Compensation for Loss of Office | Section 202 | Companies Act, 2013

The meaning of ‘Compensation for loss of office, in layman’s language means a payment made by a Company to a director, senior executive, or a consultant who is forced to retire before the expiry of a service contract, as a result of a merger, takeover, or any other reason.

There might be situations where a person is forced to retire from his office, not voluntary of course, then this section acts as a cushion and sword for him for compensation for his loss of such office. Accordingly, in this article we shall study about the provisions of Section 202 of the Companies Act, its applicability, timeline, quantum of loss that can be claimed and other frequently asked questions (FAQs).

1. Regulatory Framework related to Compensation for Loss of Office

• Section 202 of the Companies Act, 2013
• Rule No 17 of the Companies (Meeting of Board and its Power) Rules, 2014

2. Person Eligible To Receive Compensation

• Managing Director;
• Whole Time Director, and
• Manager

3. Permissible Timeline For Claiming Loss Of Office

As per Section 202(3) of the Companies Act, 2013, any payment made to a managing or whole-time director or manager in pursuance of Section 202(1) shall not exceed the remuneration, which he would be earned during the following time period, whichever is shorter:-

• The remainder of his term, or
• For three years

The same should be 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, whatsoever is the case.

4. Cases Where Payment Is Not Allowed

a. From Director’s Perspective: – 

No payment shall be made in the following cases (As per Section 202 of the Companies Act, 2013):-

1. where the director resigns from his office as a result of the reconstruction or amalgamation of the company and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company or amalgamated body corporate;
2. where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
3. where the office of the director is vacated under sub-section (1) of section 167;
4. 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;
5. where the director has been guilty of fraud or breach of trust or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company/subsidiary/holding thereof.
6. where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

b. From Company’s Perspective: – 

No payment shall be made to the managing director or whole-time director or manager of the company by way of compensation for the loss of office in the following cases [As per Rule No. 17 of the Companies (Meeting of Board and its Power) Rules, 2014]:

1. the company is in default in repayment of public deposits or payment of interest thereon;
2. the company is in default in redemption of debentures or payment of interest thereon;
3. the company is in default in repayment of any liability, secured or unsecured, payable to any bank, public financial institution or any other financial institution;
4. the company is in default in payment of any dues towards income tax, VAT, excise duty, service tax or any other tax or duty, by whatever name called, payable to the Central Government or any State Government, statutory authority or local authority, other than in cases where the company has disputed the liability to pay such dues.
5. there are outstanding statutory dues to the employees or workmen of the company which have not been paid by the company (other than in cases where the company has disputed the liability to pay such dues); and
6. the company has not paid dividend on preference shares or not redeemed preference shares on due date.

5. Procedure for Payment to Director for Loss Of Office

In accordance to Rule 17 of the Companies (Meeting of Board and its Power) Rules, 2014, no director of a Company shall receive any payment by way of compensation unless: –

• a resolution at a general meeting has been passed approving the payment of such amount.
• Also, the following shall be the mandatory disclosure of such resolution: –

(a) name of the director;

(b) amount proposed to be paid;

(c) event due to which compensation become payable;

(d) date of Board meeting recommending such payment;

(e) basis for the amount determined;

(f) reason or justification for the payment;

(g) manner of payment – whether payable in cash or otherwise and how;

(h) sources of payment; and

(i) any other relevant particulars as the Board may think fit.

6. Frequently Asked Questions (FAQs) related to Compensation for Loss of Office:

1. Does the Company have discretionary powers on payment of compensation?

Reply: When we look into the language of the section, it starts with the word “may” and accordingly, we can conclude that the Company has discretionary powers to provide for compensation for loss of office. However, there are numerous precedent case laws in which the court has directed the Company to use such discretionary powers with utmost rationality and in the interest of Company only. 

2. What do you understand by the word “Manager”?

Reply: As per Section 2(53) of the Companies Act, 2013 “manager” means as an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not.

3. What is meaning of the “Whole Time Director”?

Reply: In accordance to Section 2(94) of the Companies Act, 2013, “whole-time director” means as a director who is in the whole-time employment of the Company.

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{The author i.e., Mrs. Kajal Goyal is a Company Secretary in Practice at Kajal Goyal and Associates and can be reached at (M) 9999952595 and (E) [email protected]}