Companies Act Section 202 — Compensation for loss of office of managing or whole-time director or manager
CHAPTER XIII APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL
Commercial / Corporate
Summary
A company may pay compensation to a managing or whole-time director or manager for losing their office, for retiring from office, or in connection with such loss or retirement. This payment cannot be made to any other type of director.
No payment can be made under sub-section (1) in the following situations: (a) where the director resigns because of a reconstruction of the company or its merger with another body, and is then appointed as a managing or whole-time director, manager, or other officer of the new or merged company; (b) where the director resigns for any reason other than a reconstruction or merger; (c) where the director's office is vacated under sub-section (1) of section 167; (d) where the company is being wound up, whether by court order or voluntarily, and the winding up was due to the director's negligence or default; (e) where the director has been guilty of fraud or breach of trust in relation to the company, or of gross negligence in or gross mismanagement of the affairs of the company or its subsidiary or holding company; and (f) where the director has instigated or directly or indirectly taken part in bringing about the termination of their own office.
Any payment made under sub-section (1) cannot exceed the remuneration the director would have earned if they had stayed in office for the rest of their term, or for three years, whichever is shorter. This is calculated based on the average remuneration actually earned during the three years immediately before leaving office, or during the shorter period if the director held office for less than three years. However, no such payment can be made if the winding up of the company begins before, or within twelve months after, the date the director left office, and the company's assets after deducting winding-up expenses are not enough to repay the shareholders their share capital, including any premiums they contributed.
Nothing in this section prevents a company from paying a managing or whole-time director or manager any remuneration for services they rendered to the company in any other capacity.
Official Text
(1) A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.
(2) No payment shall be made under sub-section (1) in the following cases, namely:—
(a) where the director resigns from his office as a result of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
(b) where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
(c) where the office of the director is vacated under sub-section (1) of section 167;
(d) where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;
(e) where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; and
(f) where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.
(3) Any payment made to a managing or whole-time director or manager in pursuance of sub-section (1) shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than three years, during such period:
Provided that no such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the premiums, if any, contributed by them.
(4) Nothing in this section shall be deemed to prohibit the payment to a managing or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity.