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).
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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 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.
No payment shall be made in the following cases (As per Section 202 of the Companies Act, 2013):-
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]:
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) 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.
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.
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.
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) cskajalgoyal@gmail.com}