Appointment & Remuneration of Managerial Personnel (Sec 196 To Sec 205)

Chap 3: Appointment & Remuneration of Managerial Person
Chapter 3:
Appointment & Remuneration of Managerial
Personnel (Sec 196 to sec 205)
Sec 196: Appointment of managing director, whole-time director or manager
M17: There are four directors in Two Squares Ltd. Mr. Rao, being the director in station, has been
authorized to draw and endorse cheque or other negotiable instruments on account of the company and
also to direct registration of transfer of shares and signing the share certificates etc. Whether as per
provisions of the Companies Act, 2013, he will be treated as managing director of the company? Also
narrate the procedure of appointment of a managing director in a company.
Ans:
Provision: [Relevant section 2 & 196 of the Companies Act, 2013 as follows]
Managing Director [Section 2(54)]: Section 2(54) of the Companies Act, 2013 defines a “Managing Director”
as a director who is entrusted with substantial powers of management of the affairs of the company by:
i. virtue of articles of a company or
ii. an agreement with the company or
iii. a resolution passed in its general meeting, or by its Board of Directors, and includes a director
occupying the position of the managing director, by whatever name called (Deemed Managing
Director).
Explanation to Section 2(54) clarifies that substantial powers of the management shall not be deemed to
include the power to do such administrative acts of a routine nature when so authorised by the Board such
as:
i. the power to affix the common seal of the company to any document or
ii. to draw and endorse any cheque on the account of the company in any bank or
iii. to draw and endorse any negotiable instrument or
iv. to sign any certificate of share or
v. To direct registration of transfer of any share.
Explanation & Answer
In the instant case, Mr. Rao, a director in Two Squares Ltd. has been authorized to draw and endorse cheque
or other negotiable instruments on account of the company and also to direct registration of transfer of
shares and sign the share certificates etc.
Hence, according to explanation to section 2(54), Mr. Rao will not be treated as managing director of the
company as he is authorized to do administrative acts of a routine nature.
Procedure of appointment of a managing director [Section 196(4)]
(1) Subject to the provisions of section 197 and Schedule V, a managing director shall be appointed, and
the terms and conditions of such appointment and remuneration payable be approved by the Board of
Directors at a meeting.
(2) The terms and conditions and remuneration approved by Board of Directors as above shall be subject
to the approval of shareholders by a resolution at the next general meeting of the company.
(3) In case such appointment is at variance to the conditions specified in the Schedule V of the Companies
Act, 2013, the appointment shall be approved by the Central Government.
(4) The notice convening Board or general meeting for considering such appointment shall include the
terms and conditions of such appointment, remuneration payable and such other matters including
interest, of a director or directors in such appointments, if any.
(5) E-filing: A return in the prescribed form (Form No. MR.1) along with the prescribed fee shall be filed with
the Registrar within sixty days of such appointment.
Final Answer:
Mr. Rao will not be treated as managing director of the company as he is only authorized to do administrative
acts of a routine nature.
PM: A complaint was received by the Central Government from some shareholders of a public company
that a person had been appointed as the Managing Director of the company without seeking the approval
of the Central Government when such approval was required. State as to what action can be taken by the
Central Government under the Companies Act, 2013. Also examine the validity of the acts of the Managing
© CA Darshan D. Khare
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Director, if the complaint is found true.
Ans:
Appointment of Managing Director:
i. According to section 196(3) of the Companies Act, 2013, a Company shall appoint Managing Director (MD)
or Manager or Whole Time Director (WTD) who is of 21 years to 70 years of age by passing an Ordinary
resolution.
ii. A person who has attained the age of 70 years can be appointed as MD or Manager or WTD by passing
GM-Special Resolution along with an explanatory statement annexed to the notice for such motion shall
indicate the justification for appointing such person. A person who is below 21 years can never be
appointed as MD or Manager or WTD.
iii. Where no special resolution is passed but an ordinary resolution is, the person of ≥ 70 years can be
appointed provided prior approval of Central Government is availed. The person who is below age of 21
years cannot be appointed as MD or WTD or Manager.
iv. The MD or WTD or Manager shall be appointed as per schedule V and sec 197 of companies Act, 2013.
v. The appointment shall be approved by BOD-OR and shall be further approved by company in the 1st GM
held after such BM.
vi. In addition to this approval of CG is required for such appointment if it is not in compliance of Schedule V.
vii. Any appointment made at BM if disapproved at the GM then acts conducted by such director between
such BM & GM shall be deemed to be valid.
Explanation:
i. In the given case the appointment of the MD is made in accordance with sec 196. But it is not clear that
whether the appointment is made in terms of schedule V. If in such case the appointment is not made as
per schedule V then the approval of the CG will be required. Assuming the appointment is not in line with
schedule V in the given case the CG approval will be required. If such CG approval is not obtained, then
the appointment will be considered to be invalid.
ii. If the CG is of the opinion that the appointment of managerial person at Public Company is made without
the approval of CG and without complying to schedule V, CG may adopt the following procedure:
a. Make reference to the CLB (now NCLT) for enquiry and to give decision.
b. CLB shall issue show cause notice.
c. CLB shall make order terminating appointment if it is satisfied that the appointment is made in
contravention to section 196.
iii. Any act done by MD till the approval of the CG will be valid in law even if CG disapproves the appointment
afterwards. In addition to this the acts done by MD till the approval of GM will also be considered as valid.
[196(5)]
iv. Director need to refund the remuneration to company & company cannot waive of the recovery of
remuneration.
Answer:
Thus in the given case the appointment will be considered as invalid if the approval of the CG is not obtained
on non-compliance of Schedule V. Any act done by MD before such approval will be considered as valid in
law.
PM: X was appointed as Managing Director for life by the Articles of Association of a private company
incorporated on 1st June, 2005. The articles also empowered X to appoint a successor. X, by will appointed
G to succeed him after his death. Examine in this connection:
(a) Can G succeed X as Managing Director after the death of X?
(b) Is it possible for the company in general meeting to remove X from his office of directorship during
his life time?
Ans:
Provision: [Relevant section 203, 196 & 169 of the Companies Act, 2013 as follows]
1. Section 196(2) of the Companies Act, 2013 lays down that no company shall appoint or re-appoint any
person as its managing director, whole-time director or manager for a term exceeding five years at a
time. No concession or exception is allowed by the Act to private companies. In addition to this section
166 prohibit the assignment of office of the director
2. Further, section 196(4) of the Companies Act, 2013 provides that a MD or Manager or WTD, shall be
appointed and the terms and conditions of such appointment and remuneration payable be approved
by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next
general meeting of the company and by the Central Government in case such appointment is at variance
to the conditions specified in Schedule V of the Act.
3. Section 169(1) / 203 of the Companies Act, 2013 empowers the company to remove a director, by
ordinary resolution before the expiry of his period of office after giving him an opportunity of being
heard. This section applies to both public and private companies. It applies to all directors except a
director appointed by the Tribunal under section 242 of the Act. The above provision applies to the
Managing Director also as he is a director of the company and the member of its Board of Directors.
Explanation:
In the given case. X is appointed as director for a lifetime in case of private company which is actually
prohibited as per sec 196 as it provides maximum tenure of 5 years only. In addition to this the appointment
of G by X is also not allowed as sec 166 that prohibits the assignment of the office by X.
(Logically In addition to this the MD / WTD can be removed u/s 169 by GM-OR. Thus X can also be removed
u/s 169.)
(ICAI: ED can be removed u/s 203 by BM-OR)
Answer:
Thus in the given case:
a. G cannot succeed X after his death as assignment is prohibited in sec 166.
b. Had Mr. X been validly appointed as the Managing Director, it would have been possible for the company
to remove him before expiry of his term, in accordance with the provision of section 169.
Sec 197: Overall maximum managerial remuneration and managerial

remuneration in case of absence or inadequacy of profits
PM: M/s Star Health Specialities Ltd. owns a Multi-specialty Hospital in Chennai. Dr. Hamilton, a practising
Heart Surgeon, has been appointed by the company as its director and it wants to pay him fee, on case to
case basis, for surgery performed on the patients at the hospital. A question has arisen whether payment
of such fee to him would amount to payment of managerial remuneration to a director subject to any
restriction under the Companies Act, 2013.
Advise the company, which seeks to ensure that the same does not contravene any provision of the
Companies Act, 2013.
Ans:
Provision: [Relevant section 197 of the Companies Act, 2013 as follows]
The remuneration to the BOD including the ED will be maximum upto limit decided in this section. But if the
company wants to provide for lower level of the remuneration then it will be depend on:
a. AOA of the company; or
b. GM-OR; or
c. GM-SR (if AOA requires the same).
The above remuneration decided for the BOD will be inclusive of the remuneration for all services provided
by him in any other capacity.
e.g. if the director gives the secretarial compliance service in addition to the directorship then the
remuneration decided in the above provision will be inclusive of secretarial compliance service.
Exception:
The services rendered shall not be considered as part of managerial remuneration if:
a. Services given are of professional nature and
b. Director giving such services have necessary qualification and experience for giving such services.
(And the same is accepted and recommended by remuneration committee u/s 178).
Explanation:
In the given case the company wants to pay the fees to director Dr. Hamilton for surgeries made by him on
case to case basis. Now in this case Dr. Hamilton is professional and giving professional service. He also
possesses the requisite professional qualification which will be point of consideration by Remuneration
Committee. Thus the fees paid to Mr. Hamilton for making the heart surgeries will not be considered as
managerial remuneration.
Answer:
Thus the company can pay the fees to Mr. Hamilton on professional case to case basis and it will not be
considered as part of managerial remuneration.
M17: Mr. Smart, a technocrat aged 71 years and reputed to be a specialist in reviewing sick companies is
being considered to be appointed as Managing Director of Downhill Industries Limited. The company has
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been incurring losses for the past several years and its “effective capital” is Rs. 500 crores. Referring to the
provisions of the Companies Act, 2013, discuss:
(i) Can Mr. Smart be appointed as Managing Director of the company despite being over 70 years of age?
If so, what is the process to be followed to enable this?
(ii) What is “effective capital” as per Schedule V of the Act?
(iii)What is the maximum permissible remuneration under the Companies Act, 2013?
Ans:
1. Appointment of Managing Director:
a. According to section 196(3) of the Companies Act, 2013, a Company shall appoint Managing
Director (MD) or Manager or Whole Time Director (WTD) who is of 21 years to 70 years of age by
passing an Ordinary resolution.
b. A person who has attained the age of 70 years can be appointed as MD or Manager or WTD by
passing GM-Special Resolution along with an explanatory statement annexed to the notice for such
motion shall indicate the justification for appointing such person. A person who is below 21 years
can never be appointed as MD or Manager or WTD.
c. Where no special resolution is passed but an ordinary resolution is, the person of ≥ 70 years can be
appointed provided prior approval of Central Government is availed.
2. Effective Capital as per Schedule V of the Act: “Effective Capital” means the aggregate of the paid-up
share capital (excluding share application money or advances against shares); amount, if any, for the
time being standing to the credit of share premium account; reserves and surplus (excluding revaluation
reserve); long term loans and deposits repayable after one year (excluding working capital loans, over
drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements)
as reduced by the aggregate of any investments (except in case of investment by an investment company
whose principal business is acquisition of shares, stock, debentures or other securities), accumulated
losses and preliminary expenses not written off.
3. Maximum permissible remuneration as per Section II of Part II of Schedule V: “where in any financial year
during the currency of tenure of a managerial person, a company has no profits or its profits are
inadequate, it may, pay remuneration to the managerial person (shall be approved by Remuneration
Committee) not exceeding 120 lakh plus 0.01% of the effective capital in excess of RS. 250 crores in case
where the effective capital is 250 crores and above”.
Explanation and Answer
No company shall appoint or continue the employment of any person as MD or Manager or WTD who is
below the age of 21 years or has attained the age of 70 years. However, a person who has attained the age
of seventy years may be appointed to such office by passing of a special resolution in which case the
explanatory statement annexed to the notice for such motion shall indicate the justification for appointing
such person. The Company may also consider passing a General Meeting-Ordinary Resolution for such
appointment provided a prior approval of Central Government.
Hence, Downhill Industries Limited can appoint Mr. Smart aged 71 years as Managing Director of
Downhill Industries Limited by passing Special resolution and justifying his appointment in the explanatory
statement annexed to the notice for such motion. In case of ordinary resolution is passed, prior approval of
Central Government is required.
As per Section II of Part II of Schedule V, where in any financial year during the currency of tenure of
a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the
managerial person (shall be approved by Remuneration Committee) not exceeding 120 lakh plus 0.01% of
the effective capital in excess of RS. 250 crores in case where the effective capital is 250 crores and above”.
Hence, the maximum permissible remuneration shall be 120 lakh plus 0.01% of 250 crore [500 crore - 250
crore]: RS. 120 Lakh + 2.5 lakh are RS. 122.5 Lakh.
[Assumption: Mr. Smart reputed to be a specialist in reviewing sick companies is being considered to be
appointed as Managing Director of Downhill Industries Limited and the company has been incurring losses
for the past several years, it may also be assumed that Downhill Industries Limited is a sick company. So, in
that case, the company may pay remuneration upto two times the amount permissible under section II
(provided under section III of part II of schedule V)].
Increase in the sitting fees of the company.
PM: The Article of Association of a listed company has fixed payment of sitting fee for each Meeting of
Directors subject to maximum of Rs. 30,000. In view of increased responsibilities of independent directors
of listed companies, the company proposes to increase the sitting fee to Rs. 45,000 per meeting. Advise
the company about the requirement under Companies Act, 2013 to give effect to the proposal.
Ans:
The sitting fees can be paid to the ED & NED of the company for:
a. Board meeting; or / &
b. For committee meetings; or / &
c. For any other meeting decided by BOD.
The fees for the different class of companies will be different.
The limit of the fees and the fees for the independent director will be as follows.
1. The maximum fees that can be paid to any director can be Rs. 1 lac per Board Meeting / per committee
meeting.
2. However, the BOD can decide fees lower than above limit by BOD-OR.
3. The fees of ID and 1-woman director shall be more than or equal to the fees paid to other NED.
Explanation:
In the given case company used to pay the sitting fees of Rs. 30,000. The company now wants to increase the
sitting fees to Rs. 45000 now because of the increased workload and responsibility. As the proposed increase
within the limit of max sitting fees of Rs. 1 lakh the company can increase the same by passing BOD-OR.
Answer:
Thus the company can increase the sitting fees to Rs. 45,000 by BOD-OR.
The payment of sitting fees
PM: A company wants to include the following clause in its Articles of Association:
“Each director shall be entitled to be paid out of the funds of the company for attending meetings of the
Board or a Committee thereof including adjourned meeting such sum as sitting fees as shall be determined
from time to time by the Directors but not exceeding a sum of Rs. 30,000 for each such meeting to be
attended by the Director.”
You are required to advise the company as to the validity of such a clause and the correct legal position
under the provisions of the Companies Act, 2013.
Ans:
1. The maximum fees that can be paid to any director can be Rs. 1 lakh per Board Meeting / per committee
meeting.
Explanation:
In the given case the company wants to pay the sitting fees for the attending the BM i.e. Rs. 30,000. The
amount of the fees stated is well within the maximum limit of the sitting fees as per law i.e. Rs. 1 lac per BM
per director. The sitting fee is same for original as well as adjourned meeting.
Answer:
Thus in the given case the clause inserted by AOA of the company of sitting fees of Rs. 30,000 is valid in law.
Suggestion:
The sitting fees can be paid in case of loss also.
Guarantee Commission paid to director whether Managerial Remuneration?
PM: Directors of ABC Limited have been given the following remuneration --
Guarantee Commission has been paid to them for having guaranteed the term loans obtained from a
financial institution.
Examine the validity of the above payment in the light of the provisions of the Companies Act, 2013.
Ans:
Case Law: [Relevant section 197 of the Companies Act, 2013 as follows]
It was held in Suessen Textile Bearings Ltd v. Union of India [(1984) 55 (Comp. Cases 492, 496, 497)] that
the guarantee commission paid to directors for giving surety against loans or credit facilities taken by the
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company from financial institution is not a remuneration. Therefore, GM - Special resolution is not necessary.
The director giving guarantee does not render manual, clerical, technical, supervisory or administrative
service. He gets the commission for the risk which he bears and that has nothing to do with his directorship.
Guarantee commission given to a director will be in excess of his remuneration for the risk he has took for
the Company.
Explanation:
In the given case the guarantee commission is paid to the director of the company for giving the guarantee
for availing term loan by company from the financial institution. The commission is valid in law as per above
litigation. The commission paid in the given case is for the risk taken by the director for payment of all debt
in case of non-payment by the company. Which ultimately helped the company for availing the loan on the
basis of the same.
Answer:
Thus the guarantee commission paid in the given case is valid in law.
Appointment of person with the age of 70 years, payment of commission of 4%, Remuneration in case
of loss of Rs. 40,000 per annum whether permissible?
PM: Advise M/s Super Specialities Ltd. in respect of the following proposals under consideration of its
Board of directors:
(i) Appointment of Managing Director who is more than 70 years of age;
(ii) Payment of commission of 4% of the net profits per annum to the directors of the company;
(iii) Payment of remuneration of Rs. 40,000 per month to the whole time director of the company
running in loss and having an effective capital of Rs. 95.00 lacs.
Ans:
1. The company shall appoint MD or manager or WTD who is between the ages of 21-70 years by ordinary
resolution at general meeting.
2. The person who has attained age of 70 years can be appointed as MD or WTD or Manager by passing GM
special resolution Proper justification for the appointment of person who has attained age off 70 years
shall be given in explanatory statement of GM.
3. The person who is below age of 21 years cannot be appointed as MD or WTD or Manager.
The remuneration of the MD / WTD / Manager (i.e. ED) will be as follows:
1. 5% of Net Profit if there is only one ED; or
2. 10% of net profit to all ED if there are 2 or more ED.
The remuneration to NED will be as follows:
a. If company have appointed ED: then 1% of Net Profit to all NED; or
b. If company not has appointed ED: then 3% of Net profit to all NED.
The company shall pay remuneration in case of loss as per schedule V. The remuneration under schedule V
will be based on long term liquidity i.e. effective capital as follows.
Effective Capital (EC) Opt 1
EC < 5 cr (-ve or +ve) 60 Lakh
5 cr< EC < 100 cr 84 Lakh
100 cr< EC < 250 cr 120 Lakh
EC > 250 cr 120 Lakh + 0.01% of EC above 250 cr.
For Remuneration in Option 1, required GM-OR, remuneration committee approval and the company has
not committed any default in payment of dues to any bank or public financial institution or non-convertible
debenture holders or any other secured creditors. However, in case the company has made such a default,
this condition shall be deemed to be complied with if the company of obtains the prior approval of the bank
or public financial institution concerned or the non-convertible debenture holders or other secured creditor,
as the case may be, before obtaining the approval in the General Meeting.
The remuneration in case of, above option 1 can be given unlimited by Special resolution at GM.
Explanation:
In the given case the company want to appoint and pay following managerial remuneration.
(i) In the given case company wants to appoint MD who is of age more than 70 years. The company can
appoint such MD if company passed GM-SR for the same u/s 196 or GM-OR and taking CG approval after
such appointment as stated above
(ii) As per the above provisions the company can pay max 5% of NP as commission or remuneration to
MD/WTD/Manager and 3% of NP to all NED in the absence of the ED or 1% of NP to all NED in the
presence of ED. In the given situation it is not stated the director is ED or NED. Assuming the director is
NED the commission of 4% of the net profit is prohibited to NED. But the same commission in excess of
the limit specified shall be approved by company through GM-OR.
(iii) In the given case the company is suffering through loss thus the remuneration will be based on effective
capital of the company which is Rs. 95 lacs. In such case as effective capital is less than Rs. 5 cr the
remuneration can be paid max Rs. 60 lacs per annum per director. Then the monthly remuneration of
Rs. 40,000 is well within the limit as calculated above. However the payment of such remuneration shall
be possible only if the following conditions are satisfied:
- the payment of remuneration is approved by resolution passed by the board and in the case of a
company covered sub-section (1) of section 178 also by the Nomination and Remuneration
Committee.
- The company has not committed any default in payment of dues to any bank or public financial
institution or non-convertible debenture holders or any other secured creditors. However, in case
the company has made such a default, this condition shall be deemed to be complied with if the
company of obtains the prior approval of the bank or public financial institution concerned or the
non-convertible debenture holders or other secured creditor, as the case may be, before obtaining
the approval in the General Meeting.
- A special resolution has been passed at the General Meeting of the company authorising the
payment of remuneration. Such special resolution shall remain valid for a period not exceeding 3
years.
- Statement shall be given to the shareholders along with the notice calling the General Meeting.
Answer:
Thus:
(i) Company can appoint a 70-year-old person as MD after passing GM-SR.
(ii) Company cannot pay 4% of NP as commission unless it takes GM-OR.
(iii) Company can pay the managerial remuneration in case of loss upto Rs. 40,000 per month as per
Schedule V compliance.
Payment of remuneration in case of loss.

PM: X, a Director of MJV Ltd., was appointed on 1st April, 2011, one of the terms of appointment was that
in the absence of adequacy of profits or if the company had no profits in a particular year, he will be paid
remuneration in accordance with Schedule V. For the financial year ended 31st March, 2014, the company
suffered heavy losses. The company was not in a position to pay any remuneration but he was paid Rs. 50
lacs for the year, as paid to other directors. The effective capital of the company is Rs. 150 crores. Referring
to the provisions of Companies Act, 2013, as contained in Schedule V, examine the validity of the above
payment of remuneration to X.
Ans:
Provision: [Relevant section 197 and Schedule V of the Companies Act, 2013 as follows]
2. 10% of net profit to all ED if there are 2 or more ED.
a. If company has appointed ED: then 1% of Net Profit to all NED; or
b. If company has not appointed ED: then 3% of Net profit to all NED.
will be based on long term liquidity i.e. effective capital as follows. The remuneration in case of loss can only
be paid to ED.
EC < 5 cr (-ve or +ve) 60 Lakhs
5 cr< EC < 100 cr 84 Lakhs
100 cr< EC < 250 cr 120 Lakhs
EC > 250 cr 120 Lakhs + 0.01% of EC above 250 cr.
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Explanation:
In the given case the company appointed an ED. The company paid him the remuneration of Rs. 50 lakhs in
case of loss. But as per above provisions of the schedule V the company need to have the effective capital of
more than Rs 100 cr. The company possess the effective capital of Rs. 150 thus the payment of the
remuneration is well within the law.
Answer:
Thus the payment of the remuneration of Rs. 50 lakhs in the above case is valid in the law.
Suggestion:
Provided that company should have took the approval of the remuneration committee and the condition
regarding the same in option 1 stated above is complied.
Remuneration to ED in case of profit or loss.

M03: M/s Supreme Technologies Limited proposes to appoint Mr. E and Mr. F as whole–time directors for
a period of three years with effect from 1st June, 2018. The company proposes to pay a consolidated salary
of Rs. 80,000 per month to each of them.
Mr. D, the MD of the company, has been appointed for a period of five years with effect from 1st January,
2016 on a remuneration payable in the form of commission at the rate of five percent of net profits subject
to a minimum remuneration of Rs. 80,000 per month.
The effective capital of the company at the end of the financial year ending 31 st March, 2018 is Rs. 4.5
crores and it has been increased to Rs. 5.5 crores on 1st April, 2018 by way of right issue of equity shares.
The company failed to pay the dues of a bank on 1st January, 2018 and the default is still continuing.
The company seeks your advice on the steps to be taken to comply with the requirements of Section 196
read with Schedule V to the Companies Act, 2013 with regard to the proposed appointment of Mr. E and
Mr. F as whole time directors. Advise explaining the relevant provisions.
Ans:
2. 10% of net profit to all ED if there is 2 or more ED.
be paid to ED.
100 cr< EC < 250 cr 120 Lakhs
Explanation:
In the given case the company appointed to executive director’s E and F with proposed salary of Rs. 80,000
per month which will lead to yearly salary of Rs. 9.6 lacs per director. The company have effective capital of
Rs. 5.5 cr. According to the same company can pay salary of Rs. 84 lacs to one ED per year. But the company
has defaulted in the repayment of the deposit for more than 30 days in last FY i.e. from 1 Jan 2003 to 31
March 2003. In such situation assuming that the company is suffering loss the company cannot pay the
remuneration of Rs. 80,000 to each ED i.e. Mr E and Mr F as the company is defaulted in compliance of the
condition of the option 1 for payment of the remuneration in case of loss. In the given case net profit is not
given so assuming company is in loss, remuneration of Rs. 80,000 per director per month is valid in law.
Answer: The appointment of Mr. E and Mr F can be made upto maximum remuneration of 10% (2 or more
directors) of net profit. But in case of loss they will not be eligible to Rs. 80,000 remunerations to each.
Sitting fees increase / Commission to NED / Guarantee commission.

N03: Examine whether the payment of following remuneration to Non–executive Directors (Directors who
are neither in the whole–time employment of the company nor Managing Director) is in accordance with
the provisions of the Companies Act, 2013:
(a) Sitting fee payable to Directors is increased from Rs. 3,000 to Rs. 6,000 per meeting by amending the
Articles of Association.
(b) Commission payable to Non–executive Directors is calculated on the basis of book profits arrived at
after providing for depreciation as per straight line method.
(c) Guarantee commission has been paid to one of the Non–executive Directors for having guaranteed and
term loans obtained for a Financial Institution.
Ans:
1. The maximum fees that can be paid to any director can be Rs. 1 lac per Board Meeting / per
committee meeting.
Case Law:
company from financial institution is not a remuneration and therefore, GM - Special resolution is not
necessary. The director giving guarantee does not render manual, clerical, technical, supervisory or
administrative service. He gets the commission for the risk which he bears and that has nothing to do with
his directorship.
Explanation & Answer:
In the first case, company used to pay the sitting fees of Rs. 3000. The company now wants to increase the
sitting fees to Rs. 6000 now. As the proposed increase within the limit of max sitting fees of Rs. 1 lakh the
company can increase the same by passing BOD-OR.
In the second case, as per the above provisions the company can pay max 3% of NP to all NED in the absence
of the ED or 1% of NP to all NED in the presence of ED. In the given situation it is stated the director is NED.
Therefore, commission in excess of the limit specified shall be approved by company through GM-OR.
However, the book profits should be arrived at after providing for depreciation in accordance with section
123 & in the present case it does not seems to be a violation of the same & hence commission so calculated
can be paid.
In the third case, the guarantee commission is paid to the director of the company for giving the guarantee
in case of nonpayment by the company. Which ultimately helped the company for availing the loan on the
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basis of the same.
Payment of excess remuneration to ED and refund of the same
N04:Mr. Weldon was appointed as a Director of Esquire Engineering Ltd. with effect from 1 st October,
2002. Since the Company, namely, Esquire Engineering Ltd. wanted to take full advantage of the wisdom
and expertise of Mr. Weldon, it offered him remuneration payable on monthly basis and subject to
approval of GM-SR for approval for payment of such remuneration. Anticipating the approval of the
GM-SR, Esquire Engineering Ltd. started paying such remuneration from the date of appointment and
continued to do so till 31st March, 2003. The members by special resolution did not fully approve the
remuneration proposed by the company and restricted the same to a lower amount. On scrutiny of the
accounts, it was established that the company, till 31st March, 2003, has paid to Mr. Weldon a total sum
of Rs. 1.20 Lacs in excess of the remuneration sanctioned by the special resolution. You are required to:
(i) State with reference to the provisions of the Companies Act, 2013 in respect of recovery and waiver
of recovery of the excess remuneration so paid, whether Mr. Weldon can keep the excess
remuneration so received and under what conditions.
(ii) Draft a resolution for waiver of recovery of the excess remuneration so paid by the Company.
Ans:
Provision: [Relevant section 197(9) & 197(10) of the Companies Act, 2013 as follows]
For the purpose of the excess remuneration the General Meeting-Special Resolution is required as stated in
the provisions.
If in case the director receives the excess remuneration without the approval of General Meeting-Special
Resolution then such director will be liable to re-fund such remuneration to the company, within two years
or such lesser period as may be allowed by the company, and until such sum is refunded, hold such sum in
the trust of the company.
The company cannot waive off recovery of the excess remuneration refunded by the director.
But if GM-SR approves the director to keep the excess remuneration and not to refund the same to the
company in such case the director need not refund the remuneration and the company can waive of the
recovery of the same.
(a) Mr. Weldon was appointed as a non-executive director. He was paid monthly remuneration awaiting the
approval of GM-SR. However, the remuneration sanctioned by the members through special resolution
was lesser than the remuneration actually paid to Mr. Weldon. Therefore, Mr. Weldon cannot keep
remuneration drawn by him which is in excess of the remuneration sanctioned by the GM-SR,
Accordingly, he shall refund to the company Rs. 120000. Until such refund is made, he shall hold it in
trust for the company. Further, the company shall not waive the recovery of any sum refundable to it
under sub-section (9) unless approved by the company by special resolution within 2 years from the date
the sum becomes refundable and then Mr. Weldon shall have a right to retain the excess remuneration
drawn by him.
(b) The required resolution is given as under:
Subject - Waiver of recovery of excess remuneration
Passing Authority - General Meeting
Nature of the Resolution - Special Resolution
"RESOLVED that pursuant to the provisions of section 197 and other applicable provisions, if any, consent of
the company be and is hereby given for waiving the recovery of an amount of Rs. 120000 paid to Mr. Weldon,
the director of the company, during the period of 1stOctober, 2002 to 31stMarch, and 2003. Being in excess
of the remuneration sanctioned by the GM-SR vide letter no .......... dated.........
RESOLVED FURTHER THAT the company secretary be and is hereby authorised to take the necessary steps in
this regard. "
Remuneration to ED in case of loss

M06: EF Chemicals Ltd. proposes to appoint one whole–time technical Director on a consolidated monthly
remuneration of Rs. 30,000 and one whole–time Marketing Director on a consolidated salary of Rs. 25,000
per month for a period for three years with effect from 1st September, 2014. The company has got a
Managing Director and he is getting Rs. 40,000 per month. Explain the requirements under the Companies
Act, 2013 to be complied with by the company in connection with the proposed appointment of whole
time Directors taking into account the following data collected from the Balance Sheet of the company as
on 31st March, 2014.
Rs.
Paid–up Share Capital 80,00,000
Debentures redeemable after three years 90,00,000
Investments 20,00,000
Accumulated Loss 70,00,000
Preliminary Expenses not written off 15,00,000
Ans:
Provision:
be paid to ED.
The remuneration in case of above option can be paid only on the compliance of the following conditions.
100 cr< EC < 250 cr 120 Lakhs
this condition shall be deemed to be complied with if the company obtains the prior approval of the bank or
public financial institution concerned or the non-convertible debenture holders or other secured creditor, as
the case may be, before obtaining the approval in the GM. The remuneration in case of, above option 1 can
be given unlimited by Special resolution at GM.
(A) The calculation of the effective capital will be as follows.
Effective Capital: Schedule V Explanation.
Add:
1. Aggregate of the paid-up share capital (excluding share application money or advances against
shares)
2. share premium account
3. reserves and surplus (excluding revaluation reserve)
4. long-term loans and deposits repayable after one year (excluding working capital loans, over drafts,
interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements)
Less:
1. aggregate of any investments (except in case of investment by an investment company whose
principal business is acquisition of shares, stock, debentures or other securities)
2. accumulated losses
3. Preliminary expenses not written off.
The effective capital shall be calculated as on the last day of the financial year preceding the final year in
which the appointment of the managerial person is made.
Explanation:
The effective capital of EF Chemicals Limited shall be calculated as on 31.03.2014. Accordingly, the effective
capital of EF Chemicals Limited is Rs. 80,00,000 + 90,00,000 - 20,00,000 - 70,00,000 - 15,00,000 =
Rs.65,00,000.
As the effective capital in the given case is less than Rs. 5 cr. thus the remuneration to MD can be paid up to
Rs. 60 lacs. Therefore, it is permissible to pay monthly remuneration of Rs. 30,000 to the whole time technical
director and monthly remuneration of Rs. 25,000 to whole-time marketing director, as well as monthly
remuneration of Rs. 40,000 to the already appointed managing director.
The payment of remuneration as per Schedule V is possible only if the company has not made any default in
repayment of any of its debts(including public deposits) or debentures or interest payable thereon for a
continuous period of 30 days in the preceding financial year & company have obtained the approval of the
remuneration committee in such case.
Answer:
The company EF Chemicals Ltd can pay the remuneration of Rs. 30,000 monthly to WTD and Rs. 25,000 to
WTD of marketing & Rs. 40,000 monthly remunerations to MD on compliance of conditions of schedule V.
3.11
Refund of Excess Remuneration

N06: Mr. X appointed as the Managing Director of XYZ Ltd. w.e.f. 1st October, 2006. The company made an
application to the Central Government for approval, as the remuneration proposed to be paid to Mr. X
was beyond the limits laid down in schedule V to the Companies Act, 2013. The company started paying
remuneration from the date of appointment and continued to do so till 31st March, 2007. The Central
Government did not approve the remuneration as proposed by the company and restricted the same to a
lower amount. On scrutiny of the accounts, it was noticed that the company till 31st March, 2007 has paid
to Mr. X, a total sum of Rs. 1.20 lakhs in excess of the remuneration sanctioned by the Central Government.
Explain with reference to the provisions of the Act whether Mr. X can keep the excess remuneration. Draft
the resolution for sanctioning the excess remuneration.
Ans:
Provision: [Relevant section 197(9) & 197(10) of the Companies Act, 2013 as follows]
For the purpose of the excess remuneration the General Meeting-Special Resolution is required as stated in
the provisions.
If in case the director receives the excess remuneration without the approval of General Meeting-Special
Resolution then such director will be liable to re-fund such remuneration to the company, within two years
or such lesser period as may be allowed by the company, and until such sum is refunded, hold such sum in
the trust of the company.
The company cannot waive off recovery of the excess remuneration refunded by the director.
But if GM-SR approves the director to keep the excess remuneration and not to refund the same to the
company in such case the director need not refund the remuneration and the company can waive of the
recovery of the same
Explanation:
Mr. X was appointed as a Managing Director. He was paid monthly remuneration awaiting the approval of
GM-SR. However, the remuneration sanctioned by the members through special resolution was lesser than
the remuneration actually paid to Mr. X. Therefore, Mr. X cannot keep remuneration drawn by him which is
in excess of the remuneration sanctioned by the GM-SR. Accordingly, he shall refund to the company Rs.
120000. Until such refund is made, he shall hold it in trust for the company. Further, the company shall not
waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by
special resolution within 2 years from the date the sum becomes refundable and then Mr. X shall have a right
to retain the excess remuneration drawn by him
Answer:
Thus Mr X cannot keep such excess remuneration of Rs. 1.20 lacs. He shall hold it in trust of the company
and refund the same to company.
The required resolution is given as under:
Subject - Waiver of recovery of excess remuneration
Passing Authority - General Meeting
Nature of the Resolution - Special Resolution
"RESOLVED that pursuant to the provisions of section 197 and other applicable provisions, if any, consent of
the company be and is hereby given for waiving the recovery of an amount of Rs. 120000 paid to Mr. X, the
Managing Director of the company, during the period of 1stOctober, 2006 to 31stMarch, 2007 being in excess
of the remuneration sanctioned by the GM-SR vide letter no .......... dated.........
RESOLVED FURTHER THAT the company secretary be and is hereby authorised to take the necessary steps in
this regard. "
Increase in sitting fees

N08: The board of directors of XYZ Limited having paid–up share capital of Rs. 6 crores and free reserves
of Rs.3 crores proposes to increase the sitting fee which is at present Rs.5,000. They seek your advice about
the maximum amount upto which the sitting fee may be increased without seeking the approval of the
members. Advise explaining the relevant provisions of the Companies Act, 2013.
Ans:
meeting.
The paid up capital and the reserves are irrelevant for the purpose of increasing the sitting fees.
Answer:
Thus the company XYZ Ltd. can increase the sitting fees from Rs. 5000 to Rs. 1 lacs as per given provision
without seeking the approval of the members.
M10:Non-executive Directors of ABC Limited, who are neither in the whole time employment of the
company nor Managing Directors have been given the following remuneration -
(a) Guarantee Commission has been paid to them for having guaranteed the term loans obtained
from a financial institution.
(b) Examine the validity of the payments in the light of the provisions of the Companies Act, 2013.
Ans :(a) Guarantee Commission to NED:
company from financial institution is not a remuneration and therefore, GM - Special resolution is not
necessary. The director giving guarantee does not render manual, clerical, technical, supervisory or
administrative service. He gets the commission for the risk which he bears and that has nothing to do with
his directorship.
Explanation:
In the given case the guarantee commission is paid to the director of the company for giving the guarantee
in case of non-payment by the company. Which ultimately helped the company for availing the loan on the
basis of the same.
Answer:
Thus the guarantee commission paid in the given case to non-executive director by ABC Ltd is valid in law.
N12: Neemuch Pharma Limited having an "Effective Capital" of Rs 4 crore as on 31st March, 2012 raised Rs.
2 crore by way of issue of right shares in May, 2012 during the current Financial Year 2012-2013. The
company is managed by Mr. Chandrasekhar, the Managing Director, and he is getting a minimum
remuneration of Rs 80,000 per month.
The company proposes to appoint two whole-time Directors in July, 2012 on a consolidated minimum
salary of Rs 60,000 per month to each of them.
What is the "Effective Capital" for the purpose of determining the minimum remuneration payable to the
proposed Whole-time Directors?
State the requirements to be complied with under Schedule V to the Companies Act, 2013 to give effect to
the proposed appointments.
Ans:
Effective Capital: Effective Capital means the aggregate of the paid-up share capital (excluding share
application money or advances against shares); amount, if any, for the time being standing to the credit of
share premium account, reserves and surplus, long term loans and deposits repayable after one year
(excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and
other short term arrangements) as reduced by the aggregate of any investments (except in the case of
investment by an investment company whose principal business is acquisition of shares, stock debentures or
other securities), accumulated losses and preliminary expenses not written off.
Appointment of whole-time directors: Neemuch Pharma Limited proposes to appoint two whole-time
Directors in July, 2012 on a consolidated minimum salary of Rs 60,000 per month to each of them. The
effective capital shall be calculated as on the last date of the financial year preceding the financial year in
3.13
which appointment is made. In this case, the effective capital on 31st March, 2012 (i.e. the last date of the
preceding financial year) is Rs 4 crores. The right issue of shares in May, 2012 is not relevant here for the
purpose of ascertaining effective capital.
If the effective capital is Rs. 1 crore or more but less than Rs 5 crores, remuneration payable shall not exceed
Rs 60 Lakhs p.a. per director. This ceiling shall apply for each Managing Director and/or whole-time director.
In the given case, the proposed minimum remuneration for each of the whole time directors is Rs. 60,000
p.m. and also Mr. Chandrasekhar, the existing Managing Director is only Rs. 80,000 p.m. i.e. within the ceiling
laid down above.
Hence the following steps are to be taken to comply with the requirements under section 197 read with
Schedule V.
(i) If there is no remuneration committee, remuneration committee must be formed consisting of at least
3 non-executive independent directors including nominee directors, if any. The remuneration payable
to two whole time Directors must be approved by a resolution passed by the remuneration committee.
(ii) Board meeting must be convened to appoint two whole time Directors as additional directors, if they
are not directors.
(iii) It shall be further approved by Company in the 1st GM held after such BM on a consolidated salary of
Rs 60,000 p.m.
(iv) In addition to this approval of CG is required for such appointment if it is not in compliance of Schedule
V.
(v) A return in the prescribed form must be filed with Registrar of Companies within 60 days from the date
of such appointment.
RTP15: The Board of Directors of a listed company have decided to fix payment of sitting fee for each
Meeting of Directors subject to maximum of Rs. 30,000. In view of increased responsibilities of women
directors of the company, the company proposes to increase the sitting fee to Rs. 45,000 per meeting.
State whether the company can accept such a proposal to increase the sitting fees for women directors
keeping in view the provisions of the Companies Act, 2013.
Ans:
d. Board meeting; or / &
e. For committee meetings; or / &
f. For any other meeting decided by BOD.
meeting.
Explanation:
1. The Board of Directors of a listed company have decided to fix payment of sitting fee for each Meeting
of Directors subject to maximum of Rs. 30,000. In view of increased responsibilities of women directors
of the company, the company proposes to increase the sitting fee to Rs. 45,000 per meeting.
2. Since the sitting fees to women Directors is at par with that of other Non-Executive Directors and is only
proposed to be increased, the Company can accept the proposal made to increase the sitting fees for
women directors.
Answer:
Thus the company can increase the sitting fees to Rs. 45,000 by BOD-OR.
RTP 16: Advise Super Specialties Ltd. in respect of the following proposals under consideration of its
Board of Directors:
i. Appointment of Managing Director who is more than 70 years of age;
ii. Payment of commission of 4% of the net profits per annum to the directors of the company;
iii. Payment of remuneration of Rs 40,000 per month to the whole time director of the company running
in loss and having an effective capital of Rs 95 lacs.
Ans:
i. Under the proviso to section 196 (3) of the Companies Act, 2013, a person who has attained the age of
seventy years may be employed as managing director, whole-time director or manager by the approval
of the members by a special resolution passed by the company in the general meeting and the explanatory
statement annexed to the notice for such motion shall indicate the justification for appointing such
person.
ii. Under section 197 (1) the limit of total managerial remuneration payable by a public company, to its
directors, including managing director and whole-time director, and its manager in respect of any financial
year shall not exceed eleven per cent of the net profits of that company for that financial year computed
in the manner laid down in section 198. Further, the third proviso to section 197 (1) provides that except
with the approval of the company in general meeting, the remuneration payable to directors who are
neither managing directors or whole-time directors shall not exceed one percent. of the net profits of the
company, if there is a managing or whole-time director or manager; or three per cent of the net profits in
any other case. Therefore, in the given case, the commission of 4% is beyond the limit specified, and the
same should be approved by the members by ordinary resolution.
iii. If, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay
to its directors, including managing or whole time director or manager, by way of remuneration any sum
exclusive of any fees payable to directors except in accordance with the provisions of Schedule V. Only
Executive Directors are eligible for remuneration, Non-Executive Directors will not receive remuneration
in case of no profit or its profits are inadequate. Therefore, in the given case, Payment of remuneration
of Rs. 40,000 per month to the whole time director of the company running in loss is eligible.
RTP14. 16: M/s Shivalik Ltd. owns a Multi-specialty Hospital in Kochi. Dr. Harshit, a practicing Heart
Surgeon, has been appointed by the company as its non-executive director and it wants to pay him fee, on
case to case basis, for surgery performed on the patients at the hospital. A question has arisen whether
payment of such fee to him would amount to payment of managerial remuneration to a director subject
to any restriction under the Companies Act, 2013. Advise the company, which seeks to ensure that the
same does not contravene any provision of the Companies Act, 2013.
Ans:
Under the proviso to sub-section (4) of section 197 of the Companies Act, 2013, in case–
(i) The services rendered are of a professional nature; and
(ii) In the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-
section (1) of section 178, or the Board of Directors in other cases, the director possesses the requisite
qualification for the practice of the profession.
In the given case the company wants to pay the fees to director Dr. Harshit for surgeries made by him on
case to case basis. Now in this case Dr. Harshit is professional and giving professional service. He also
possesses the requisite professional qualification which will be point of consideration by Remuneration
Committee. Thus the fees paid to Mr. Harshit for making the heart surgeries will not be considered as
managerial remuneration.
M16: International Technologies Limited, a listed company, being managed by a Managing Director
proposes to pay the following managerial remuneration:
(i) Commission at the rate of five percent of the net profits to its Managing Director, Mr. Kamal.
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of Rs.
50,000 and also commission at the rate of one percent of net profits of the company subject to the
condition that overall remuneration payable to ordinary directors including monthly remuneration
payable to each of them shall not exceed two percent of the net profits of the company. The
commission is to be distributed equally among all the directors.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a director, for
professional services rendered as software engineer, whenever such services are utilized.
You are required to examine with reference to the provisions of the Companies Act, 2013 the validity of
the above proposals.
Ans:
International Technologies Limited, a listed company, being managed by a Managing Director proposes to
3.15
pay the following managerial remuneration:
i. Commission at the rate of 5% of the net profits to its Managing Director, Mr. Kamal: Part (i) of the
second proviso to section 197(1), Provides that except with the approval of the company in general
meeting by special resolution, the remuneration payable to any one managing director; or whole
time director or manager shall not exceed 5 % of the net profits of the company and if there is more
than one such director then remuneration shall not exceed 10 % of the net profits to all such
directors and manager taken together.
In the present case, since the International Technologies Limited is being managed by a Managing Director,
the commission at the rate of 5% of the net profit to Mr. Kamal, the Managing Director is allowed
and no approval of company in general meeting is required.
ii. The directors other than the Managing Director are proposed to be paid monthly remuneration of
Rs. 50,000 and also commission at the rate of 1 % of net profits of the company subject to the
condition that overall remuneration payable to ordinary directors including monthly remuneration
payable to each of them shall not exceed 2 % of the net profits of the company: Part (ii) of the second
proviso to section 197(1) provides that except with the approval of the company in general meeting,
the remuneration payable to directors who are neither managing directors nor whole time directors
shall not exceed-
(A) 1% of the net profits of the company, if there is a managing or whole time director or manager;
(B) 3% of the net profits in any other case.
In the present case, the maximum remuneration allowed for directors other than managing or whole
time director is 1% of the net profits of the company because the company is having a managing
director also. Hence, if the company wants to fix their remuneration at not more than 2% of the net
profits of the company, the approval of the company in general meeting by special resolution is
required.
iii. The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a director, for
professional services rendered as software engineer, whenever such services are utilized:
(1) According to section 197(4), the remuneration payable to the directors of a company, including any
managing or whole-time director or manager, shall be determined, in accordance with and subject
to the provisions of this section, either
i. by the articles of the company, or
ii. by a ordinary resolution of GM or,
iii. if the articles so require, by a special resolution, passed by the company in general meeting,
(2) The remuneration payable to a director determined aforesaid shall be inclusive of the remuneration
payable to him for the services rendered by him in any other capacity.
(3) Any remuneration for services rendered by any such director in other capacity shall not be so
included if—
(a) The services rendered are of a professional nature; and
(b) In the opinion of the Nomination and Remuneration Committee, if the company is covered under
sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses
the requisite qualification for the practice of the profession.
Hence, in the present case, the additional remuneration to Mr. Bhatt, a director for professional services
rendered as software engineer will not be included in the maximum managerial remuneration and is allowed
but opinion of Nomination and Remuneration Committee is to be obtained.
Also, the International Technologies Limited (a listed company) shall disclose in the Board’s report, the ratio
of the remuneration of each director to the median employee’s remuneration and such other details as may
be prescribed under the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014.
N17: Venus Limited is a widely held, listed company having two executive directors who are technocrats.
The company has suffered losses in the last four years. The company wants to enhance the remuneration
of the executive directors to Rs. 6, 00,000 per month from existing remuneration of Rs. 4, 00,000. The
audited balance sheet as on 31st March 2016 reveals that the paid up capital of the company is Rs. 15
crores, accumulated losses Rs. 11 crores and secured long term borrowings Rs. 5 crores. Besides, the
company has long term investments of Rs. 11 crores. The company’s remuneration committee has
recommended the proposal and the company is regular in repayment of its debts. Analyse the proposition
with reference to the provisions of the Companies Act 2013.
Ans:
1. If, in any financial year, a company has no profits or its profits are inadequate, the company shall not
pay to its directors, including any managing or whole- time director or manager, by way of remuneration
any sum exclusive of any fees payable to directors except in accordance with the provisions of Schedule
V.
2. In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision
relating to the remuneration of any director which purports to increase or has the effect of increasing
the amount thereof, whether the 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 its
Board, shall not have any effect unless such increase is in accordance with the conditions specified
Schedule V.
3. The company shall pay remuneration in case of loss as per schedule V. The remuneration under schedule
V will be based on long term liquidity i.e. effective capital as follows. The remuneration in case of loss
can only be paid to ED.
The remuneration in case of above option can be paid only on the compliance of the following
conditions.
100 cr< EC < 250 cr 120 Lakhs
Since, the company has suffered losses in the last four years; the company will pay remuneration to its
directors in accordance with the provisions of Schedule V to the Companies Act, 2013.
The total remuneration that Venus Limited is intending to pay to two technocrats is 144 lakhs per annum,
from the current remuneration of 96 lakhs per annum. However, the remuneration of two executive directors
has been proposed by the remuneration committee and the company is regular in payment of debts,
approval of GM-SR is required. Remuneration of Rs. 4 Lacs per month is allowed but for Rs. 6 Lacs per month
requires GM-SR. The remuneration to 2 directors here is given in normal capacity so it will require GM-SR.
RTP15: X, a Director of PQR Ltd., was appointed on 1st April, 2013, one of the terms of appointment was
that in the absence of adequacy of profits or if the company had no profits in a particular year, he will be
paid remuneration in accordance with Schedule V. For the financial year ended 31 st March, 2015, the
company suffered heavy losses. The company was not in a position to pay any remuneration but he (X)
was paid Rs. 50 lacs for the year, as paid to other directors. The effective capital of the company is Rs. 150
crores. Referring to the provisions of the Companies Act, 2013, as contained in Schedule V, examine the
validity of the above payment of remuneration to X.
Ans:
The remuneration payable to managerial personnel is linked to the effective capital of the company. Where
in any financial year during the currency of tenure of a managerial person, a company has no profits or its
profits are inadequate, it may, without GM-SR, pay remuneration to the managerial person not exceeding
Rs.60 Lakhs in the year in case the effective capital of the company is between Rs.100 crores to 250 crores.
The limit will be doubled if approved by the members by special resolution and further if the appointment is
for a part of the financial year the remuneration will be prorated. The remuneration under schedule V will
be based on long term liquidity i.e. effective capital as follows. The remuneration in case of loss can only be
paid to ED.
3.17
100 cr< EC < 250 cr 120 Lakhs
In the given case the company appointed to Mr. X as an executive director. The Company have pay
remuneration to the managerial person not exceeding Rs. 60 Lakhs in the year in case the effective capital of
the company is less than Rs. 5 Crore. But here the effective capital of the company is Rs. 150 crores. From
the foregoing provisions contained in schedule V to the Companies Act, 2013 the payment of Rs. 50 Lacs in
the year as remuneration to Mr. X is valid in case he accepts it as under the said schedule he is entitled to a
remuneration of Rs. 120 Lakhs in the year and his terms of appointment provide for payment of the
remuneration as per schedule V.
Sec 202: Compensation for loss of office of managing or whole-time director or

manager
RTP N14: Mr. Fin, Managing Director of Ray Fabrics Limited from last 4 years, lost his office. As per the
provisions of the Companies Act, 2013, explain the following:
i. State the compensation to be paid to Mr. Fin in relation to the loss of his office.
ii. State the cases when no compensation is paid to the Managing Director in the situation of loss of
office.
Ans:
i. As per section 202 of the Companies Act, 2013, the compensation payable to Mr. Fin will be shall not
exceed the remuneration which he would have earned if he had been in office for the remainder of his
term (1 year) or for 3 years, whichever is shorter, calculated on the basis of the average remuneration
actually earned by him during a period of 3 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. In
case of Mr. Fin, it will be remaining 1 year of his term as the term of the Managing Director is 5 years
multiplied by average remuneration of last 3 years.
ii. Following are the cases in which no compensation is paid to the Managing Director in the situation of
the loss of office:
(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.
PM: Can a company pay compensation to its directors for loss of office? Explain briefly the relevant
provisions of the Companies Act, 2013 in this regard?
Ans:
1. The company can pay the compensation for loss of office or consideration for retirement only to ED
such as MD / WTD / Manager.
2. However, the company cannot pay compensation to NED in this section; the company can pay the
compensation to NED in sec 191.
The compensation to ED shall not be paid in following cases.
a. Where directors resigns as follows:
i. Resignation because of Amalgamation or reconstruction of the company even when he is
appointed as ED of amalgamated company.
ii. Where director resigns voluntarily without any reason or due to personal reasons.
b. Where director is liable to vacate office u/s 167 (discussed in chapter Appointment and Qualification
of Directors).
c. Director enters into any transaction or he does any act or negligence which lead to winding up of
company.
d. The director has executed fraud or gross negligence or mismanagement in the conduct of the affairs
of:
i. Company itself in which he is director; or
ii. Holding company of the company in which he is director.
e. Where director does any act or creates or supports to create any situation which can terminate his
office.
Other than the cases specified above the director are eligible for the compensation. E.g. where company
removed the director voluntarily in section 169 without any reason then the director is eligible for
compensation under this section.
If the compensation derived as per this section, then such compensation shall not exceed the maximum limit
calculated as per following method.
Max Compensation = Period of Compensation X Average yearly remuneration earned.
Period of Compensation = Remaining period of office or 3 years whichever is lower.
Average yearly remuneration earned = Average remuneration of period which is lower of {actual period
worked or 3 years}.
Compensation paid to ED on ad hoc basis. Can company recover the same?

PM: Mr. Doubtful was appointed as Managing Director of Carefree Industries Ltd. for a period of five
years with effect from 1.4.2011 on a salary of Rs. 12 lakhs per annum with other perquisites.
The Board of directors of the company on coming to know of certain questionable transactions
terminated the services of the Managing Director from 1.3.2014. Mr. Doubtful termed his removal as
illegal and claimed compensation from the company. Meanwhile the company paid a sum of Rs.5 lakhs
on ad hoc basis to Mr. Doubtful pending settlement of his dues. Discuss whether:
a. The company is bound to pay compensation to Mr. Doubtful and, if so, how much.
b. The company can recover the amount of Rs. 5 lakhs paid on the ground that Mr. Doubtful is not
entitled to any compensation, because he is guiding of corrupt practice.
Ans:
a. Where directors resign as follows:
b. Where director is liable to vacate office u/s 167.
3.19
company.
of:
office.
Other than the cases specified above the director is eligible for the compensation. E.g. where company
If the compensation derived as per this section then such compensation shall not exceed the maximum limit
worked or 3 years}.
Case Law:
Decision in case of Bell vs. Lever Bros. (1932) AC 161 where it was observed that a director was not legally
bound to disclose any breach of his fiduciary obligations so as to give the company an opportunity to dismiss
him. In that case the Managing Director was initially removed by paying him compensation and later on it
was discovered that he had been guilty of breaches of duty and corrupt practices and that he could have
been removed without compensation. Then company cannot demand the compensation back.
The Company is not bound to pay compensation to Mr. Doubtful however company cannot recover the
compensation which is already paid. The compensation here is adhoc basis that is Suo moto not as per
Section 202 then company cannot recover the same.
Compensation paid to ED on ad hoc basis. Can company recover the same?

PM: A Managing Director was removed during the tenure of office and certain compensation was paid to
him. It was later on found that during the tenure of his office that he was guilty of corrupt practices and
the company felt that no compensation should have paid to him and therefore wants to recover the
compensation so paid to him. Can the company succeed?
Ans:
2. However the company cannot pay compensation to NED in this section, the company can pay the
3. The compensation to ED shall not be paid in following cases.
of Directors).
company.
of:
office.
Other than the cases specified above, the director is eligible for the compensation. E.g. where company
worked or 3 years}.
Case Law:
Decision in case of Bell vs. Lever Bros. (1932) AC 161 where it was observed that a director was not legally
Answer:
Thus as per above provisions and the case law any compensation paid to ED on ad hoc basis cannot be
recovered on the ground that company later found that the director was working defective.
Compensation paid to defaulting director whether can be recovered?
N07: Mr. X was appointed as the Managing Director of ABC Ltd. for a period of 5 years w.e.f., 1st January,
2006. Since his work was found unsatisfactory. His services were terminated from 15 th August, 2007 by
paying compensation for the loss of office as provided in the agreement entered into by the company.
Later, the company discovered that during his tenure of office Mr. X was guilty of many corrupt practices
and that he should have been removed without payment of compensation. Advice the company whether
the services of the Managing Director can be terminated without payment of compensation as provided
in the agreement and whether the company can recover the amount already paid to Mr. X filing a suit.
Ans:
2. However the company cannot pay compensation to NED in this section, the company can pay the
of Directors).
company.
of:
office.
Other than the cases specified above, the director is eligible for the compensation. E.g. where company
worked or 3 years}.
Case Law:
Decision in case of Bell vs. Lever Bros. (1932) AC 161where it was observed that a director was not legally
3.21
Explanation & Answer: Compensation is paid on agreement basis i.e. adhoc and Suo moto but cannot be
recovered. Thus, (a) if compensation has already been paid to Mr. X by ABC Ltd., the compensation cannot
be recovered back as per the decision in Bell v Lever Bros.
(b) If the breach of the duty and corrupt practices of Mr. X come to light at the time when his services are
terminated, the company is not liable to pay any compensation to him.
Director of the Company Mr. Raman resigns from his office as a result of amalgamation of the X Company
with the other body corporate. Further he is appointed as the Managing director of the body corporate
resulting from the amalgamation. State in the light of the Companies Act, 2013 whether in this situation,
is company liable towards Managing Director to compensate for the loss of office after his resignation?
Ans:
iii. Resignation because of Amalgamation or reconstruction of the company even when he is
iv. Where director resigns voluntarily without any reason or due to personal reasons.
b. Where director is liable to vacate office u/s 167.
company.
of:
iii. Company itself in which he is director; or
iv. Holding company of the company in which he is director.
office.
Other than the cases specified above the director are eligible for the compensation. E.g. where company
If the compensation derived as per this section, then such compensation shall not exceed the maximum limit
worked or 3 years}.
As per the facts given in the question, Mr. Raman, a Managing Director of X company resigns from his office
as a result of amalgamation of the said company with the other body corporate. He is appointed as Managing
Director of the Body Corporate resulting from the amalgamation. So, accordingly, as per the above stated
provision, company shall not make compensation to the Mr. Raman for the loss of office due to his
resignation on the account of amalgamation of the company with other body corporate.
Sec 203: Appointment of Key Managerial Person
N06: Mr. XYZ is the Managing Director of M/s. ABC Ltd. PQR Ltd. decides to appoint him as the Managing
Director of the company. State the legal requirements under the Companies Act, 2013 to give effect to the
proposed appointment. Draft a resolution for the appointment of Mr. XYZ as the Managing Director of
PQR Limited.
Ans:
1. If a person is already MD / Manager at any other company, then he can be appointed as MD in company
by passing BOD-UR.
2. This is how 1 individual can hold max. 2 offices of MD / Manager together at the same time.
3. While passing above BOD-UR the company should have given notice to all BOD about such meeting and
the resolution is to be passed at BM only and not by circulation (sec 175 discussed later).
Explanation:
In the given case Mr. XYZ is the Managing Director of M/s. ABC Ltd. PQR Ltd. decides to appoint him as the
Managing Director of the company. This will clearly require the BOD-UR passed at BM conducted.
Answer:
Thus appointment of Mr. XYZ as MD of PQR Ltd will require the BM-UR.
Drafting of Resolution:
Subject of Resolution: Appointment of Mr XYZ as MD.
Type of resolution: Unanimous Resolution.
Type of Meeting: Board Meeting
Resolved that, as per section 203 of the Companies Act, 2013 read with Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, company hereby passes the Board Meeting Unanimous
resolution for appointment of Mr XYZ as the MD of PQR Ltd.
Resolved further that, Mr Intelligent is empowered to take all the necessary steps to complete such
appointment and complete the formalities there of.
RTP16: Mr. W has been appointed as a whole time director in a public company which is having a paid up
share capital of Rs. 20 crores. He met with an accident which led the office of whole time KMP vacant.
State the provisions of the Companies Act, 2013 with regards to filling of the casual vacancy of KMP. What
will be the answer if Mr. W has been appointed as whole time director in a Government Company?
Ans:
Provision: [Relevant Section 203 read with Rule 8 of the Companies Rules, 2014as follows]
1. Every company belonging to such class or classes of companies as may be prescribed, shall have the whole
time Key Managerial Personnel. According to Rule 8 of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014 every listed company and every other public company having a paid-
up share capital of Rs. 10 crore or more shall have whole-time key managerial personnel.
2. Further as per sub-section 4 to Section 203 of the Companies Act, 2013, if the office of any whole-time
KMP is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a
period of six months from the date of such vacancy.
3. According to provisions of sub-section 4A to Section 203, the provisions of sub-section (1), (2), (3) and (4)
of section 203 shall not apply to a managing director or Chief Executive Officer or manager and in their
absence, to a whole-time director of the Government Company. So the law given above in section 203(4)
shall not be attracted in the case of Government Company.
RTP16/ M15: Explain the concept of KMP (Key Managerial Personnel) as introduced by the Companies Act,
2013.
Explain the classes of companies which are required to appoint whole time Key Managerial Person under
the provisions of the said Act.
Ans:
Provision: [Relevant Section 203 read with Rule 8 of the Companies Rules, 2014as follows]
Every company belonging to such class or classes of companies as may be prescribed, shall have the following
whole time Key Managerial Personnel.
(a) Managing Director or Chief Executive Officer or Manager and in their absence, a Whole-time Director;
(b) Company Secretary; and
(c) Chief Financial Officer According to Rule 8 of the Companies (appointment and Remuneration of
Managerial Personnel) Rules, 2014,
As per rule 8 of Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules,
2014, every listed company and every other public company having a paid up share capital of Rs. 10 crore or
more shall have a whole time key managerial personnel.
Further, as per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel)
Amendment Rules, 2014, a company other than a company covered under Rule 8 above, which has a paid up
share capital of Rs 5 crore or more shall have a whole-time company secretary.
Sec 204: Secretarial audit for bigger companies

RTP 16: Explaining the provisions of the Companies Act, 2013, examine whether the following
companies are required to get the Secretarial Audit conducted:
3.23
i. ABC Company Limited is a company listed at Bombay Stock Exchange and has a paid-up share
capital of Rs. 50 crore.
ii. DEF Company Limited is a company which has a paid up equity share capital of Rs. 100 crore but
has a turnover of Rs. 100 crore during the financial year 2014-15. The company is not listed on any
of the Stock Exchanges.
Ans:
Provision: [Relevant Section 204 of the Companies Act, 2013 as follows]
In accordance with the provisions of the Companies Act, 2013, as contained in section 204(1) every listed
company and a company belonging to other class of companies as may be prescribed, shall annex with its
Boards report made in terms of section 134(3), a secretarial audit report, given by a company secretary in
practice, in such form as may be prescribed.
The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that for the
purposes of section 204(1), the other class of companies shall be as under:
1. Every public company having a paid up share capital of Rs. 50 crore or more; or
2. Every public company having a turnover of Rs. 250 crore or more
Answer:
The format of the Secretarial Audit Report shall be in Form No. MR-3 Accordingly:
i. In the first case since the company is a listed company at Bombay Stock Exchange, the company has to
get the Secretarial Audit done. Paid-up share capital of the company criteria is not applicable in the given
case. Therefore, the requirement of having at least Rs. 50 crore paid up share capital does not apply in
the given case since the company is a listed company.
ii. In the second case, the paid up share capital of the company is Rs. 100 crores and turnover of the
company is Rs. 100 crore. The paid up share capital is in excess of the required limit, the company has
to get the Secretarial Audit done. Turnover criteria of Rs. 250 crore does not apply in this case since the
company has already fulfilled the paid up share capital criteria.
Other
RTP17: State the legal position in the given situations:
a) Mr. Financer, is a CEO in a public company. State whether the limits on managerial remuneration
under section 197 and schedule V apply to Mr. Financer.
b) Mr. X is a Whole Time Director (WTD) in a Super Ltd. He is also Whole Time Director (WTD) in its
subsidiary company. Discuss the validity of Mr. X as WTD in its subsidiary company.
Ans:
(a) Section 197 applies with regard to remuneration of directors including MD/ WTD and Manager.
Schedule V provides conditions with regard to appointment and remuneration of MD/ WTD and
Manager, Therefore, the provisions related to the managerial remuneration are not applicable on all
KMP i.e., to CEO, CFO, or CS but they are applicable only to MD/WTD and Manager. So, Section 197 &
Schedule V shall not apply to Mr. Financer.
(b) As per section 203(2) of the Companies Act, 2013, every whole-time key managerial personnel of a
company shall be appointed by means of a resolution of the Board containing the terms and conditions
of the appointment including the remuneration. Whole-time key managerial personnel shall not hold
office in more than one company at the same time except in its subsidiary company [Section 203 (3)].
So accordingly, Mr. X can validly hold the position of Whole time director in the subsidiary of Super Ltd.

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Chap 3: Appointment & Remuneration of Managerial Person

Sec 197: Overall maximum managerial remuneration and managerial

Payment of remuneration in case of loss.

Remuneration to ED in case of profit or loss.

Sitting fees increase / Commission to NED / Guarantee commission.

Remuneration to ED in case of loss

Refund of Excess Remuneration

Increase in sitting fees

Sec 202: Compensation for loss of office of managing or whole-time director or

Compensation paid to ED on ad hoc basis. Can company recover the same?

Compensation paid to ED on ad hoc basis. Can company recover the same?

Sec 204: Secretarial audit for bigger companies

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