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TMI Blog1965 (9) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... g as 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 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 against 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, exhibits "F" dated January 2, 1963, and "G" dated April 26, 1963, reiterated the stand that the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Industry's letter of even number dated 9th October, 1963, I am directed to say that the Central Government has been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sought 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 add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired 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 of 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(i ) 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration 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 a 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, fin 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 acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Tesolution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting 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 years after such commencement or remainder of the term of office 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 a managing director. It allows their remuneration to be paid either by way of a 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. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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): "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 358 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dable 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 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." Section 309, it will be seen, does not make any distinction between the remunera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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 303 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 al sums receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the defendant No. 3 a special resolution was necessary in order to enable him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 view 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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