Section 310
INCREASE
IN REMUNERATION OF DIRECTORS
[1994]
80 COMP. CAS. 1 (MAD)
v.
Additional Registrar of Companies
PRATAP
SINGH J.
FEBRUARY
3, 1994
S.
Ramasubramanian for the petitioners.
K.
Ilias Ali for the respondent.
Pratap
Singh J.‑The
accused in E.O.C.C. No. 20 of 1991 on the file of the Additional Chief Judicial
Magistrate, Madurai, have filed this petition under section 482 of the Code of
Criminal Procedure, praying to call for the records in the above case and quash
the same.
The
short facts are: The respondent has filed a complaint against the petitioners
under section 310 read with section 629A of the Companies Act, 1956
(hereinafter referred to as "the Act"). The allegations in the
complaint are briefly as follows: M/s. Fenner (India) Ltd. (first accused) is a
company incorporated under the Indian Companies Act. The second accused is the
managing director of the said company. Accused Nos. 3 to 9 are non-wholetime
directors of the company. The officer authorised by the Central Government
inspected the affairs of the company from September 5, 1990, to September 18,
1990. During the course of inspection, it was found that clause 92 of the articles
of association of the company empowered it to pay remuneration to non-wholetime
directors. The company had passed a special resolution in the meeting of the
shareholders held on December 30, 1986, authorising payment of commission to
non-wholetime directors at the rate of one per cent, of the net profits,
subject to the maximum of Rs. 1,50,000 in any year and holding that such
authorisation was not given effect during the years ending with August 31,
1987, to August 31, 1989. During the year ending with March 31, 1990, the
company had earned sufficient net profits and made a provision for payment of
commission to the tune of Rs. 1,50,000 to non-wholetime directors, which was
later paid on August 23, 1990. The payment of the said commission over and above
the sitting fees to non-wholetime directors is an increase in the remuneration
within the meaning of section 310 of the Act. The approval of the Central
Government ought to have been obtained under section 310 of the Act. No such
approval has been obtained. Thus, the accused had contravened the provisions of
section 310 of the Act, which is punishable under section 629A of the Act.
Hence, the complaint.
Mr.
S. Ramasubramanian, learned senior counsel appearing for the petitioners, would
submit that section 310 does not cast any obligation on the petitioners to
inform the Central Government about the passing of such a resolution and merely
declares that such an increase shall not have any effect, unless such increase
is in accordance with the conditions specified in Schedule XIII, in cases where
Schedule XIII is applicable, and in any other case, unless it is approved by
the Central Government and as such the failure to get the approval of the
Central Government would not constitute any offence liable to be punished under
section 62 9A of the Act.
Per
contra, Mr. Ilias Ali, learned standing counsel for the Central Government,
would submit that there is a restriction on paying any enhanced remuneration
without such a resolution being approved by the Central Government and in this
case, there had been a payment of Rs. 1,50,000 violating the restriction and so
section 629A is applicable and the complaint can be sustained.
I
have carefully considered the submissions made by the rival counsel. To
consider the said submissions, the relevant portions of the complaint need be
stated. In paragraph 6, it is stated that during the course of inspection, it
was found that the company had passed the necessary special resolution at the
meeting of the shareholders held on December 30, 1986, authorising payment of
commission to non-wholetime directors at the rate of one per cent, of the net
profits, subject to the maximum of Rs. 1,50,000 in any year and that the said
authorisation is valid for five years. It is further stated that during the
year ending with March 31, 1990, the company had earned sufficient net profits
and made a provision for payment of commission of Rs. 1,50,000 to non-wholetime
directors, which was later paid on August 23, 1990. It is also stated that the
payment of commission over and above sitting fees to non-wholetime directors is
an increase in the remuneration within the meaning of section 310 of the Act.
Then the material portion in paragraph 6 of the complaint reads as follows:
"Accordingly,
approval of the Central Government ought to have been obtained under section
310 of the Act. However, it was found during the course of inspection such
approval has not been obtained and accordingly the accused herein have
contravened the provisions of section 310 of the Act which is punishable under
section 629A of the Act".
The
positive case set out in the complaint is that the approval of the Central
Government ought to have been obtained under section 310 of the Act and in this
case since such approval had not been obtained, there was a contravention of
section 310 of the Act, and thus an offence was committed.
To
consider whether the stand taken in the complaint is correct or not section 310
of the Act needs extraction and it reads as follows:
"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 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 any 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—
(a) in cases where Schedule XIII is applicable,
unless such increase is in accordance with the conditions specified in that
Schedule; and
(b) in any other case, unless it is 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 such sum as may be
prescribed:
Provided
further that in the case of any private company which converts itself into a
public company or becomes a public company under the provisions of section 43A,
any provision relating to the remuneration of any director including a managing
or whole time director as contained in its memorandum or articles or in any
agreement entered into by it or in any resolution passed by it in general
meeting or by its board of directors includes a provision for the payment of
fee for each meeting of the board or a committee thereof attended by any such
director which is in excess of the sum specified under the first proviso, such
provision shall be deemed to be an increase in the remuneration of such
director and shall not, after it ceases to be a private company, or, as the
case may be, becomes a public company, have any effect unless approved by the
Central Government".
The
language of the section does not cast any obligation that such an amendment
increasing the remuneration should be communicated to the Central Government.
It declares that such an amendment shall not have any effect, unless it is
approved by the Central Government in cases falling outside Schedule XIII; and
in cases where Schedule XIII is applicable, unless such an increase is in
accordance with the conditions specified in that Schedule. The plain language
of the section does not postulate or cast an obligation on the petitioners that
such special resolution should be communicated to the Central Government for
approval. The section is merely declaratory that such a resolution would not
have any effect, unless it is approved by the Central Government.
Mr.
Ramasubramanian, learned senior counsel for the petitioners, would rely upon
the case in Raghunath Swarup Mathur v. Raghuraj Bahadur Mathur [1967] 37 Comp
Cas 304; AIR 1967 All 145, in which a Division Bench of the Allahabad High
Court had occasion to consider section 263 of the Act. The material portion of
section 263 of the Act is in the following terms:
"263.
(1) At a
general meeting of a public company or of a private company which is a
subsidiary of a public company, a motion shall not be made for the appointment
of two or more persons as directors of the company by a single resolution
unless a resolution that it shall be so made has first been agreed to by the
meeting without any vote being given against it.
(2) A
resolution in contravention of sub-section (1) shall be void whether or not
objection was taken at the time to its being so moved".
The
appellants before the Allahabad High Court were convicted of an offence under
section 263 read with section 629A of the Act. While construing section 263,
the learned judges had held as follows (at page 305):
"It
is true that a single resolution moved to elect two or more directors of the
company clearly amounts to contravention of the provisions of section 263(1) of
the Act and such a contravention would have been punishable under section 629A
of the Act, but for the existence of sub-section (2) of section 263. This
sub-section lays down the consequence of moving such a faulty resolution, viz.,
it renders void every resolution moved in contravention of sub-section (1) of
section 263, with the result that the resolution itself becomes non est and
non-existent, in the eye of law. In other words, it would be deemed that such a
resolution had never been moved. If such a resolution, (being void ab initio)
does not at all exist in law, there is no question of its contravening any
provision of the Act, entailing punishment".
Learned
counsel had rightly pointed that the provisions made in section 310 of the Act
are similar to section 263 and hence the ratio of this decision is applicable
to the case on hand. He further relied upon the decision in Registrar of
Companies v. Bharat Produce Co. Ltd, [1980] 50 Comp Cas 250 (Cal), in which the
Calcutta High Court had occasion to consider the scope of section 269(2) of the
Act. Section 269(2) of the Act reads as follows:
"Where
a public company or a private company which is a subsidiary of a public
company, is an existing company, the reappointment of a person as a managing or
whole time director for the first time after the commencement of the Companies
(Amendment) Act, 1960, shall not have any effect unless approved by the Central
Government".
The
language of this section is analogous to section 310 of the Act. The learned
single judge of that court had considered the submissions made by Mr. Ghosh, learned
counsel appearing for the petitioner with regard to section 269(2) of the Act,
accepted the same and pointed out in his order as follows (at page 253):
"Mr.
Ghosh, the learned advocate appearing for the petitioner, contends that section
269(2) expressly provides that the reappointment of a person shall not take
effect unless approved by the Central Government and that necessarily means
that there is an implied prohibition against the company from allowing such a
person to act as a director and the latter's acting as such before the receipt
of the approval. Inasmuch as opposite party No. 2 continued to function as
wholetime director on such reappointment, by the company, they violated the
implied prohibition and thereby contravened section 269(2) for which they are
liable for prosecution under section 629A of the Act, argued Mr. Ghosh. Mr.
Dhar, the learned advocate appearing for the opposite parties, on the other
hand, contends that section 269(2) is declaratory in nature and does not
contain any prohibition against acting under such reappointment. Mr. Dhar
further argues that there can be a contravention only when there is a direction
or prohibition and since there is no such direction or prohibition in section
269(2), there cannot be any contravention of the said provision so as to make
any person liable under section 629A of the Act. In support of his contention,
Mr. Dhar relies upon a Division Bench judgment of the Allahabad High Court, in
the case of Raghunath Swarup Mathur v. Har Swamp Mathur [1968] Crl. LJ 670;
[1967] 37 Comp Cas 802 (All) and a judgment of the Queens' Bench in the case of
Sales-Matic Ltd. v. Hinchcliffe [1959] 1 WLR 1005.
There
cannot be any manner of doubt that before a person can be said to have
contravened any provision of the Act there must be a specific prohibition or
direction thereunder. In the Act with which we are concerned there are some
specific provisions incorporating such directions and prohibitions. For
example, in section 197A of the Act, it has been specifically provided that no
company shall, after the commencement of the Companies (Amendment) Act, 1960,
appoint or employ at the same time or after the expiry of six months from such
commencement continue the appointment or employment at the same time of more
than one of the categories of managerial personnel, namely, managing director
and manager. Similarly, in section 204 of the Act, it has been expressly stated
that no company shall, after the commencement of the Act, appoint or employ any
firm or body corporate to any office or place of profit under the company for a
term exceeding five years at a time. There are many other similar provisions in
the Act which issue express directions or prohibitions and, needless to say,
contravention of such directions or provisions are punishable under the Act.
Unlike these provisions section 269(2) does not issue any direction or
prohibition ; it only declares that reappointment of a person as a managing
director or wholetime director, for the first time after the commencement of
the Companies (Amendment) Act, 1960, shall not have any effect unless approved
by the Central Government".
The
learned judge has clearly pointed out that these provisions of the Companies
Act are merely declaratory and do not create an offence. The said ruling,
according to counsel for the petitioner, is applicable to the facts of the
present case.
Mr.
Ilias Ali advocate, would submit that the offence complained of would come
under the second limb of section 629A. For considering this submission, section
629A needs extraction and it reads thus :
"629A.
Penalty where no specific penalty is provided elsewhere in the Act.—If a
company or any other person contravenes any provision of this Act for which no punishment
is provided elsewhere in this Act or any condition, limitation or restriction
subject to which any approval, sanction, consent, confirmation, recognition,
direction or exemption in relation to any matter has been accorded, given or
granted, the company and every officer of the company who is in default or such
other person shall be punishable with fine which may extend to five hundred
rupees, and where the contravention is a continuing one, with a further fine
which may extend to fifty rupees for every day after the first during which the
contravention continues". (This
portion relied on has been underlined by me.)
In
the instant case, it is not alleged in the complaint that such a restriction
was imposed or accorded by the Government and the same was violated so as to
bring it within the purview of this clause. Therefore, I am unable to accept
the submission made by Mr. Ilias Ali.
I
am clear that section 310 is merely declaratory and does not cast any
obligation on the petitioners to do a particular act so as to complain of its
contravention. Taking that view of the matter, I hold that the complaint is
clearly misconceived and is liable to be quashed.
In
the result, the petition is allowed and all further proceedings in E.O.C.C. No.
2Q of 1991 on the file of the Additional Chief Judicial Magistrate, Madurai,
shall stand quashed.
[1966]
36 COMP.CAS. 63 (MYS.)
V.
M.
SADASIVAYYA AND K. R. GOPIVALLABHA IYENGAR, JJ.
WRIT
PETITION NO. 735 OF 1964
SEPTEMBER
9, 1965
JUDGMENT
SADASIVAYYA,
J. - The petitioner in this
case is Messrs. Canara Workshops Ltd., a public company having its registered
office at Kodialbail, Mangalore-3. One V.S. Kudva was the managing director of
the said company till March 31, 1956. From April 1, 1956, till March 31, 1960,
he was acting as technical adviser of the petitioner- company on a remuneration
of Rs.750 per mensem. On April 20, 1960, the company passed a resolution
increasing the remuneration of V.S. Kudva to Rs.2,000 per mensem from April 1,
1960, subject to the approval of the Central Government. On January 2, 1961,
the respondent sent the communication, exhibit “C”, approving the increase of remuneration
of V.S. Kudva from Rs.750 per mensem to Rs.1,000 per mensem, with effect from
1st April, 1960, for his acting the director-cum-technical adviser of company.
A copy of the communication issued in this connection by the respondent is
marked exhibit “C”. Accordingly, V.S. Kudva was paid remuneration at Rs.1,000
per mensem, with effect from April 1, 1960. But, on November 17, 1962, the
respondent wrote to the petitioner pointing out that the monthly payment of
remuneration at Rs.1,000 to V.S. Kudva working as a part time director
rendering technical advice to the company cannot be so paid to him after
December 28, 1960, in view of the provisions of the Companies Act, 1956, as
amended by the Amending Act of 1960 which came into force on December 28, 1960.
The companies Act as amended in 1960 is hereinafter referred to as the Act). On
24th November, 1962, the petitioner company sent a reply (exhibit “E”) stating
that the payment of remuneration to V.S. Kudva is not again the provisions of
section 309(4) of the Act and also suggesting that the company will take
necessary action to conform to the provisions of section 309(4), if they are so
advised. The respondent in its communications, exhibit “F” dated January 2,
1963, and “G” dated April 26, 1963, reiterated the stand that the payment of
the monthly remuneration to a part-time director after the 1960 amendment of
the Companies Act, 1956, is contrary to the provisions of section 309 of the
Act. The respondents also stated that it is open to the company to regularities
the matter by refixing the remuneration of V.S. Kudva with effect from December
28, 1960, in manner laid down in sub-section (4) of section 309, i.e., by
passing a special resolution and taking approval of the Central Government.
After this correspondence the company passed two resolutions of 28th June,
1963, which are contained in exhibit “I” and which are as follows :
“THE CANARA
WORKSHOPS LIMITED, MANGALORE-3.
2nd August,
1963.
Special resolution
passed in the extraordinary general body meeting of the company dated 28th
June, 1963.
Resolved :
1. That with effect from
28-12-1960, the remuneration of director Sri V.S. Kudva as the part time
technical adviser of the company be fixed at the rate of 3/4% of the net
profits of the company in accordance with section 309, sub-section (4), of the
Companies Act 1956;
2. that with effect from
1-4-1962, Sri V.S. Kudva be also paid an additional remuneration of 1/2% of the
net profits of the company as the increased activities of the company have
required work of directorial nature from him.”
The first one
provides for remuneration from December 28, 1960, to March 31, 1962, at 3/4% of
the net profits of the company, to V.S.Kudva as part-time technical adviser of
the company, while the second provides for payment of additional remuneration
at 1/2% of the first net profits of the company from April 1, 1962, to V.S.
Kudva in respect of work of directorial nature. These resolutions were
forwarded by the company with all the requisite documents and information to
the respondent on 19th August, 1963. From the communication, exhibit “K”, dated
September 19, 1963, it is clear that this application was referred to the
advisory commission as required under section 411(b) of the Act. Presumably,
after the receipt of the report of the advisory commission, the respondent sent
the letter a copy of which is marked exhibit “L” dated January 13, 1964. The
Central Government gave approval with certain limitations and restrictions.
With regard to the first resolution, the communication, exhibit “L”, from the
Under Secretary to the Government of India states:
“In
continuation of the Ministry of Industry’s letter of even number dated 9th
October, 1963, I am directed to say that the Central Government has pleased to
approve under section 310 of the companies Act, 1956, the increase in the
remuneration payable to Sri V.S. Kudva, the director/chairman and part time
technical adviser of your company, by refixing it at a commission of 3/4%
(three fourth per cent), on the net profits of the company with effect from
28th December, 1960, subject to the condition that his remuneration by way of
commission shall not exceed Rs.9,000 (Rupees nine thousand only) per annum.”
The second
paragraph of that letter pertains to the period subsequent to April 1, 1962,
and deals with the increased remuneration proposed in both the resolutions. It
is as follows:
“The Central
Government has also been pleased to approve under section 310 of the Companies
Act, 1956, the increase in the remuneration of Sri V.S. Kudva, the part time
technical adviser of your company, by paying him a commission of one per
cent.(instead of 1-1/4% as proposed by you) on the net profits of the company
with effect from 1st April, 1962, subject to the condition that this
remuneration shall be reduced to the extent of the remuneration drawn by him
from M/s. Canara Sales Corporation Ltd., the sole selling agents of the
company, and further to the extent of the share in his own name, in the name of
his wife, son/sons and unmarried daughters, if any, in the net profits of the
said sole selling agents of the company as are relatable to the business in the
goods of your company.”
The petitioner
is aggrieved with the above said qualified approval accorded by the respondent.
He has, therefore, filed this writ petition for the issue of a writ in the
nature of certiorari or any other appropriate writ or order in respect of
exhibit “L” and to prohibit the respondent from interfering with the rights of
the petitioner company to pay the remuneration to V.S.Kudva as fixed in the
resolutions as per exhibit “I”.
From the facts
disclosed before us, it may be mentioned that the Canara Sales Corporation Ltd.
referred to in exhibit “L” is a public limited company, having a total issued
share capital of 70,033 shares of Rs.10 each out of which 9,512 shares were
held by V.S. Kudva, his wife and sons, the rest being held by others. The
Canara Sales Corporation are the sole selling agents for some of the products
manufactured by the petitioner-company and in respect of some areas only. V.S.
Kudva is the managing director of Canara Sales Corporation Ltd.
It is clear
from the facts of the case that it is the petitioner that sought for approval
of the respondent under provision of section 310 of the Companies Act. Though
it is so Sri V.Krishna Murthy, the learned advocate appearing for the
petitioner, contends that the provisions of sections 309 and 310 of the
Companies Act do not apply to the resolutions under exhibit “I” and therefore
it was unnecessary for the petitioner to seek the approval of the Central
Government. He submits that the approval was sought at the suggestion of the
respondent as is clear from their letters, exhibits “F” and “G”, and the
petitioner was prompted by the consideration that if it complied with the
suggestion of the Central Government, there would be no difficulty for the
company giving effect to the two resolutions. It is stated that it is in these
circumstances that the company sought for the approval of the Central
Government and that at the worst the company was under a misconception of law
in seeking the approval and that the same should not be construed to the
prejudice of the petitioner. I will consider in due course the question of the
applicability of the provisions of the said two sections.
The main
contentions of Sri Krishna Murthy, the learned advocate for the petitioner, are
three-fold: Firstly, it is urged that neither of these two resolutions required
the approval of the Central Government under any of the provisions of the Act
though under some mistaken belief such approval was sough by the company.
Without
prejudice to the above contention, it is nextly urged that at least the first
resolution, which pertains to remuneration proposed to be paid to V.S. Kudva
for his services as technical adviser, does not require any such approval.
Thirdly, it is
contended that, in any event, it is not competent for the respondent to have
imposed the conditions and restrictions set out in annexure “L”.
On behalf of
the respondents, it is contended by Mr. Advocate-General that the approval of
the Central Government is necessary under sections 309 and 310 and that it was
competent for the respondent, under section 637A(1), to have imposed the said
restrictions and conditions.
Special
resolution No.2 pertains to an additional remuneration proposed to be paid to
V.S. Kudva in respect of “work of directorial nature”. It seems to be
convenient, before proceeding to other matters in controversy, to consider
whether this resolution does or does not require the approval of the Central
Government, under the provisions of the Act. V.S. Kudva is neither a director
in the whole- time employment of the company nor a managing director; his remuneration,
at the time when these two resolutions were passed, did not include anything by
way of a monthly payment, though, it would appear, that sitting fee at the rate
of Rs.100 per meeting, was being to the directors. He is a director such as the
one contemplated by sub-section (4) of section 309 and the remuneration to him
and to other directors like him, which may be authorised by special resolution,
should not exceed the limit of one per cent. of the net profits as required
under clause (a) of sub-section (4) the company being one which has a managing
director. Assuming that the remuneration authorised by special resolution No.2
and the remuneration which was payable to other directors like him, together
did not exceed the said limit of one per cent., then, no approval of the
Central Government under section 309 may have been necessary. But, this does
not mean that section 310 would not be attracted. It is stated in special
resolution No.2 that it is an additional remuneration. It was pointed out by
the learned Advocate-General that this would, in fact, be additional
remuneration, as it was in addition to the remuneration that was being received
by way of sitting fee. In this view of the matter, it was an increase in the
remuneration of, at least, this particular director and thus attracted the
provisions of section 310 which made it necessary that in such cases the
approval of the Central Government should be obtained. Therefore, the
contention of Sri V. Krishna Murthy that the approval of Central Government was
not necessary, cannot be sustained in respect of special resolution No.2.
I will now
consider the question of the competency of the respondent to impose the
conditions and restrictions found in exhibit “L”. The relevant provisions with
reference to which the question pertaining to the control by the Central
Government will have to be examined are sections 309, 310 and 637A(1). Section
637A(1) is as follows:
“637A.
(1) Where the Central Government is required
or authorised by any provision of this Act, -
(a) to accord approval,
sanction, consent, confirmation or recognition to or in relation to, any
matter;
(b) to give any direction
in relation to any matter; or
(c) to grant any exemption in
relation to any matter, then, in the absence of anything to the contrary
contained in such or any other provision of this Act, the Central Government
may accord, give or grant such approval, sanction, consent, confirmation,
recognition, direction or exemption subject to such conditions, limitations or
restrictions, as it may think fit to impose and may, in the case contravention
of any such condition, limitation or restriction, rescind or withdraw such
approval, sanction, consent, confirmation, recognition, direction or
exemption.”
It will be
noticed that the power under section 637A(1) is really an incidental power, in
the sense that the Central Government can exercise this power only when it is
required under any provision of the Act, to accord approval, sanction, consent,
confirmation or recognition to or in relation to, any matter. Therefore, when
the Central Government has the competence under some other provisions of the
Act to accord its approval, sanction, consent, confirmation or recognition, then,
while granting the same, the Central Government may attach such limitations or
restrictions as it may think fit. This does not mean that the competence of the
Central Government to impose such conditions, limitations or restrictions is
either arbitrary or unlimited. Being an incidental power, it is necessary that
the limitations or restrictions should be relevant to, or bear relation, to the
matter in respect of which the Central Government has been given the competence
to accord approval, sanction, consent confirmation or recognition. In that way,
the purpose for which the approval, sanction, consent, confirmation or
recognition is necessary under any concerned provision of the Act, will be a
relevant consideration while imposing the conditions, limitations or
restrictions under section 637A(1), because the incidental power to impose the
latter cannot travel beyond the said purpose. In the present case, it is not
stated before us that the competence of the Central Government to grant
approval to the two resolutions arises under any provision of the Act other
than sections 309 and 310. Therefore, there is no need to go beyond those two
sections in order to ascertain the validity of the conditions and restrictions
which have been imposed as per exhibit “L”.
A careful
perusal of the provisions of section 309 makes it clear that the purpose, as
can be gathered from the language of that section, is to place a limitation on
the ceiling of the remuneration payable by a company to its directors and to
provide that when the company seeks to remunerate any director over and above
that limit, it must secure the approval of the Central Government. According to
sub-section (5A) if any director draws or receives, directly or indirectly, by
way of remuneration any sums in excess of the said limit, without prior
sanction of the Central Government, where it is required, he is liable to
refund such sums to the company. (The expression “remuneration”, in this
connection, includes all those items of expenditure mentioned in the
Explanation of section 198). Leaving apart the case of a director who is either
in whole-time employment of the company or a managing director (or is one
covered by the proviso to sub-section (2)), the main purpose of this section is
to ensure that a director shall not receive remuneration on a monthly basis and
that the remuneration paid to him should not exceed (unless authorised by the
Central Government) the prescribed percentage of the net profits of the
company. Therefore, the net profits of the company has bearing on the
remuneration payable to a director in this connection. Section 310 requires
that any provision or resolution purporting to increase or having the effect of
increasing, whether directly or indirectly, the remuneration of a director shall
not have any effect unless approved by the Central Government and further that
the same shall become void if, and in so far as, it is disapproved by the
Central Government. In the setting of section 310, it would not be
inappropriate to infer that in approving or disapproving any such proposed
increase in the remuneration of any director, the Central Government will have
in view the limit of remuneration payable to a director under section 309 read
with section 198, and also the other obligations enjoined in section 309. It
may also be stated that the question of any extra efforts or labours on the
part of the directors in the management of the company may also be a relevant
consideration while according or refusing the approval. It seems to me that it
is in the light of what has been stated above, that the validity or otherwise
of the conditions and restrictions imposed in exhibit “L” have to be
considered.
Under
paragraph 2 of the letter as per exhibit “L”, the Central Government has
combined the remunerations covered by both the special resolutions, and have
imposed conditions thereon. The total of the remunerations under both the
resolutions has been limited by the Central Government to one per cent. of the
net profits of the company. Further, that one per cent. has subjected to the
condition that it “shall be reduced to the extent of the remuneration drawn by
him from Messrs. Canara Sales Corporation Limited, the sole selling agents of
the company, and further to the extent of the shares in his own name, in the
name of his wife, son/sons and unmarried daughters, if any, in the net profits
of the said sole selling agents of the company as are ralatable to the business
in the goods of your company.” The contention of Mr. Krishna Murthy is that the
imposition of these conditions is quite arbitrary and that no authority to do
so is given to the Central Government under any of the provisions of the Act.
It is stated that the Canara Sales Corporation Limited is an independent
company and that any remuneration drawn by V.S. Kudva from that company has no
bearing on any remuneration payable by the petitioner- company. It is similarly
contended that any share to which either V.S. Kudva, his wife, son or unmarried
daughters may be entitled to in the net profits of Canara Sales Corporation
Limited, could have no relevance to the remuneration payable by the
petitioner-company to V.S. Kudva whether for his services of directorial nature
or as part- time technical adviser to the petitioner-company. There is much
force in the contention advanced by Mr. V. Krishna Murthy and it must be stated
that no provision in the Act has been pointed out to us on behalf of
respondent, which would enable the Central Government to impose a condition of
this nature on a consideration of the fact that some income from another
independent company is earned by V.S. Kudva and the members of his family.
considerations of this kind, which are not authorised by the provision of the
Act and which have no bearing on the financial condition of the petitioner-company,
would be irrelevant. In these circumstances, it must be held that the condition
above referred to is arbitrary and unauthorised and is liable to be struck
down.
In so far as
the second resolution pertaining to the remuneration payable to V.S. Kudva for
the directorial work done by him is concerned, it would be open to the Central
Government to consider the question afresh and impose such conditions, if any,
as it may consider necessary, in the light of what has already been stated above
in regard to the powers under section 637A.
The next
question is whether the remuneration allowed to V.S. Kudva by special
resolution No. 1 for his work as part-time technical adviser requires the
approval of the Central Government under section 309. It may be mentioned that
in this case, it is not stated on behalf of the respondent that this resolution
is a mere device to confer an unmerited benefit on V.S. Kudva to the detriment
of the company and that on that ground the Central Government seeks to exercise
control to safeguard the interests of the company. Therefore, this question
will have to be approached uninfluenced by any consideration of the control
being exercised for the protection of the company.
The
contention of Mr. Advocate-General is that this remuneration, even though it is
stated to be for the work of part-time technical adviser, is still remuneration
payable to a director and that it falls within the ambit of sub-section (4) of
section 309. It is argued that as the total of the remuneration payable under
the two special resolutions exceeds the limit of one per cent. (of the net
profits) prescribed in clause (a) of sub-section (4), the approval of the
Central Government is required for such a resolution and that therefore it will
be within the competence of Central Government to attach conditions or
restrictions under section 637A. On the other hand, the contentions of Mr. V.
Krishna Murthy are to the effect that special resolution No.1 pertains to
remuneration payable for work done by V.S. Kudva in his capacity as part time
technical adviser and that such remuneration does not come within the mischief
of section 309 which, according to the learned advocate, pertains to managerial
remuneration payable to the directors of a company. It is not disputed by him
that section 309 does not expressly state that it is confined to managerial
remuneration payable to the directors; but he seeks to substantiate his
contention from the setting of section 309, the relation which it bears to
section 198 and the fact that the office of technical adviser is an officer of
profit which a director is allowed to hold under section 314 of the Act.
The position
is not one which is free from difficulty. But, for reasons which will be
presently stated, it appears to me that the contentions urged by Mr. Krishna
Murthy are well-founded. Section 309 is the first section under the heading
“Remuneration of Directors”. Some salient features of that section, which are
relevant for the present purpose, will now be briefly referred to. Sub-section
(1) provides that the remuneration payable to the directors of a company shall
be determined either by the articles of the company, or by a resolution, or, if
the articles so require, by a special resolution passes by the company in general
meeting. It is specifically stated in the sub-section, that such determination
of the remuneration shall be in accordance with and subject to the provisions
of section 198 and section 309. Sub-section (2) provides that a director may
receive remuneration by way of a fee for each meeting of the board, or a
committee thereof attended by him. Where immediately before the commencement of
the Amendment Act of 1960 such fees were being paid on a monthly basis to a
director, the proviso to sub-section (2) allows the continuance of payment on
that basis only for a period of two year after such commencement or remainder
of the term of officer of such a director, whichever is less. Sub-section (3)
pertains to the remuneration of a director who is either in the whole-time
employment of the company or managing director. It allows their remuneration to
be paid either by way of monthly payment, or at a specified percentage of the
net profits of the company, or partly by one way or partly by the other. The
proviso states 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. Sub-section (4) pertains to the remuneration of a director who
is neither in the whole-time employment of the company, nor a managing director
and whose remuneration does not include anything by way of a monthly payment.
By implication, a director who, under the proviso to sub- section (2) is in
receipt of the fees on a monthly basis, will be excluded from the purview of
sub-section (4). To a director to whom this sub-section applies, (or where
there is more than one such director, to all of them together), the company
may, by special resolution, authorise payment of remuneration as follows: (a)
if the company has a managing or a whole-time director, a managing agent,
secretaries, or treasurers or a manager, of a commission not exceeding one per
cent. of profits; (b) in any other case, of a commission not exceeding three
per cent. of the net profits. The proviso states that the company in general
meeting may, with the approval of the Central Government, authorise the payment
of commission at a rate exceeding one per cent. or as the case may be, three
per cent. of its net profits. Sub-section (5A) provides that if any director
draws or receives, directly or indirectly, by way of remuneration, any such
sums in excess of the limits prescribed by section 309 or without the prior sanction
of the Central Government where it is required , he shall refund such sums to
the company and until such sums are refunded, hold it in trust for the company.
It is mainly
on the strength of the above provisions of section 309 that it has been contended
on behalf of the respondent that any remuneration when payable to a director
for services of whatever kind and rendered in whichever capacity, would be
covered by the said section. But the section itself does not say so; it
pertains merely to the remuneration payable to the directors of a company; it
does not purport to deal with any remuneration payable to a director on account
of services rendered by him in any capacity other than that of director. That
the legislature was aware of the possibility of remuneration becoming payable
for services rendered in some capacity other than that of director (or managing
agent, as the case may be), is clear from the language of some of the sections
which will be presently referred to. While dealing with the matter of
remuneration of managing agent, section 348(1) states that a company shall not
pay to its managing agent, by way of remuneration, whether in respect of his
services as managing agent or in any other capacity, any sum in excess of ten
per cent. of the net profits. Section 318 deals with compensation for loss of
office, sub-section (5) provides that nothing in that section shall be deemed
to prohibit the payment to a managing director or a director holding the office
of a manager, of any remuneration for services rendered by him to the company
in any other capacity. Section 314(1) provides that except in the case of
certain offices specified in that sub-section, no director shall hold any
office or place of profit under the company, unless the company has accorded
previous consent by a special resolution. Sub-section (3)(a) of section 314
states that any office or place shall be deemed to be an office or place of
profit under the company within the meaning of sub-section (1), in case the
office or place is held by a director, if the director holding it obtained
anything by way of remuneration over and above the remuneration to which he is
entitled as such director. These provisions make it clear that the legislature
was aware of the possibility of remuneration becoming payable for service
rendered to the company, in a capacity different from that of director or
managing agent, as the case may be. Further, in the context of a director
holding an office or place of profit, the legislature has recognised the fact
of such director obtaining from the company remuneration over and above that to
which he is entitled as such director. Now, if it was the intention of the
legislature that even such remuneration as was attributable to any office or
place of profit validly held under the company, should also be within the limit
specified in section 309(4), then it would only be reasonable to expect that it
would have been plainly stated so, either in section 309 or in section 314. In
a case, Ramaben A. Thanawala v. Jyoti Ltd. ([1957] 27 Comp. Cas. 105, 109;
A.I.R. 1958 Bom. 214), the High Court of Bombay had to consider the question as
to whether the salary of Rs.3,000, which was being paid to a director for work
done by him as technical adviser, fell within the limits specified in sections
198 and 309. Chagla C.J., who spoke for the Bench, came to the conclusion that
the remuneration paid for service rendered as technical adviser did not come
within the mischief of section 309 and that the limit of eleven per cent. fixed
in section 198 in respect of managerial remuneration did not apply to
remuneration paid for service of technical adviser. It is true, that this
decision was prior to Amending Act of 1960, by which there has been an
amendment of section 309. But, it seems to me that the principles of
interpretation relied upon by that learned Chief Justice for construing the
relevant provisions for reaching that conclusion, are still applicable for
ascertaining the true position, particularly when, in spite of that decision, it
is nowhere plainly stated in the amended Act that the remuneration obtained by
a director of his validly holding an office of profit, should also come within
the limit specified in section 309(4). It was pointed out in that decision that
the limit of eleven per cent. specified in section 198 was for the purpose of
controlling the cost of management. At that time, as sub-section (1) of section
198 stood, it did not expressly state that the limit of eleven per cent.
referred to the total of managerial remuneration; that sub-section spoke merely
of the total remuneration payable by the company to its directors, etc. It was
only in the marginal note to that sub-section that indication had been given
that what was sought to be controlled was the overall maximum managerial
remuneration. While rejecting the view that the salary of Rs.3,000 which was
being paid to the director for work done by him as technical adviser should
also fall within the limit of eleven per cent., the learned Chief Justice
stated as follows (in paragraph 4 at page 216) ([1957] 27 Comp. Cas. 105,109;
A.I.R. 1958 Bom. 214):
“The question
that is raised is whether the amount of Rs.3,000 paid to the third defendant as
a technical adviser and not as a director is included in the limit of eleven per
cent. fixed by section 198...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 is,
presumably, in acceptance of the above view of the Bombay High Court, that when
section 198 was subsequently amended, express mention was made in sub-section
(1) of the total managerial remuneration and that it should not exceed the limit
of eleven per cent. It should also be noted that so much of the previous
marginal note (to the former unamended section) as pertained to the overall
maximum managerial remuneration, has been retained in the marginal note to the
amended section. In these circumstances, it would be quite proper to understand
that the purpose of section 198(1) is to impose a limit only on the cost of
management. The various provisions which pertain to remuneration payable by the
company to the different categories of managerial personnel and the directors
have been so designed as to ordinarily keep the total cost within the limit of
eleven per cent. (of the net profits) specified in section 198(1). A scrutiny
of section 309 reveals certain unmistakable indications that the remuneration
payable to the directors, as dealt with therein, is only managerial
remuneration of any other kind. Firstly, the very fact that sub-section (1)
requires the remuneration to be determined in accordance with and subject to
the provisions of section 198, gives the indication that the legislature had in
view only managerial remuneration which is the only kind of remuneration that
has been dealt with in section 198 (including the provision for remuneration to
directors in case of absence or inadequacy of profits). Secondly, the
remuneration that is permitted under sub-section (2) is clearly for work done
as a director, being remuneration by way of a fee for each board or committee
meeting attended by him. That is clearly managerial remuneration, which would,
in the ordinary course, have fallen within the limit of eleven per cent.
specified in section 198(1) but for the exclusion directed in sub-section (2)
of section 198. Sub-section (3) of section 309 pertains to the remuneration
payable to a director in the wholetime employment of the company or a managing
director. This has to be read with sub-section (3) of section 198. There cannot
be any doubt that the remuneration contemplated in sub-section (3) of section
309 is only in respect of the work done in the capacity of wholetime director
or managing director.
In the
context of the previous sub-sections, there is no reason to assume that the
remuneration dealt with in sub-section (4) of section 309 pertains to any work
done by a director otherwise than in his capacity as such director. The
director to whom this sub-section relates is not a wholetime director; nor does
he receive any remuneration by way of a monthly payment. It is conceivable that
he may be in a position to render to the company services otherwise than in his
capacity as a director; this sub-section does not say that the remuneration for
such services should also be controlled by the specified limits. On the other
hand, the fact that the applicability of one or the other of the alternative
limits set out in clauses (a) and (b) depends upon the existence or otherwise
of the specified categories of managerial personnel, is an indication that the
remuneration contemplated could only be in respect of work done by him in his
capacity as a director. If the work done or the services rendered by him to the
company are not such as could be attributable to his capacity as a director,
then he should be remunerated therefor, in the same way as any other person
would have been, had he done the work or rendered the service to the company.
Where the
intention of the legislature was that the remuneration earned in whatever
capacity should be brought within a particular limit, it has been so expressed
in clear terms; section 348(1), which pertains to the remuneration of managing
agent, is an example. If the limit of 11 per cent. specified in section 198(1)
was intended to cover every kind of remuneration earned in whatever capacity,
then there would have been no need to enact the prohibition contained in section
348(1). It is because the limit of 11 per cent. is confined only to managerial
remuneration and does not extend to any other kind of remuneration, that there
was the necessity for section 348(1). In my view, the remuneration payable to
directors under section 309 is part of the managerial remuneration dealt with
under section 198 and that the limitations in section 309 do not extend to any
other kind of remuneration earned in a capacity different from that of
director.
In order to
determine whether a place office held by a director is a place or office of
profit, the test that is laid down in sub-section (3) of section 314 is that he
“obtains from the company anything by way of remuneration over and above the
remuneration to which he is entitled as such director”. Therefore, the
remuneration derived from an office of profit permitted under section 314 to be
held by a director is distinct from the remuneration to which he is entitled as
director. (The remuneration to which he is entitled in his capacity as
director, is that covered by sections 198 and 309). There is nothing in section
314 to the effect that the limits specified in section 198(1) and section
309(4) should govern the remuneration derived by a director holding an office
of profit permitted under section 314. In the absence of any express provisions
to the contrary, there is no principle on the basis of which such a director
could be denied remuneration for such work or services; equally, there would be
no reason to extend to such remuneration the limit of percentages mentioned in
section 309(4), when the law does not expressly state that the said limit would
be applicable to remuneration attributable to services rendered or work done in
some capacity other than that of a director.
My conclusion
in regard to this aspect of the case is that by being appointed as a part-time
technical adviser V.S. Kudva was holding an office of profit (permitted under
sub-section (1) of section 314, and that the remuneration payable to him for
services rendered by him in his capacity as technical adviser does not come
within the mischief of section 309 of the Act. Therefore, no approval of the
Central Government is necessary in respect of the remuneration payable to him
for his services as part-time technical adviser. It follows that the incidental
powers under section 637A cannot be availed of in respect of special resolution
No.1 and the remuneration payable thereunder to V.S. Kudva.
GOPIVALLABHA
IYENGAR J. - I have had the advantage of perusing the judgment proposed by my
learned brother Sadasivayya, J. The facts of the case have been set out in
detail in the said judgment, and it is unnecessary for me to set them out
again. I am in agreement with the view expressed therein that the approval of
the Central Government should be obtained by the petitioner company in respect
of resolution No.2 in exhibit “I”. Secondly, I am also in agreement with the
observations relating to the scope of section 637A(1) of the Companies Act. I
also agree that the validity or otherwise of the conditions and restrictions
imposed in exhibit “L” have to be considered in the light of the observations
made in the judgment to the scope of section 637A(1) of the Act.
But, I regret
my inability to share the view of my learned brother on the question whether
the remuneration allowed to V.S. Kudva by special resolution No. 1 for his work
as part-time technical adviser requires the approval of the Central Government
under section 309. I therefore propose to consider the arguments advanced by the
learned counsel pertaining to resolution No.1 and the conditions imposed in
exhibit “L” in respect of it.
The first
contention of Sri V. Krishna Murthy, the learned advocate for the petitioner,
in this regard is that the remuneration paid to V.S. Kudva as part-time
technical adviser of the company does not come within the purview of the
provisions of section 309 of the Act and, therefore, it is unnecessary to apply
for the approval of the Central Government under the provisions of sub-section
(4) of section 309.
The second
contention of Sri Krishna Murthy is that, even if the provisions of section
309(4) should be considered as applicable to the abovesaid remuneration, even
then the approval of the Central Government is unnecessary inasmuch as the rate
of percentage of the net profits payable to the part-time
director-cum-technical adviser is less than 1 per cent.
The third
contention of Sri Krishna Murthy is that the additional remuneration stipulated
in resolution No. 2 is payable to V.S. Kudva as director from April 1, 1962,
and therefore it should not be added on to the 3/4 per cent. referred to in
resolution No.1 payable to him as technical adviser from December 28, 1960, and
hence, the Central Government’s order in exhibit “L” combining the two remunerations
of two different categories is unjustifiable and the conditions set out in
paragraph 3 of exhibit “L” are unsustainable in law.
The learned
Advocate-General on the other hand contends that any remuneration paid by the
company to its director or directors is controlled by the provisions of section
309 of the Act; and so far as the provisions of section 309 are concerned,
there is no scope for differentiating the remuneration paid to the director as
director or in any other capacity. He submits that section 309 is a code in
itself covering the subject of payment of remuneration to the directors of a
company.
In support of
the first contention on behalf of the petitioner, Sri V. Krishna Murthy
strongly relies on the decision of the Bombay High Court in Ramaben Thanawala
v. Jyoti Ltd. ([1957] 27 Comp. Cas. 105) and also on the several provisions of
the Act indicating that there is a distinction made between remuneration
received by a director as such and the remuneration received by him in any other
capacity. Sri Kirshna Murthy invites our attention to the provisions of section
271 of the Act which makes a distinction between a director and a technical
director. I do not think that the provisions of that section in any manner help
the petitioner. The petitioner is not a technical director. The resolution in
question is with reference to him as a technical adviser. The next section
which Sri Krishna Murthy refers to is section 314 of the Act, which deals with
the prohibition against a director holding any office or place of profit. He
invites our attention to the provisions of section 314(1)(b) under which the
application of the section to a particular category of offices including that
of the technical adviser is excepted, and to clause (3) which makes a reference
to a director obtaining from the company remuneration over and above the
remuneration to which he is entitled as such director, whether as salary, fees,
commission, perquisites, the right to occupy free of rent any premises as a
place of residence, or otherwise. It cannot be disputed that a director can
also hold an office of profit. The question that arises for consideration in
this case is not whether a director can hold an office of profit or not but
whether the remuneration paid to him on that account comes within the
provisions of section 309(4). The same observations apply to the provisions of
section 318(5) of the Act to which Sri V. Krishna Murthy draws our attention.
The provision under section 318(5) contemplates the payment to a managing
director or director holding the offices of manager of any remuneration for
services rendered by him to the company in any other capacity. It cannot be
disputed that a director can claim compensation in respect of services rendered
by him in any other capacity as provided in section 318. This does not give any
support to the contention that the remuneration paid to a director in any
capacity other than as a director does not come within the scope of section
309(4) of the Act. Sri V. Krishna Murthy further referred to section 348 of the
Act which provides for the remuneration of managing agents. The said section is
as follows :
“348. Remuneration of managing
agent ordinarily not to exceed 10 per cent of net profits. –
(1) A company shall not pay
to its managing agent, in respect of any financial year beginning at or after
the commencement of this Act, by way of remuneration, whether in respect of his
services as managing agent or in any other capacity, any sum in excess of ten
per cent. of the net profits of the company for that financial year.
(2) For the purposes of
this section, any payment made by way of remuneration to any of the following
persons shall be deemed to be included in the remuneration of the managing
agent :-
(a) Where the managing
agent of the company is a firm, every partner in the firm;
(b) Where the managing
agent of the company is a public company, every director of that public
company;
(c) Where the managing
agent of the company is a private company, every director and member of that
private company.
(3) Nothing contained in
sub-section (1) or sub-section (2) shall be deemed to affect the operation of
sections 352, 354 and 356 to 360.”
Our attention
is drawn to sub-section (1) of section 348, making reference to the services of
managing agent, as managing agent or in any other capacity. So far as the
managing agent is concerned, it will be seen that there are other provisions in
the Act which provide for additional remuneration for the services rendered by
the managing agent other than in his capacity as such. Section 352 provides for
payment of additional remuneration in excess of the limits specified in
sections 198 and 348, if such remuneration is sanctioned by a special
resolution of the company and is approved by the Central Government as being in
public interest. Similarly, sections 356 and 258 provide for payment to the
managing agent otherwise as managing agent. A reference to the proviso to
section 198 shows that the total of managerial remuneration referred to therein
does not affect the operation of sections 352 to 354 and 356 to 360 of the Act,
under which there is provision to make payment to the managing agents otherwise
than as managing agents. Keeping in view the above sections of the Act, the
provisions of section 309 are to be scrutinised. Section 309 of the Companies
Act as amended by Act 65 of 1960 is set forth below to examine the validity of
the relative contentions of the parties :
“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.
(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) In the case of a
director who is neither in the whole-time employment of the company nor a
managing director and whose remuneration does not include anything by way of a
monthly payment, the company may, by special resolution, authorise the payment,
to such director, or where there is more than one such director, to all of them
together.
(a) If the company has a
managing or whole-time director, a managing agent or secretaries and
treasurers, or a manager, of a commission not exceeding one per cent. of the
net profits of the company ;
(b) In any other case of a
commission not exceeding three per cent. of the net profits of the company :
Provided
that the company in general meeting
may, with the approval of the Central Government, authorise the payment of
commission 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 limits 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 whole-time 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 renewed, from time to time, by special resolution
for further period 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.”
Section 309,
it will be seen, does not make any distinction between the remuneration payable
to the director as such director or in any other capacity. There is nothing in
the wording of section 309 to limit the application of the section to the
remuneration paid to the directors in their capacity only as director. The
opening sentence of section 309(1) signifies that the remuneration contemplated
therein is remuneration payable to all directors including any managing or
whole- time director. Sub-section (2) provides that the director may receive
remuneration by way of fee for each meeting of the board or a committee thereof
attended by him. The change effected by the amendment is to omit any provision
being made for monthly payment. Under the amended section the payment on a
monthly basis can continue only for a period of two years after December 28,
1960, when the amendment of the Act came into force. Sub-section (3) refers to
the remuneration payable to a director who is in the whole-time employment of
the company or to a managing director either by monthly payment or at a
specified percentage of the net profits of the company and partially by one and
partially by the other. The limit of remuneration is also fixed. It should not
exceed five per cent. of the net profits, if there is one director acting as a
managing director. If there are more than one, the remuneration of the managing
directors altogether cannot exceed ten per cent. of the net profits. Under
section 309(4) provision is made for remuneration payable to a director who is
neither in the whole-time employment of the company nor a managing director and
whose remuneration does not include anything by way of a monthly payment. The
limit for such payment is also prescribed. If within the limit prescribed under
section 198 more than one per cent. can be paid to a director under section
309(4), it can be done only with the approval of the Central Government. It
must be borne in mind that the maximum remuneration payable to a managing agent
provided under section 348 is ten per cent. of the net profits. The maximum
remuneration payable to a managing director or a whole-time director is also
fixed at five per cent. when there is one director and at ten per cent. when
there are more than one director under sub-section (3), subject to payment at a
higher percentage with the approval of the Central Government. Under section
198, the overall managerial remuneration is eleven per cent. of the net
profits. It should be noted that but for the proviso in the section the
payments referred to in sections 352, 356, 358, 359 and 360 would come within
the limit stated in section 198. It can be deduced that the scope of
remuneration to directors under the provisions of section 309(4) is
circumscribed by the margin available between eleven per cent., the ceiling
fixed under section 198 and what has been paid to the managing agent or the
managing director or the whole-time director as the case may be. Quite apart
from these considerations, the terms of section 309 are such as to include all
remuneration payable to directors. Therefore, it appears to me that if the
payment under resolution No.1 of exhibit “I” provides for the remuneration to a
director exceeding the permissible limit, it would be obligatory on the part of
the company to comply with the terms of section 309(4) and obtain the approval
of the Central Government. The provisions of sub-section (5A) of section 309
are also significant. It refers to the remuneration received by a director
directly or indirectly. The learned Advocate-General relies upon this provision
in support of his argument that all sums received by the director directly or
indirectly come within the scope of section 309 of the Act. The indirect
remuneration can include the remuneration paid to a director for any office
held by him as in this case the technical adviser. The contention of the
Advocate-General that the provisions of section 309 envelop all remunerations
paid to director in whatever capacity it may be, should be accepted.
Strong
reliance was placed by Sri V.Krishna Murthy on the decision of the Bombay High
Court in Ramaben Thanawala v. Jyoti Ltd. ([1957] 27 Comp. Cas. 105, 109) as
mentioned before. In that case a director who was a partner of the managing
agency firm was appointed as a technical adviser on a salary of Rs.3,000 per
mensem. Two questions arose for consideration. The first question was whether
the amount of Rs.3,000 paid to the defendant as a technical adviser was included
in the limit of 11 per cent. fixed by section 198, viz., the managerial
remuneration. The second question was whether the payment of remuneration to
the above-said director as technical adviser came within the stipulation of
remuneration of 10 per cent. of the net profits of the company as stipulated in
the managing agency agreement. The petitioner’s counsel invites our attention
to the following observations of Chief Justice Chagla ([1957] 27 Comp. Cas.
105, 109) :
“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, the 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 sough 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 the
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.”
In
appreciating these observations, we must have regard to the fact that the
aforesaid decision pertains to the Act as it was before the amendment in 1960.
The principle underlying the restrictions imposed under the Act is that there
must be Governmental control on the apportionment of remuneration to top
management of public companies. This principle has not been disputed. Sections
309 and 348 have also been amended and I have already analysed the provisions
of section 309 taking into consideration the amendments effected under the 1960
Amending Act. The restriction set out in section 314 of the Act against a
director of a company, from holding any office or place of profit does not
apply to the appointment of a director as a technical adviser. Therefore,
except the provisions of section 309(4) read with section 198, there is no
safeguard against any provision being made for payment of remuneration by the
company to a director in regard to his services in any capacity other than that
of a director. Further, it must be noted that the Bombay High Court took the
view that the remuneration of Rs.3,000 per mensem provided for the director who
was a partner of the managing agency firm would be in violation of the
provisions of section 348 which stipulate that the 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. In fact they held that ([1957] 27
Comp. Cas. 105, 111, 112; A.I.R. 1958 Bom. 214) :
“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.”
Further, at
page 217 they observe as follows :
“Therefore, in
our opinion, although the 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 the defendant No.2 to the 10
per cent. mentioned in section 348.”
These
observations indicate that the decision in the case rested more on the
provisions of section 348 of the Act than under the provisions of sections 198
and 309 of the Act. I may respectfully mention that the observations made in
the Bombay decision with reference to section 314 overlook the fact that no
safeguard is provided against the appointment of a director as a technical
adviser under section 314 of the Act. In view of the amendments effected under
the Amending Act 65 of 1960, and the absence of any safeguard in section 314 in
respect of the appointment of a director as technical adviser, it is difficult
to say if the Bombay High Court would have taken the same views as it did prior
to the amendment in 1960. The statement in the first resolution in exhibit “I”
that the remuneration was being fixed by the company in accordance with section
309, sub-section (4), of the Companies Act, 1956, accords with the correct
position in law and there is no reason to take a different stand. The proposed
payment can be made only with the approval of the Central Government as
provided in the said section.
The second
contention of Sri V. Krishna Murthi falls next to be considered. If, by
resolution No.1 in exhibit “I” the company was fixing the remuneration of the
director for the first time, perhaps the contentions of Sri Krishna Murthy
would have been sustainable. It is clear from the correspondence proposed in
this case that under exhibit “C” the respondent had approved the payment of
Rs.1,000 per mensem to V.S. Kudva as director-cum-technical adviser and he was
paid at that rate up to December 28, 1960. The first resolution in exhibit “I”
provides for a variation of the payment of the remuneration payable to the
director V.S. Kudva. In these circumstances the provisions of section 310 of
the Act would come in the way of Sri V. Krishna Murthy’s contention. Section
310 is as follows :
“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.”
The first
resolution in exhibit “I” effects an amendment in the provision relating to the
remuneration of a director and it is not contended before us that the amendment
or the variation now effected under resolution No.1 does not purport to
increase or has the effect of increasing the remuneration that is already being
paid. In view of the application made by the company seeking the approval of
the Central Government under section 310, it is not possible to sustain the
position that the resolution has not the effect of increasing the remuneration
that was being paid to V.S. Kudva. The provisions of section 310 are wide
enough to cover the present case and therefore I cannot accept the contention
of Sri V. Krishna Murthy that it was not necessary to seek the approval of the
Central Government proceeding on the basis that the provisions of section
309(4) apply to the payment of remuneration referred to in the first
resolution.
Next, the
validity of the conditions imposed by the Central Government in exhibit “L”
with reference to the first resolution in exhibit “I” requires to be examined.
The contention of Sri. V. Krishna Murthy in this regard is that before the
conditions referred to in exhibit “L” were imposed, the petitioner was not
given any opportunity to state what he had to say with respect to the variation
proposed by the respondent. From exhibit “K” dated October 9, 1963, it appears
that the application of the petitioner for approval was forwarded to the
advisory commission under section 411 of the Act. In this case it is found that
prior to December 28, 1960, the technical adviser was paid a remuneration of
Rs.1,000 per mensem. No reasons are mentioned in exhibit “L” as to why the
remuneration payable to him from December 28, 1960, to April 1, 1962, should be
reduced to a maximum of Rs.9,000 per annum. This action is not merely not in
conformity with the principles of natural justice but also with the practice of
the respondent that before making any final order on an application for
approval the company was given an opportunity to make its representations to
the Government in regard to the proposed variations. In fact the advisory
commission gave a hearing to the company before passing orders as per exhibit
“C” on January 2, 1961, granting approval only for payment of a sum of Rs.1,000
per mensem while the company sought for approval to pay remuneration at
Rs.2,000 per mensem to the technical adviser. The remuneration that V.S. Kudva
gets as technical adviser is reckoned separately from the remuneration proposed
to be paid to him for his services of a directorial nature. Before the
conditions were imposed, the Central Government did not inform the company what
they proposed to do and the company was unable to place any material before the
Central Government as to why the imposition of that condition was not justified
in the circumstances of the case. No reasons are shown to us as to how this
condition can be justified even having regard to the provisions of section 637A
of the Act.
In the second
paragraph of exhibit “L”, reference is made to the remuneration payable to V.S.
Kudva with effect from April 1, 1962, both for his services as technical
adviser of the company and the additional service of a directorial nature. As
observed already, the two services are of different categories and there is no
reason for making up the remuneration payable in respect of the services
rendered by him as technical adviser and additional services of a directorial
nature. Apart from this, the imposition of the condition referred to in
paragraph 2 of exhibit “L” which covers both the resolutions cannot be
justified, keeping in view the observations of my learned brother Sadashivayya
J. in respect of the scope of section 637A of the Act. Therefore, the
conditions imposed in exhibit “L” relating to the first resolution also cannot
be sustained.
In the light
of the foregoing conclusions, the prayer sought for in the petition, viz., that
the respondent must be prohibited from interfering with the company to pay the
remuneration to V.S. Kudva as fixed by the resolution dated June 28, 1963, cannot
be granted. The directions in exhibit “L” according conditional approval in
respect of the two resolutions in exhibit “I” cannot also be sustained. I think
it proper that the Central Government should reconsider the grant of approval
in respect of both resolutions keeping in view the observations made by this
court regarding the scope of section 637A of the Act.
ORDER OF THE COURT
We are agreed
that the conditions which have been imposed in the second paragraph of exhibit
“L” should be quashed and we accordingly quash the same.
So far as the
second resolution is concerned we direct that the Central Government shall
reconsider as to what conditions, if necessary, should be attached to the
remuneration proposed therein; while doing so, the Central Government will have
regard to what has been stated by us in respect of section 637A of the Act.
Until the
Central Government, after such reconsideration, passes further orders, the
company will be at liberty to pay V.S. Kudva Rs.12,000 per annum towards his remuneration
from December 28, 1960. This is without prejudice to the different views
expressed by us and will be by way of an interim arrangement.
So far as the
first resolution is concerned, no writ or direction will issue, in view of the
differences of opinion as expressed above.
There is no
order as to costs.