When it comes to Directorial Law, a matter of great interest to Company Directors is whether payment of monthly pension to a person who had served as a non-executive independent director on the board of a company is subject to any restrictions under the Companies Act, 1956 (the “Act”).
To understand the law on the subject, one would need to traverse the provisions contained in Section 309 of the Act which lays down the manner and the extent to which remuneration is payable to the directors of the company, including any managing or whole time director. While that being so, neither sub-section 1 nor sub-section 4 of Section 309 of the Act provide in any manner or deal with the subject of payment to persons who had served as directors either in the capacity of a managing or a whole-time director or as a non-whole-time director and had retired.
Sub section 4 of section 309 of the Act reads as follows:
A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration – either
- by way of a monthly, quarterly or annual payment with the approval of the Central Government; or
- by way of commission if the company by special resolution authorizes such payments;
Provided that the remuneration paid to such director, or where there is more than one such director, to all of them together shall not exceed one per cent of the net profits of the company, if the company has a managing director or whole-time director.
It may be noted that sub-section 4 of Section 309 talks of a director “who is neither in the whole-time employment of the company nor a managing director”. The word “is” after the words “a director who” in the said sub-section, connotes that the person referred to should be a director in presenti when he receives the remuneration referred to in the said sub-section. Therefore, so long as a person has ceased to be a director of the company and is not a director in presenti of that company when the right to receive pension accrues to him, it can be legally argued that sub-section 4 of Section 309 of the Act would not apply in the given case.
The word “remuneration” has been interpreted by the Supreme Court of India in Central Bank of India v. Their Workmen AIR 1960 SC12:(1959) 129 Com Cases 367 as follows:
‘Remuneration’ is reward, recompense, pay for service rendered.
In Black Law’s Dictionary – Sixth Edition on page 1134 the term “pension” has been given the following meaning:
deferred compensation for services rendered
In circumstances, where a person is to be paid a monthly pension, after his retirement as a non-executive independent director, there cannot be a case of payment of remuneration to him within the meaning of Section 309 of the Act, as he does not render any service as a director or otherwise to that company. Even in the instance where the pension is paid in recognition of the past services of the person as a director, there cannot be a legal argument to say that it is deferred compensation for services rendered by him as a director and to that extent it amounts to remuneration to a director as sub-section 4 of Section 309 of the Act does not contemplate such a position in Law.
The next question that arises is whether the payment of pension would be hit by the provisions contained in Section 314 of the Act.
The term ‘office of profit’ has been interpreted by Supreme Court of India in another context in Satrucharla Chandrasekhar Raju v. Vyricherla Pradeep Kumar Dev, as follows:” Generally, it is understood that an office means a position to which certain duties are attached. An office of profit involves two elements namely that there should be such an office and that it should carry some remuneration.
Sub section 3 of Section 314 reads as follows:
Any office or place shall be deemed to be an office or place of profit under the company within the meaning of this section.
- in case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise;
- in case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite the right to occupy free of rent any premises as a place of residence or otherwise.
From the foregoing, it would appear that by receiving a pension, a person who is not a relative of any director or promoters of the company which is paying the monthly pension or who presumably does not come under any other specified persons under Section 314 of the Act cannot be said to occupy an office of profit in the company . Therefore in the given case, a company which seeks to pay a monthly pension to a person who has served on its board as a non-executive independent director in recognition of his contribution to the company is free to do so after having received the consent of its shareholders for such payment.
However, as a matter of abundant caution, in view of the judgment of the Supreme Court in Dr.A.Lakshmanaswamy Mudaliar v. Life Insurance Corporation of India AIR 1963 SC 1185, the company which is making the payment of monthly pension would be well advised to ensure that its Memorandum of Association contains an enabling clause to pay pension to directors / former directors of the company.
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