Compensation For Loss of Office of Managing or Whole Time Director or Manager

Section 202: Compensation for loss of office of managing or whole-time director or manager. As per the provisions of Section 202 of Companies Act 2013, compensation for loss of office/consideration for retirement from office may be paid to MD/WTD or manager subject to specified limits and except in the specified cases.

(1) A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.

(2) No payment shall be made under sub-section (1) in the following cases, namely:—

(a) where the director resigns from his office as a result of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing or whole-time director, manager, or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;

(b) where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;

(c) where the office of the director is vacated under sub-section (1) of section 167;

(d) where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;

(e) where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; and

(f) where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

(3) Any payment made to a managing or whole-time director or manager in pursuance of sub-section (1) shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than three years, during such period:

Provided that no such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the premiums, if any, contributed by them.

(4) Nothing in this section shall be deemed to prohibit the payment to a managing or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity.

Specifications for Compensation to Director for Loss of Office

Compensation may be paid for the following reasons: –

  • For the loss of office; or
  • As consideration for retirement from office
  • In connection with such loss or retirement

Compensation to whom

  • Managing Director
  • Whole Time Director
  • A director is holding the office of a manager.

Permissible period

  • Unexpired period of Directorship.
  • Three years.

Basis: Average remuneration Earned

  • Period for which Director held the office.
  • Three years immediately preceding the date of the cessation of office.

 Rule 17 of company act

In relation to subsections discussed previously, Rule 17 of the Companies (meeting of boards and its Powers) supplements this provision. No director of a company can reaps monetary benefit via compensation w.r.t event included in sub-section (1) of section 191 unless the company’s member comes across following particulars, and then they authenticate the payment amount in the general meeting.

  • Director name
  • The exact figure of the payable amount
  • illustration of the circumstances in which compensation becomes payable
  • Board meeting Date w.r.t such payment
  • illustration on how the amount is determined
  • Fact or reasons that justify the payment
  • Payment mode
  • Payment source
  • Relevant particulars.

Any expenses bear by the company in the form of compensation to counter office-related loss or as a consideration for retirement to an MD, or whole-time Director of the company shall not surpass the limit mentioned under section 202. No payment shall be made to Directors or MD of the company as a compensation for the office loss or retirement consideration from the office or in connection with such loss or retirement if the following reasons gets satisfied.

Those are as follows: –

  • The company involved in paying issues regarding public deposits or payment of interest thereon;
  • The company is still in the defaulter list of entities engaged in mismanagement w.r.t payment of interest or redemption of debentures. 
  • The company is acting as a defaulter w.r.t liability, towards public financial institutions, banks, and financial institutions.
  • The company has income tax liabilities that still need to be addressed. Plus, expenses like VAT, excise duty, service tax are still waiting in a queue that the company failed to address on time.
  • The company failed to make a payment regarding the statutory dues of employees.
  • The company failed to pay dividends on preference shares or unable to redeemed preference shares on the due date.
  • The company is accountable to pay expenses w.r.t compensation to the MD of the company or Directors for the loss of office.
  • These payments seek approval of general meetings, or else it will bear no value.
  • Any amount reaped by the Director before approval or received in the violation of this section shall not be deemed a company’s transaction. 

If a company’s Director violates the provision through any means, the predetermined fine will be imposed on such activities. The bandwidth of this fine ranges from Rs 25,000 to Rs 10,00,00.

Conclusion

Section 202 is an employee-oriented provision that protects the right of top management to claim for compensation. The unexpected shutdown of the office could lead to loss of remuneration, and that where section 202 comes into the picture. It led the Directors or MD of the company to demand compensation for their remaining tenure. 

Reference

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