Companies Act Section 191 — Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares
CHAPTER XII MEETINGS OF BOARD AND ITS POWERS
Commercial / Corporate
Summary
Sub-section (1) sets out the main rule. A director of a company cannot receive any payment as compensation for losing their office, or as payment for retiring from office, or in connection with such loss or retirement, when the payment is linked to certain transfers. These transfers are: the transfer of the whole or any part of the company's undertaking or property; or the transfer of any or all of the company's shares resulting from an offer made to the general body of shareholders; or an offer made by another body corporate to make the company its subsidiary or the subsidiary of its holding company; or an offer made by an individual to obtain the right to exercise or control at least one-third of the total voting power at a general meeting; or any other offer that is conditional on acceptance to a given extent. Such a payment cannot be received from the company, from the transferee of the undertaking or property, from the transferees of shares, or from any other person (other than the company), unless the prescribed particulars about the proposed payment, including its amount, have been disclosed to the members of the company and the proposal has been approved by the company in a general meeting.
Sub-section (2) provides an exception. The rule in sub-section (1) does not affect any payment made by a company to its managing director, whole-time director, or manager as compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement, provided the payment is subject to the prescribed limits or priorities.
Sub-section (3) deals with approval of the payment. If a payment under sub-section (1) or sub-section (2) is not approved because there is no quorum in the meeting or in an adjourned meeting, then the proposal is not considered to have been approved.
Sub-section (4) addresses payments made in violation of the rules. If a director receives any payment in contravention of sub-section (1), or if the proposed payment is made before it is approved in the meeting, the amount so received by the director is deemed to have been received by the director in trust for the company.
Sub-section (5) sets out the consequence for default. If a director makes any default in complying with the provisions of this section, the director is liable to a penalty of one lakh rupees.
Sub-section (6) clarifies the scope of the section. Nothing in this section is to be taken as prejudicing the operation of any law that requires disclosure to be made with respect to any payment received under this section or other similar payments made to a director.
Official Text
(1) No director of a company shall, in connection with—
(a) the transfer of the whole or any part of any undertaking or property of the company; or
(b) the transfer to any person of all or any of the shares in a company being a transfer resulting from—
(i) an offer made to the general body of shareholders;
(ii) an offer made by or on behalf of some other body corporate with a view to a company becoming a subsidiary company of such body corporate or a subsidiary company of its holding company;
(iii) an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meeting of the company; or
(iv) any other offer which is conditional on acceptance to a given extent, receive any payment by way of compensation for loss of office or as consideration for retirement from office, or in connection with such loss or retirement from such company or from the transferee of such undertaking or property, or from the transferees of shares or from any other person, not being such company, unless particulars as may be prescribed with respect to the payment proposed to be made by such transferee or person, including the amount thereof, have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.
(2) Nothing in sub-section (1) shall affect any payment made by a company to a managing director or whole-time director or manager of the company by way of compensation for loss of office or as consideration for retirement from office or in connection with such loss or retirement subject to limits or priorities, as may be prescribed.
(3) If the payment under sub-section (1) or sub-section (2) is not approved for want of quorum either in a meeting or an adjourned meeting, the proposal shall not be deemed to have been approved.
(4) Where a director of a company receives payment of any amount in contravention of sub-section (1) or the proposed payment is made before it is approved in the meeting, the amount so received by the director shall be deemed to have been received by him in trust for the company. 1[
(5) If a director of the company makes any default in complying with the provisions of this section, such director shall be liable to a penalty of one lakh rupees.]
(6) Nothing in this section shall be taken to prejudice the operation of any law requiring disclosure to be made with respect to any payment received under this section or such other like payments made to a director.