatically available to any
Chairman of the Board or Corporation unless individual notification was issued.
The facilities already provided to the previous Chairman of the Corporation
were made available to the petitioner too.
8. In
my opinion, what stares at the face of the petitioner is that the appointments
of the Directors or Chairman of the Corporation are made under the relevant
provisions of the Articles of Association of the Corporation subject to such
terms and conditions and upon such remunerations as the Governor may fix under
Article 78(a) of the Articles of Association. No doubt, decision of the
Governor under Article 78(a) or for that matter Article 72 referred to above,
is not his own decisions, he acts on the aid and advice of the Council of
Ministers. Nevertheless the exercise of power is under the Companies Act read with
Articles of Associations. The claim of the petitioner, if any, thus, is to be
considered within the parameters of the Articles of Association and the
Companies Act.
9. In
the case of Mnikant Pathak v. State of Bihar 1997 (1) PLJR 664, a Full Bench of
this Court has held that the Government Corporations/Companies incorporated
under the Companies Act are ‘State’ within the meaning of Article 12 of the
Constitution and therefore amenable to the writ jurisdiction of the High Court.
However in view of the decision of the Supreme Court in Heavy Engg. Mazdoor
Union v. State of Bihar AIR 1970 SC 82, as also other decisions referred to in
the judgment, it was not possible to issue any direction to the State
Government to pay salary to its employees and therefore the claim was not
maintainable against the State of Bihar. The Court pointed out the distinction
between the Government Companies created by statute and those incorporated
under the Companies Act and observed that so far as the statutory Corporations
are concerned the question as to liability of the State in the context of their
employees would depend on the provisions of the statute concerned. So far as
the Companies incorporated under the Companies Act are concerned the liability,
if any, was of the concerned Company or corporation and not of the Government
of Bihar. It would be useful to quote the relevant part of the judgment in
Heavy Engg. Mazdoor Union’s case (supra) as under:—
“An
incorporated company, as is well-known, has a separate existence and the law
recognises it as a juristic person separate and distinct from its members. This
new personality emerges from the moment of its incorporation and from that date
the person subscribing to its memorandum of association and others joining it
as members are regarded as a body incorporated or a corporation aggregate and
the new person beings to function as an entity (Cf. Saloman v. Saloman &
Company 1897 AC 22). Its rights and obligations are different from those of its
shareholders... The company so incorporated derives its powers and functions
from and by virtue of its memorandum of association and its article of
association. Therefore, the mere fact that the entire share capital of the
respondent company was contributed by the Central Government and the fact that
all its shares are held by the President and certain officers of the Central
Government does not make any difference. The company and the shareholders
being, as aforesaid, distinct entities the fact that the President of India and
certain officers hold all its share does not make the company an agent either
of the President or the Central Government...
5. It is true
that besides the Central Government having contributed the entire share
capital, extensive powers are conferred on it, including the power to give
directions as to how the company should function, the power to appoint
directors and even the power to determine the wages and salary payable by the
company to its employees. But these powers are derived from the company’s
memorandum of association and the articles of association and not by reason of
the company being the agent of the Central Government. The question whether a
corporation is an agent of the State must depend on the facts of each case.
Where statutes setting up a corporation so provides such a corporation can
easily be identified as the agent of the State as in Graham v. Public Works
Commissioner 1901-2 K.B. 781 where Phillimore, J. said that the Crown does in
certain cases establish with the consent of Parliament certain officials or
bodies who are to be treated as agents of the Crown even though they have the
power of contracting as principles. In the absence of a statutory provision,
however, a Commercial Corporation acting on its own behalf even though it is
controlled wholly or partially by a Government department, will be ordinarily
presumed not to be servant or agent of the State. The fact that a minister
appoints the members or directions of a corporation and he is entitled to call
for information, to give directions which are binding on the Directors and to
supervise over the conduct of the business of the corporation does not render
the corporation as an agent of the Government....” (p. 85)
10. The
claim of the petitioner has thus to be considered in the light of the abovesaid
decisions. It is clear that no direction can be issued for payment of salary
& allowances and/or other facilities against the State of Bihar. The claim,
if any, can be made only against the Corporation. In para 26 of the counter
affidavit it has been stated that the claim of the petitioner was finally
considered in the meeting of the Board of Directors on 11-7-1991 vide Item No.
11 of the agenda and finding no justification in the claim the Board was
pleased to reject the same after due deliberations. The decision was confirmed
in the subsequent meeting on 10-2-1992. In course of hearing of the case it was
stated at the Bar that the Corporation has since gone in liquidation and
winding up petition has been filed in this Court. In the circumstances, the petitioner
has no option but to place his claim in the winding up proceeding, if so
advised, in accordance with law.
11. In
the result, I do not find any merit in this writ petition which is accordingly
dismissed but without any order as to costs.
P.N. Yadav, J.—I agree.
[1986]
60 COMP. CAS. 281 (MAD)
HIGH COURT OF MADRAS
v.
Madras Purasawalkam Hindu
Janopakara
Saswatha Nidhi Ltd
V. RAMASWAMI AND SINGARAVELU JJ
JULY 18, 1985
JUDGMENT
V. Ramaswami J.—We are in agreement with the learned judge on the
interpretation of section 3.09(7) of the Companies Act. The provision does not
prohibit renewal within a period of five years. The proviso relied on by the
learned counsel also does not in any way help the learned counsel for the
appellant because in this case the original resolution fixing maximum
remuneration at Rs. 15,000 per year came into force on June 12, 1980. The
second resolution passed increasing the maximum to Rs. 30,000 was only made on
December 30, 1982, i.e., more than one year from the date on which the earlier
resolution came into force. Therefore, there are no merits in this case. The
appeal is accordingly dismissed.