Appointment and Remuneration of Managerial Personnel – CA Final Law Study Material

Appointment and Remuneration of Managerial Personnel – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Appointment and Remuneration of Managerial Personnel – CA Final Law Study Material

Question 1.
Mr. ‘X’ was appointed as Managing Director for life by the Articles of Association of a private company incorporated on 1st June, 2020. Examine in this connection, can ‘X’ be appointed for life as Managing Director?
Answer:
Appointment of Managing Director for life:

As per Sec. 196(2] of the Companies Act, 2013, no company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding 5 years at a time.
No concession or exception is allowed by the Act to private companies.
In the present case, Mr. ‘X’ was appointed as Managing Director for life by the Articles of Association of a private company incorporated on 1st June, 2020.

Conclusion: Mr. ‘X’ cannot be appointed as Managing Director for life in a private company.

Question 2.
Advise Super Specialties Ltd. in respect of the following proposal under consideration of its Board of directors: Appointment of Managing Director who is more than 70 years of age.
Answer:
Appointment of Managing Director:

As per Sec. 196(3) of the Companies Act, 2013, no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who is below the age of 21 years or has attained the age of 70 years.

However, it is also provided that a person who has attained the age of 70 years may be employed as managing director, whole-time director or manager by the approval of the members by a special resolution passed by the company in the general meeting and the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.

It is also provided that where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the C.G. is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of 70 years may be made.

Question 3.
A complaint was received by the C.G. from some shareholders of a public company that a person had been appointed as the Managing Director of the company without seeking the approval of the C.G. when such approval was required. State as to what action can be taken by the C.G. under the Companies Act, 2013. Also examine the validity of the acts of the Managing Director if the complaint is found true. [Nov. 11 (5 Marks)]
Answer:
Validity of appointment of Managing Director, if C.G. approval not taken:

Sec. 196(4) of Companies Act, 2013 provides that, subject to the provisions of Sec. 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved

by the BOD at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and
by the C.G. in case such appointment is at variance to the conditions specified in Part I of that Schedule.

Approval of C.G. is required only if the appointment is not in accordance with Part I of Schedule V. Procedure for obtaining approval is prescribed u/s 201 and Rule 7.

In a situation, where approval of the C.G. is necessary, but approval not obtained, appointment of the managing director is considered as void. The Central Government may on receipt of the notice refer the matter to the Registrar to take necessary action against the company.

Sec. 196(5) provides that subject to the provisions of this Act, where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid. The interpretation of this sub-section can be drawn even in case the approval of the Central Government is not taken and the acts done by the managing director will be deemed to be valid.

Question 4.
There are four directors in Two Squares Ltd. Mr. Rao, being the director in station, has been au-thorized to draw and endorse cheque or other negotiable instruments on account of the company and also to direct registration of transfer of shares and signing the share certificates etc. Evaluate whether he will be treated as managing director of the company? Also narrate the procedure of appointment of a managing director in a company in the light of the Companies Act, 2013. [May 17 (8 Marks), RTP-May 18]
Answer:
Managing Director:
Sec. 2(54) of the Companies Act, 2013 defines a “Managing Director” as a director who is entrusted with substantial powers of management of the affairs of the company by:
(a) virtue of articles of a company, or
(b) an agreement with the company, or
(c) a resolution passed in its general meeting, or by its Board of Directors, and includes a director occupying the position of the managing director, by whatever name called.

Explanation to Section 2(54) clarifies that substantial powers of the management shall not be deemed to include the power to do such administrative acts of a routine nature when so authorised by the Board such as: –

the power to affix the common seal of the company to any document or
to draw and endorse any cheque on the account of the company in any bank or
to draw and endorse any negotiable instrument or
to sign any certificate of share or
to direct registration of transfer of any share.

In the instant case, Mr. Rao, a director in Two Squares Limited has been authorized to draw and endorse cheque or other negotiable instruments on account of the company and also to direct registration of transfer of shares and signing the share certificates etc.

Conclusion: As per explanation to Sec. 2(54), Mr. Rao will not be treated as managing director of the company as he is authorized to do administrative acts of a routine nature.

Procedure of appointment of a managing director:
Sec. 196(4) deals with the provisions relating to appointment of a managing director. Accordingly,

(1) Subject to the provisions of Sec. 197 and Schedule V, a managing director shall be appointed, and the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting.

(2) The terms and conditions and remuneration approved, by Board of Directors as above shall be subject to the approval of shareholders by a resolution at the next general meeting of the company.

(3) In case such appointment is at variance to the conditions specified in Part I of Schedule V of the Companies Act, 2013, the appointment shall be approved by the Central Government.

(4) The notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.

(5) A return in the prescribed form (Form No. MR.1) along with the prescribed fee shall be filed with the Registrar within sixty days of such appointment.

Question 5.
Advise SuperSpecialties Ltd. in respect of the following proposals under consideration of its Board of directors: Payment of commission of 4% of the net profits per annum to the directors of the company.
Answer:
Limit over Managerial Remuneration:

The total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in Sec. 198 except that the remuneration of the directors shall not be deducted from the gross profits.

Remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed 1% of the net profits of the company if there is a managing or whole-time director or manager; otherwise 3%. Any remuneration above the prescribed limit, requires approval of company in general meeting, by a special resolution.

In the given case, company is considering payment of commission of 4% of the net profits per annum to the directors of the company.

Conclusion: Commission of 4% is beyond the limit specified, and hence, it should be approved by the members by special resolution.

Question 6.
State the legal position in the given situation: Mr. Financer, is a CEO in a public company. State whether the limits on managerial remuneration under section 197 and Schedule V apply to Mr. Financer.
Answer:
Applicability of Sec. 197 and Schedule V:

Section 197 applies with regard to remuneration of directors including MD/WTD and Manager.
Schedule V provides conditions with regard to appointment and remuneration of MD/WTD and Manager.

Conclusion: Provisions related to the managerial remuneration are not applicable on all KMP’s i.e., to CEO, CFO, or CS but they are applicable only to MD/WTD and Manager.

Question 7.
M/s Star Health Specialties Ltd. owns a multi-specialty Hospital in Chennai. Dr Hamilton a practising heart surgeon has been appointed by the company as its non-executive ordinary director and it wants to pay him fee on case to case basis for surgery performed on the patient at the hospital.

A question has arisen weather payment of such fees to him would amount to payment of managerial remuneration to a director subject to any restriction under the Companies Act, 2013. Advise the company which seeks to ensure that the same does not contravene any provisions of the Companies Act, 2013.
Answer:
Remuneration for services rendered by any director in other capacity:

Proviso to Sec. 197(4) of Companies Act, 2013 states that remuneration for services rendered by any director in other capacity shall not be so included in managerial remuneration if
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee, if the company is covered u/s 178(1), or the BOD in other cases, the director possesses the requisite qualification for the practice of the profession.

In the present case, Dr. Hamilton has been appointed as a director and company wants to pay him fee on case to case basis for surgery performed on the patient at the hospital.

Conclusion: Company can pay Dr. Hamilton, fee for surgeries performed, as a professional fee which shall not be construed as a Managerial Remuneration under the Act.

Question 8.
Examine whether the payment of following remuneration to non-executive directors is in accordance with the provisions of the Companies Act, 2013: Sitting fees payable to directors is increased from ₹ 30,000 to ₹ 60,000 per meeting.
Answer:
Increase in Sitting Fees:

Sec. 197(5) of the Companies Act, 2013 provides that a director may receive remuneration by way of fee for attending the Board/Committee meetings or for any other purpose as may be decided by the Board, provided that the amount of such fees shall not exceed the amount as may be prescribed.

As per Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the amount of sitting fees payable to a director for attending meetings of the Board or committees thereof may be such as may be decided by the Board of directors or the Remuneration Committee thereof which shall not exceed the sum of ₹ 1 lakh per meeting of the Board or committee thereof.

Conclusion: Sitting fees to non-executive directors can be increased from ₹ 30,000 to ₹ 60,000 per meeting by passing a resolution in the Board Meeting.

Question 9.
A listed company has fixed payment of sitting fees for each meeting of directors at ₹ 75,000 in view of increased responsibilities of independent directors of listed companies. The company proposes to increase the sitting fees to ₹ 1 lakh per meeting. Advise the company about the requirement under the Companies Act, 2013 to give effect to this proposal. [RTP – Nov. 18]
Answer:
Increase in Sitting Fees:

As per Rule 4 of the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014, the amount of sitting fees payable to a director for attending meetings of the Board or committees thereof may be such as may be decided by the Board of directors or the Remuneration Committee thereof which shall not exceed the sum of ₹ 1 lakh per meeting of the Board or committee thereof. Sitting fee for Independent Directors and Women Directors, shall not be less than the sitting fee payable to other directors.

Conclusion: Sitting fees to independent directors can be increased from ₹ 75,000 to ₹ 1,00,000 per meeting by passing a resolution in the Board Meeting.

Question 10.
A public company wants to include the following clause in its articles of association: “Each director shall be entitled to be paid out of the funds of the company for attending meetings of the board or a committee there off including adjourned meeting such sum as sitting fees as shall be determined from time to time by the directors but not exceeding a sum of ₹ 1,50,000 for each such meeting to be attended by the director”. You are required to advise the company as to the validity of such a clause and the correct legal position.
Answer:
Limit of Sitting Fees payable:

Conclusion: Proposed Clause as to sitting fees payable is not in order as sitting fees in excess of ₹ 1 lac is not permitted under the law. Further, sitting fees cannot be paid for adjourned meeting as it is considered as continuation of original meeting.

Question 11.
Mr. X was appointed as a director of Esquire Engineering Ltd. with effect from 1st April 2020. Since the company namely, Esquire Engineering Ltd. wanted to take full advantage of the wisdom and expertise of Mr. X, it offered him remuneration payable on monthly basis and made an application to the C.G. for approval for payment of such remuneration.

Anticipating the approval of the C.G. Esquire Engineering Ltd. started paying such remuneration from the date of appointment and continue to do so till 31st March 2021. The C.G. did not fully approve the remuneration proposed by the company and restricted the same to a lower amount.

On scrutiny of the accounts, it was established that the company till 31st March 2021 has paid to Mr. X a total sum of ₹ 1,20,000 in excess of the remuneration sanctioned by the C.G.

You are required to: State with reference to the provisions of the Companies Act, 2013 in respect of recovery and waiver of recovery of excess remuneration so paid, whether Mr. X can keep the excess remuneration so received and under what conditions.
Answer:
Provisions as to managerial remuneration:
Refund of excess remuneration:
As per Sec. 197(9) of Companies Act, 2013, If any director draws or receives, directly or indirectly, by way of remuneration any such sums m excess of the limit prescribed by this section or without approval required under this section he shall refund such sums to the company within two years or such lesser period as may be allowed by the company and until such sum is refunded, hold it in trust for the company.

Waiver of refund due from director:

As per Sec. 197(10) of Companies Act, 2013, the company shall not waive the recovery of any sum refundable to it unless approved by the company by special resolution within two years from the date the sum becomes refundable.

However, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining approval of such waiver.

Question 12.
International Technologies Limited, a listed company, being managed by a Managing Director pro-poses to pay the following managerial remuneration:
(i) Commission at the rate of 5% of the net profits to its Managing Director, Mr. Kamal.
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of ₹ 50.000 and also commission at the rate of 1% of net profits of the company subject to the condition that overall remuneration payable to ordinary directors including monthly remuneration payable to each of them shall not exceed 2% of the net profits of the company. The commission is to be distributed equally among all the directors.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a director, for professional services rendered as software engineer, whenever such services are utilized.

You are required to examine with reference to the provisions of the Companies Act, 2013 the validity of the above proposals. [May 16 (8 Marks), MTP-Oct.18, April 19, RTP-Nov. 20]
Answer:
Managerial remuneration:
(i) Commission to managing director @ 5%:

Second proviso to Sec. 197(1) of Companies Act, 2013 provides that except with the approval of the company in general meeting by a special resolution, the remuneration payable to any one managing director; or whole time director or manager shall not exceed 5 % of the net profits of the company and if there is more than one such director then remuneration shall not exceed 10 % of the net profits to all such directors and manager taken together.

Conclusion: Commission at the rate of 5% of the net profit to the Managing Director is allowed and no approval of company in general meeting by special resolution is required.

(ii) Remuneration of Other Directors:

Second proviso to Sec. 197(1) of Companies Act, 2013 further provides that the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,
(A) 1% of the net profits of the company, if there is a managing or whole-time director or manager;
(B) 3% of the net profits in any other case.

In the present case, directors other than the Managing Director are proposed to be paid monthly remuneration of ₹ 50,000 and also commission at the rate of 1% of net profits of the company subject to the condition that overall remuneration payable to ordinary directors including monthly remuneration payable to each of them shall not exceed 2% of the net profits of the company.

Conclusion: As the company is having a managing director, maximum remuneration allowed for directors other than managing or whole time director is 1% of the net profits of the company. Hence, if the company wants to fix their remuneration above 1% of the net profits of the company, the approval of the company in general meeting by special resolution is required.

(iii) Remuneration for services rendered by any director in other capacity:

Proviso to Sec. 19 7 (4) of Companies Act, 2013 states that remuneration for services rendered by any director in other capacity shall not be so included in managerial remuneration if
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee, if the company is covered u/s 178(1), or the BOD in other cases, the director possesses the requisite qualification for the practice of the profession.

In the present case, company proposes to pay additional remuneration to Mr. Bhatt, a director, for professional services rendered as software engineer, whenever such services are utilized.

Conclusion: Company can pay Mr. Bhatt, additional remuneration, for professional services which shall not be construed as a Managerial Remuneration under the Act.

Question 13.
The Articles of Association of a listed company provides for fixed payment of sitting fee for each meeting of Directors subject to maximum of ₹ 30,000. In view of the increased responsibilities of ‘ Independent Directors of listed companies, the company proposes to increase the sitting fee to ₹ 45,000 per meeting. Advise the company about the requirement under the companies Act, 2013 to give effect to the proposal. [Nov. 18-New Syllabus (4 Marks)]
Answer:
Increase in Sitting Fees:

Sitting fee for Independent Directors and Women Directors, shall not be less than the sitting fee payable to other directors.

Conclusion: Sitting fees to independent directors can be increased from ₹ 30,000 to ₹ 45,000 per meeting by passing a resolution in the Board Meeting and altering the Articles of Association by Special Resolution.

Question 14.
You are a young women Chartered Accountant from India, having graduated from a top notch business school in India and later on became a Certified Public Accountant (CPA) from USA. You have a special acumen for providing scratch to end business advisory and regulatory related solutions.

Your client, M/s. New Tech Software Solutions Limited (NTSSL) is a listed entity engaged in developing customised software packages for two and three wheeler automobile manufacturers in India and abroad. The Company follows strict corporate governance norms in letter and spirit and has the following composition of Board of Directors:

NAME	DESIGNATION/CATEGORY
Mr. X	CEO and Managing Director
Mr. Y	Non-independent and Non-Executive Director
Mr. A, Mr. B, Mr. C and Mr. D	Independent Directors
Mrs. E	Independent, Women Director

During the financial year 2020-2021, the Company made the following remuneration to its Directors:

Mr. X – CEO & MD	Monthly remuneration of 50,000 + Commission of ₹ 1,50,000 calculated as a percentage of net profits
Mr. Y	Commission at the rate of 1% of the net profit.

Others
(i) Mr. Y was paid a fee ₹ 1,00,000 for the services rendered by him as a graduate civil engineer for valuing the assets of the Company. Though he is not a Registered Valuer, he carried out the valuation on the assumption that, valuation can be done by a person having such qualifications and experience for registered valuers.

(ii) Payment of ₹ 5,00,000 insurance premium towards Directors and Officers Liability Policy to protect the Company against any negligence on the part of Mr. X, the Managing Director. A claim of ₹ 1,00.000 was lodged with the Insurance Company as a result of guilty of negligence of Mr. X.

With the above information, the said Company approached you seeking certain clarifications. Clearly explaining the relevant provisions of the Companies Act, 2013 and the Rules made there under, provide your professional advise to the following questions as raised by the Company:

(i) Whether the payments made to Mr. X and Mr. Y forms part of an overall maximum managerial remuneration?
(ii) Whether payment of insurance premium towards Directors and Officers Liability Policy form part of remuneration of Mr. X?
(iii) Who is the approving/recommending authority for the payments made to Mr. Y? [Nov. 20 – New Syllabus (8 Marks)]
Answer:
Provisions as to managerial remuneration:

As per Sec. 197(1) of Companies Act, 2013, the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in Sec. 198.

As per proviso to Sec. 197(4) of the Companies Act, 2013, any remuneration for services rendered by any director in other capacity shall not be so included if:
(a) the services rendered are of a professional nature; and
(b) in the opinion of the Nomination and Remuneration Committee, if the company is covered u/s 178(1) or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

As per Sec. 197(6) of Companies Act, 2013, a director or manager may be paid remuneration either byway of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.

As per Sec. 197(13) of Companies Act, 2013, where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, CEO, CFO or CS for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel:

Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:

(i) Payments made to Mr. X and Mr. Y forms part of an overall maximum managerial remuneration. Fees paid to Mr. Y for valuation services will also form part of managerial remuneration as by qualification he is an engineer. (It is assumed here that he does not possess requisite qualification for valuation purposes).

(ii) Payment of insurance premium towards Directors and Officers Liability Policy form part of remuneration of Mr. X considering the provisions of Sec. 197(13).

(iii) Approving authority as stated u/s 197(4) will be Nomination and Remuneration Committee, if the company is covered u/s 178(1) or the Board of Directors in other cases.

Question 15.
Non-executive directors of ABC Ltd. who are neither in the whole-time employment of the company nor managing director have been given the Guarantee commission has been paid to them for having guaranteed the term loans obtained from a financial institution. Examine the validity of payment in the light of the provisions of the Companies Act, 2013.
Answer:
Payment of Guarantee Commission:

Guarantee commission paid to directors for giving surety against loans or credit facilities taken by the company from financial institution is not a remuneration as the director giving guarantee does not render manual, clerical, technical, supervisory or administrative service.

He gets the commission for the risk which he bears and that has nothing to do with his directorship.

Conclusion: Considering the above, it may be concluded that the guarantee commission paid to the directors for guarantee provided on loan from a financial institution is valid.

Question 16.
A Public Limited Company is finalizing its accounts for the year ended 31.3.2020 and the Chief Financial Officer has been asked to compute the net profit for the purpose of managerial remuneration on the basis of the following information:
Net Profit as per the Profit and Loss Account : ₹ 500.00 lakhs

The Profit & Loss account includes the following items:
(i) Profit from the sale of a machinery : ₹ 50.00 lakhs
(ii) Profit from the sale of forfeited shares : ₹ 1.00 lakh
The Profit and Loss Account does not include the following items:
(i) Interest on unsecured loans and advances : ₹ 2.00 lakhs
(ii) Bad debts to the extent to be written off : ₹ 5.00 lakhs
Calculate the correct net profit for the purpose of determining the managerial remuneration. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Calculation of Profit for the purpose of determining the managerial remuneration:

Sec. 197(3) of Companies Act, 2013 enlist various items of which credit shall not be given in making the computation of net profit. In accordance with which, credit shall not be given to:

Profits on sales by the company of forfeited shares;
Profits from the sale of any immovable property or fixed assets of a capital nature.

Sec. 197(4) of Companies Act, 2013 enlist various items of which deductions are allowed in making the computation of net profit.’In accordance with which, deduction shall be allowed

Interest on unsecured loans and advances;
Debts considered bad and written off or adjusted during the year of account.

Based on the provisions as stated above, the correct net profit for the purpose of determining the managerial remuneration may be computed as below:

Net Profit as per the Profit and Loss Account	₹ 500.00 lakhs
Less: Profit from the sale of a machinery	₹ 50.00 lakhs
Less: Profit from the sale of forfeited shares	₹ 1.00 lakh
Less: Interest on unsecured loans and advances	₹ 2.00 lakhs
Less: Bad debts to the extent to be written off	₹ 5.00 lakhs
Net profit for the purpose of determining the managerial remuneration	₹ 442.00 lakhs

Question 17.
Can a company pay compensation to its directors for loss of office? Explain briefly the relevant provisions of the Companies Act, 2013 in this regard.
Answer:
Compensation for loss of office of managing director:

As per Sec. 202 of the Companies Act, 2013, a company may make payment to a managing director 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.

However, no payment shall be made in the following cases, namely:
(a) where the director resigns from his office as a result of the reconstruction or amalgamation of the company with another company and he 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 reconstruction or amalgamation;
(c) where the office of the director is vacated u/s 167(1);
(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.

Amount of compensation shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for 3 years, whichever is shorter.

Question 18.
Mr. Doubtful was appointed as Managing Director of Carefree Industries Ltd. for a period of five years with effect from 1.4.2018 on a salary of ₹ 12 lakhs per annum with other perquisites. The Board of directors of the company on coming to know of certain questionable transactions, terminated the services of the Managing Director from 1.3.2021. Mr. Doubtful termed his removal as illegal and claimed compensation from the company. Meanwhile the company paid a sum of ₹ 5 lakhs on adhoc basis to Mr. Doubtful pending settlement of his dues. Discuss whether:

(i) The company is bound to pay compensation to Mr. Doubtful and, if so, how much.
(ii) The company can recover the amount of ₹ 5 lakhs paid on the ground that Mr. Doubtful is not entitled to any compensation, because he is guiding of corrupt practice. [MTP-Aug. 18, May 20]
Answer:
Compensation for loss of office of managing director:

As per Sec.202 of the Companies Act, 2013, a company may make payment to a managing director 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.

However, compensation is not payable 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.

Amount of compensation shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for 3 years, whichever is shorter.

In the present case, Mr. Doubtful, Managing Director was appointed for a period of 5 years on w.e.f. 1.4.2018 on a salary of ₹ 12 lakhs p.a. Due to some allegation against him, his services were terminated from 1.3.2021 and company paid a sum of ₹ 5 lakhs on adhoc basis to him pending settlement of his dues. Mr. Doubtful termed his removal as illegal and claimed compensation from the company.

Conclusion: Based on the provisions of Sec. 202, following conclusions may be drawn:

(i) Company is not liable to pay any compensation, if it was found that director is guilty of fraud or breach of trust or gross negligence in the conduct of affairs of the company. Otherwise, compensation payable by the company would be ₹ 25 Lacs calculated at the rate of ₹ 12 Lacs p.a. for unexpired term of 25 months.

(ii) As far as ad hoc payment of ₹ 5 Lacs is concerned, it will not be possible for the company to recover the amount from Mr. Doubtful in view of the decision in case of Bell vs, Lever Bros, where it was observed that a director was not legally bound to disclose any breach of his fiduciary obligations so as to give the company an opportunity to dismiss him.

Question 19.
Mr. X was appointed as the managing director of ABC Ltd. for a period of five years with effect from 1st Jan. 2020. Since his work was found unsatisfactory, services were terminated from 10th April 2021 by paying compensation for loss of office as provided in the agreement entered into by the company.

Later the company discovered that during his tenure of office, Mr. X was guilty of many corrupt practices and that he should have been removed without payment of compensation. Advise the company whether the services of the managing director can be terminated without payment of compensation as provided in the agreement and whether the company can recover the amount already paid to Mr. X by filing a suit.
Answer:
Compensation for loss of office of managing director:

Amount of compensation shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for 3 years, whichever is shorter.

Conclusion: Mr. X can be removed without compensation if he is guilty of fraud or breach of trust or gross negligence.

As far as recovery of amount already paid is concerned, it will not be possible for the company to recover the amount from Mr. X in view of the decision in case of Bell vs. Lever Bros, where it was observed that a director was not legally bound to disclose any breach of his fiduciary obligations so as to give the company an opportunity to dismiss him.

Question 20.
Mr. Gopi is the Managing Director of LGB Limited. The company wants to vacate the post of Managing Director on March, 2021 and appoint Mr. lakshmikant in place of Mr. Gopi due to hands on experience and better track records. The tenure of appointment of Mr. Gopi is upto 30th June, 2024 with the condition that he will get compensation in case of early vacation of his office due to the Company’s requirements. Mr. Gopi was drawing following remuneration during the last five financial years:

Financial Year	Remuneration (₹ in Lakhs)
2016-17	30
2017-18	35
2018 -19	40
2019-20	45
2020-21	50

Mr. Gopi approaches you to know the amount of compensation he will be eligible to get from LGB Limited as per the provisions of the Companies Act, 2013. Advise.

What will be your answer if a person is only an ordinary director but neither the Managing Director nor a whole time director nor a manager of the company? [Nov. 18 – New Syllabus (8 Marks)]
Answer:
Compensation for loss of office of managing director:

Amount of compensation shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for 3 years, whichever is shorter.

Amount of compensation shall be calculated on the basis of the average remuneration actually earned by him during a period of 3 years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than 3 years, during such period.

In the present case remaining tenure of Mr. Gopi in the company is 4years and 3 months, therefor he is entitled to compensation for a maximum period of three years.

Average remuneration actually earned during a period of 3 years immediately preceding the date on which he ceased to hold office is arrived at ₹ 45 Lacs (40 Lacs + 45 Lacs + 50 Lacs /3).

Conclusion: Mr. Gopi is entitled for a compensation of ₹ 135 Lacs. (₹ 45 Lacs × 3 years].

If a person is only an ordinary director but neither the Managing Director nor a whole-time director nor a manager of the company, he will not be entitled to any compensation.

Question 21.
Primus group of companies has three companies, viz., Primus Rolling Mills Ltd., Primus Steel Pipe Manufacturers Ltd. and Primus Marketing Company Ltd. All the three companies want to appoint Mr. Prem as their managing director. You are required to state with reference to the provisions of the Companies Act, 2013 whether such appointments are permissible.
Answer:
Restrictions as to number of companies in case of whole time directors:

As per Sec. 203(3), a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company.
Such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting.
Specific notice of such meeting and of the resolution to be moved thereat, has been given to all the directors then in India.
In the present case, three companies, viz, Primus Rolling Mills Ltd., Primus Steel Pipe Manufacturers Ltd. and Primus Marketing Company Ltd. belonging to same group, want to appoint Mr. Prem as their managing director.

Conclusion: In compliance of provisions of sec. 203(3), appointment can be made in any two companies.

Question 22.
State the legal position in the given situations: Mr. X is a Whole Time Director (WTD) in a Super Ltd. He is also Whole Time Director (WTD) in its subsidiary company. Discuss the validity of Mr. X as WTD in its subsidiary company.
Answer:
Restrictions as to number of companies in case of whole time directors:

As per sec. 203(3) of the Companies Act, 2013, a whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time.
However, a KMP is not disentitled from being a director of any company with the permission of the Board.
In the instant case, Mr. X is a Whole Time Director (WTD) in a Super Ltd. He is also Whole Time Director (WTD) in its subsidiary company.

Conclusion: Mr. X can validly hold the position of Whole time director in the subsidiary of Super Ltd.

Question 23.
Explain the concept of KMP (Key Managerial Personnel) as introduced by the Companies Act, 2013. Explain the classes of companies which are required to appoint whole time Key Managerial Person
under the provisions of the said Act. [May 15 (4 Marks)]
Answer:
Key Managerial Personnel:
As per Sec. 203(1) of the Companies Act, 2013, every company belonging to such class or classes of companies as may be prescribed, shall have the following whole time Key Managerial Personnel.

(a) Managing Director or Chief Executive Officer or Manager and in their absence, a Whole-time Director;
(b) Company Secretary; and
(c) Chief Financial Officer.

Companies requiring to appoint KMP:

As per Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, every listed company and every other public company having a paid up share capital of ₹ 10 crore or more shall have a whole-time key managerial personnel.

As per Rule 8A of the Companies [Appointment and Remuneration of Managerial Personnel] Rules, 2014, every private company which has a paid up share capital of ₹ 10 crores or more shall have a whole-time company secretary.

Question 24.
ABC Limited, an unlisted company having a paid-up share capital of Ten crores of Rupees during the preceding financial year has appointed Shri X, a fellow member of the institute of chartered accountant of India as Chief Financial Officer of the company who is appointed as Key Managerial Personnel under section 203 of the Companies Act, 2013. Shri X is also a fellow member of the Institute of company secretaries of India.

The company secretary post has become vacant. In order to reduce the administrative expenses, the company proposes to appoint Shri X as company secretary in addition to Chief Financial Officer post. Whether the proposal is legally valid under the provisions of the Companies Act, 2013? [May 18 – Old Syllabus (4 Marks)]
Answer:
Additional Appointment of Whole time KMP – CFO as Company Secretary:

Section 203 of Companies Act, 2013 requires that every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel:

Managing Director, or Chief Executive Officer or manager and in their absence, a whole-time director;
Company Secretary; and
Chief Financial Officer.

Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires that every listed company and every other public company having a paid-up share capital of ₹ 10 crore or more shall have whole-time key managerial personnel.

In the present case, ABC Ltd. is having a paid-up share capital of ₹ 10 crore and Mr. X is appointed as CFO, being a KMP u/s 203. Now the company wants to appoint Mr. X as Company Secretary in addition to KMP (CFO) post.

The whole-time position signifies whole-time ‘employment’ for a particular position/job and it is logical and necessary that an individual has, in order to do justice to his job/functions, must deploy his whole time for such functions/duties. Thus, it cannot be wrong to say that an individual is not likely to render/fulfil the responsibilities of two whole-time positions at the same time, even in the same company.

Conclusion: It will not be advisable for the company to appoint Mr. X the CFO of the company as Company Secretary.

Question 25.
Mr. Amit is the Managing Director of ANJ Limited, which is a non-government public company. The directors of CHH Limited decided to appoint Mr. Amit as the Managing Director of the company, even though Mr. Amit decided not to vacate his place of office of Managing Director of AN) Limited. A notice for a Board meeting specifying a resolution containing the proposal of appointment of Mr. Amit was served to all the eligible directors of CHH Limited.

Out of eight directors of the company, six directors attended the meeting and out of them four directors gave consent to the resolution, one director voted against the said appointment and another director abstained from voting. The Board of Directors seek your opinion whether Mr. Amit can be appointed as the Managing Director of the company in this situation. Referring to the applicable provisions of the Companies Act, 2013, advise them. [May 18 – Old Syllabus (4 Marks), RTP-Nov.18]
Answer:
Appointment of Key Managerial Personnel:

As per Sec. 203(3) of the Companies Act, 2013, a whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time.

However, a KMP is not disentitled from being a director of any company with the permission of the Board.

A company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company. Such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting. Specific notice of such meeting and of the resolution to be moved thereat, has Been given to all the directors then in India.
In the given case, unanimous consensus of all the directors present at the meeting was lacking.

Conclusion: Mr. Amit cannot be appointed as Managing Director of CHH Ltd. as board resolution was not passed with unanimous consent.

Question 26.
Mr. Mania is the Managing Director of S Limited (and nowhere else), which is a subsidiary of H Limited. Seeing the success of S Limited, the directors of H Limited (which is a listed company) decided and approached Mr. Mania to act as the Managing Director of H Limited. Mr. Mania agreed with the directors of H Limited subject to a condition that he will continue to act as the Managing Director of S Limited also.

In this direction, the directors of H Limited propose to appoint him by means of a resolution (containing the terms and conditions of appointment excluding remuneration) by circulation. Referring of and analyzing the relevant provisions of the Companies Act, 2013, decide whether the decision of appointing and the proposed mode of appointment of Mr. Mania as the Managing Director of H Limited is valid.
Will your answer differ in case S Limited is not a subsidiary of H Limited? [May 19 – Old Syllabus (4 Marks)]
Answer:
Appointment of Key Managerial Personnel:

As per Sec. 203(2) of the Companies Act, 2013, every whole-time KMP of a company shall be appointed by means of a Board Resolution containing the terms and conditions of the appointment including the remuneration.

As per Sec. 203(3), a whole-time KMP shall not hold office in more than one company except in its subsidiary company at the same time.

As per 3rd proviso to Sec. 203(3), a company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company. Such appointment or employment is made or approved by a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting. Specific notice of such meeting and of the resolution to be moved thereat, has been given to all the directors then in India.

Conclusion: Appointment of KMP can be made in duly convened meeting of Board. Proposed mode of appointment i.e. resolution by circulation is not a valid mode. Further Board Resolution must contain the terms and conditions of the appointment including the remuneration.
In case S Ltd. is not a subsidiary of H Ltd. answer remains same applying the provisions of 3rd proviso to Sec. 203(3).

Question 27.
M/s BEF Ltd., a public limited company is having a paid-up share capital of ₹ 55 crore. Whether it is obligatory for the company to conduct secretarial audit. Will it make any difference if the capital of the said BEF Ltd. was ? 45 Crores. If yes, what other formality would have to be complied by it under the provisions of the Companies Act, 2013 in this regard?
Answer:
Secretarial Audit:

As per Sec. 2 04 of Companies Act, 2013, every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board’s report made in terms of Sec: 134(3), a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed.

As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, for the purposes of Sec. 204(1), the other class of companies shall be as
(a) every public company having a paid-up share capital of ₹ 50 crore or more; or
(b) every public company having a turnover of ₹ 250 crore or more; or
(c) every company having outstanding loans or borrowings from banks or public financial institutions of ₹ 100 crore or more. For this purpose, it is clarified that the paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

In the present case, M/s BEF Ltd., a public limited company is having a paid-up share capital of ₹ 55 crore.

Conclusion: Secretarial audit is required as paid up share capital exceeds ₹ 50 Crores. However, Secretarial audit will not be required if the paid-up share capital is ₹ 45 Crores.

Other formalities to be complied with: As per Requirements of Sec. 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, company is required to appoint KMP.

Question 28.
PQR Limited is paying remuneration to its non-executive director at the rate of 1% of the net profits of the company distributed equally among all the non-executive directors. Is it possible for the company to pay minimum remuneration to non-executive directors beside sitting fees in the event of loss in a financial year.
Answer:
Remuneration of Other Directors:

Second proviso to Sec. 197(1) of Companies Act, 2013 provides that the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed,
(A) 1% of the net profits of the company, if there is a managing or whole-time director or manager;
(B) 3% of the net profits in any other case.

Remuneration to a non-executive director may be paid only if the company had made profits. Schedule V does not empower a company to pay remuneration to its non-executive directors where the company has suffered a loss.
However, there is no prohibition on payment of sitting fees.

Question 29.
Advise Super Specialties Ltd. in respect of the following proposals under consideration of its Board of directors: Payment of remuneration of ₹ 40,000 per month to the whole-time director of the company running in loss and having an effective capital of ₹ 95.00 lacs.
Answer:
Managerial Remuneration in case of company running in losses:

Section II of Part II of Schedule V provides that where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person not exceeding ₹ 60 Lakhs for the year if the effective capital of the company is negative or upto ₹ 5 Crores.

In the instant case, company is running in losses and considering a proposal of payment of remuneration of ₹ 40,000 per month to the whole-time director. Effective capital of the company is ₹ 95 lacs.

Conclusion: Proposed remuneration can be paid if conditions as specified in Section II, Part II of Schedule V are being fulfilled.

Question 30.
M/s Supreme Technologies Ltd. propose to appoint Mr. E and Mr. F as whole-time directors for a period of three years with effect from 1st Dec. 2020. The company proposes to pay a consolidated salary of ₹ 80,000 p.m. to each of them. Mr. D, the managing director of the company has been appointed for a period of five years with effect from 1st Jan., 2018 on a remuneration payable in the form of commission at the rate of 5% of net profit subject to a minimum remuneration of ₹ 80,000 p.m.

The effective capital of the company at the end of the financial year ending 31st March 2020 is ₹ 4.5 Crores and it has been increased to ₹ 5.5 Crores on 1st April, 2020 by way of right issue of equity shares. The company has not repaid dues of secured creditors and the default subsists from 1st April, 2020.

The company seek your advice on the steps to be taken to comply with the requirements of Sec. 197 read with Schedule V of the Companies Act, 2013 with regard to the proposed appointment of Mr. E and Mr. F as whole-time directors. Advice explaining the relevant provisions.
Answer:
Steps to be taken to comply with requirements of Sec. 197 and Schedule V with regard to proposed appointment of Mr. E and Mr. F as whole-time directors:

(A) Consideration of Effective Capital:

Section II of Part II of schedule V provides that where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person not exceeding ₹ 60 Lakhs for the year if the effective capital of the company is negative or upto ₹ 5 Crores.

Effective capital shall be calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made. The effective capital of the company at the end of the financial year ending 31st March 2020 is ₹ 4.5 Crores. Hence the maximum permissible limit of managerial remuneration will be ₹ 60 lakhs per year or ₹ 5 Lacs p.m.

In the present case, the remuneration payable to Mr. D, Mr. E and Mr. F is ₹ 80000 p.m. to each person. Total payment per month will be ₹ 2,40,000. It is in order.

(B) Default in payment of secured creditors:

As per Schedule V, if the company has committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

It has been stated in the question that company has not paid secured creditors and the default subsists from 1st April 2020, prior approval of secured creditors will be required before obtaining the approval for managerial remuneration in the general meeting.

Terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting and such approval shall be subject to the approval of shareholders by a resolution at the next general meeting of the company.

The notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, of a director or directors in such appointments, if any.

A return in the prescribed form (Form No. MR.1] along with the prescribed fee shall be filed with the Registrar within sixty days of such appointment.

Payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered u/s 178(1) also by the Nomination and Remuneration Committee.

Question 31.
EF chemicals Ltd. proposes to appoint one whole time technical director on a consolidated monthly remuneration of ₹ 30,000 and one whole time marketing director on a consolidated salary of ₹ 25,000 per month for a period of three years, with effect from 1st Oct., 2020. The company has got a managing director and he is getting ₹ 40,000 per month. Explain the requirements under the Companies Act, 2013 to be complied with by the company in connection with the proposed appointment of whole time directors taking into account the following data collected from the balance sheet of the company as on 31st March, 2020:
Paid-up share capital : ₹ 80 lakh
Debentures redeemable after three years : ₹ 90 lakhs
Investment : ₹ 20 lakh
Accumulated loss : ₹ 70 lakh
Preliminary expenses not written off : ₹ 15 lakh
Answer:
Requirements to be complied with in connection with appointment of whole time directors:

Sec. 197(3) of Companies Act, 2013 provides that if in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including managing or whole-time director or manager, any remuneration exclusive of any fees payable to directors except in accordance with the provisions of Schedule V. Remuneration payable as per Schedule V is based on effective capital of the company calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

Effective Capital as on 31.03.20: ₹ 80 lakhs + ₹ 90 lakhs – ₹ 20 lakhs – ₹ 70 lakhs – ₹ 15 lakhs = ₹ 65 lakhs.

Hence the maximum remuneration payable to each of its managerial personnel can be upto ₹ 60 Lakhs.

Conclusion: It is permissible to appoint one whole time technical director on a consolidated monthly remuneration of ₹ 30,000 and one whole time marketing director on a consolidated salary of ₹ 25,000 per month along with a managing director who is getting ₹ 40,000 per month.

Other requirements to be complied with:

A return in the prescribed form (Form No. MR.1) along with the prescribed fee shall be filed with the Registrar within sixty days of such appointment.
Payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered u/s 178(1) also by the Nomination and Remuneration Committee.

Question 32.
Mr. Ram was appointed as managing director of Prudential Company Limited in accordance with Schedule V for a period of five years with effect from 1st April, 2020 on a remuneration of ₹ 30 lakh per year. The board of directors of the company proposed to increase the remuneration of the managing director to ₹ 40 lakh per year.

Advise the board of directors about the legal requirements under the Companies Act, 2013 to give effect to the proposal. State whether the increased remuneration can be paid as minimum remuneration in the event of loss or in adequacy of profit.
Answer:
Legal requirements to increase in remuneration:

Sec. 197(11) of Companies Act, 2013 provides that in cases where Schedule V is applicable on grounds of no profits or inadequate profits, any proposal to increase the remuneration shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule.

In the given case, the effective capital of Prudential Company Limited is not given. Permissible limit for Managerial remuneration is ₹ 60 lakhs p.a. for the effective capital of the company is negative or less than ₹ 5 crores. For higher effective capital, higher limits of managerial remuneration are prescribed.

Conclusion: Proposed remuneration of ₹ 40 lakhs per year is permissible irrespective of any amount of effective capital.

Question 33.
The managing director of M/S Speculative Builder Ltd. has resigned, as the company was not doing, well and also incurring losses. The Board of Directors have decided to appoint Mr. Reliable aged 71 years as the new Managing Director, because of his proven track record of nearly 50 years, turning sick companies into profitable ones.

The only condition put forth by Mr. Reliable is that he should be paid the maximum permissible salary and perquisites as provided in the Companies Act, 2013 without requiring the approval of Central Government. The effective capital of the company is ₹ 20 Crores. Advise the company about:
(a) The procedure to be followed for the appointment of Mr. Reliable.
(b) The Quantum of remuneration payable to him.
Answer:
Procedure to be followed for appointment of Mr. Reliable as Managing Director:

As the age of Mr. reliable is more than 70 years, hence, in accordance with provisions of Sec. 196(3), approval of the members by a special resolution passed by the company in the general meeting will be required and the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.

As per Sec. 196(4) of Companies Act, 2013, subject to the provisions of Sec. 197 and Schedule V, a managing director, whole-time director or manager shall be appointed and the terms and conditions of such appointment and remuneration payable be approved

by the BOD at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and
by the C.G. in case such appointment is at variance to the conditions specified in Part I of the Schedule V.

Approval of C.G. is required only if the appointment is not in accordance with Part I of Schedule

Quantum of Remuneration payable:

Section II of Part II of schedule V provides that where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person not exceeding ₹ 84 Lakhs for the year if the effective capital of the company is ₹ 5 crores and above but less than ₹ 100 crores.

Remuneration in excess of above limit may be paid if approved by the members by special resolution and further if the appointment is for a part of the financial year the remuneration will be pro-rated.

Conclusion: The maximum permissible remuneration shall be ₹ 84 Lakhs (If ordinary Resolution passed). In addition, following perquisites may also be paid:
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent not taxable under the Income-tax Act, 1961;
(b) Gratuity payable at a rate not exceeding 1/2 month’s salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.

Question 34.
Board of directors of Colourful Textiles Ltd. having its Effective capital of ₹ 4 crores propose to appoint one of the directors, Mr. Shyam as managing director for 3 years with effect from 1st Dec. 2020 on a consolidated monthly salary of ₹ 40,000 p.m. Mr. Shyam is already the managing director of Unique Yarn Ltd. receiving a consolidated salary of ₹ 35,000 per month. The effective capital of Unique Yarn Ltd. is ₹ 2 crores. What are the legal requirements to be complied with by Colourful Textiles Ltd. to give effect to the proposed appointment.
Answer:
Managerial remuneration from more than one company:

As per Sec. V of Part II of Schedule V, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

According to Schedule V, Part II, Section II(A), if the effective capital is Negative or less than ₹ 5 crores, yearly remuneration payable shall not exceed ₹ 60 lakhs.

In the present case, effective capital of both the companies is less than ₹ 5 crore. So, the proposed remuneration of ₹ 40,000 p.m. in Colourful Textile Ltd. and also the existing remuneration of ₹ 35,000 p.m. in Unique yarn Ltd. is within the limits. Total Remuneration: (₹ 40,000 × 12) + (₹ 35000 × 12) = ₹ 9,00,000 is less than ₹ 60 lakhs.

Company need to take following steps to give effect to his valid appointment:
(a) Company shall pass unanimous resolution at a Board meeting. Notice of such Board meeting should be given to all directors.
(b) Resolution should be passed at general meeting approving his appointment.
(c) Disclosure of nature of interest of any director.

Question 35.
Neemuch Pharma Limited having an “Effective Capital” of ₹ 4 crore as on 31st March, 2020 raised ₹ 2 crore by way of issue of right shares in May, 2020 during the current Financial Year 2020-2021. The company is managed by Mr. Chandrasekhar, the Managing Director, and he is getting a minimum remuneration of ₹ 80,000 per month. The company proposes to appoint two whole-time Directors in July, 2021 on a consolidated minimum salary of ₹ 60,000 per month to each of them.

What is the “Effective Capital” for the purpose of determining the minimum remuneration payable to the proposed Whole-time Directors? State the requirements to be complied with under Schedule V to the Companies Act, 2013 to give effect to the proposed appointments. [Nov. 12 (8 Marks)]
Answer:
Effective Capital:
Effective capital means the aggregate of

the paid-up share capital (excluding share application money or advances against shares);
amount, if any, for the time being standing to the credit of share premium;
reserves and surplus (excluding revaluation reserve);
long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of;
any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities);
accumulated losses; and
preliminary expenses not written off.

Appointment of whole time directors: Neemuch Pharma Limited proposes to appoint two wholetime Directors in July, 2020 on a consolidated minimum salary of ₹ 60,000 per month to each of them. According to Explanation of Schedule V, the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which appointment is made. In this case, the effective capital on 31st March, 2020 (i.e. the last date of the preceding financial year) is ₹ 4 crores. The right issue of shares in May, 2020 is not relevant here for the purpose of ascertaining effective capital.

According to Schedule V, Part II, Section II (A), if the effective capital is Negative or less than ₹ 5 crores, yearly remuneration payable shall not exceed ₹ 60 lakhs. This ceiling shall apply for each Managing Director and/or whole-time director. In the given case, the proposed minimum remuneration for each of the whole-time directors is ₹ 60,000 p.m. and also Mr. Chandrasekhar, the existing Managing Director is only ₹ 80,000 p.m. i.e. within the ceiling laid down above.

Hence the appointment of two whole time directors can be made complying the following requirements under section 197 read with Schedule V.
(a) Remuneration approved by Board and remuneration committee (if exists).
(b) Board meeting must be convened to appoint them as additional directors if they are not directors.
(c) Approval should be obtained in general meeting by ordinary resolution.

Question 36.
Mr. Smart, a technocrat aged 71 years and reputed to be a specialist in reviewing sick companies is being considered to be appointed as Managing Director of Downhill Industries Limited. The com-pany has been incurring losses for the past several years and its “effective capital” is ₹ 500 crores. Referring to the provisions of the Companies Act, 2013, discuss:
(i) Can Mr. Smart be appointed as Managing Director of the company despite being over 70 years of age? If so, what is the process to be followed to enable this?
(ii) What is “effective capital” as per Schedule V of the Act?
(iii) What is the maximum permissible remuneration under the Companies Act, 2013? [Nov. 16 (8 Marks)]
Answer:
Provisions as to appointment and remuneration of managing director:
(i) Appointment of Managing Director: .

As per Sec. 196 (3) of the Companies Act, 2013, no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who is below the age of 21 years or has attained the age of 70 years.

However, it is also provided that a person who has attained the age of 70 years may be employed as managing director, whole-time director or manager by the approval of the members by a special resolution passed by the company in the general meeting and the explanatory statement annexed to the notice for such motion-shall indicate the justification for appointing such person.

Conclusion: Downhill Industries Limited can appoint Mr. Smart aged 71 years as Managing Director by passing Special resolution and justifying his appointment in the explanatory statement annexed to the notice for such motion.

(ii) Effective Capital as per Schedule V:
Effective capital means the aggregate of

the paid-up share capital (excluding share application money or advances against shares);
amount, if any, for the time being standing to the credit of share premium;
reserves and surplus (excluding revaluation reserve);

long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of;

any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities);
accumulated losses; and
preliminary expenses not written off.

(iii) Maximum Permissible Remuneration:
As per Section II of Part II of Schedule V, where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person not exceeding ₹ 120 lakhs plus 0.01% of the effective capital in excess of ₹ 250 crores in case where the effective capital is 250 crores and above.

Hence, the maximum permissible remuneration shall be 120 lakhs plus 0.01% of 250 crore [500 crore – 250 crore]: ₹ 120 Lakhs + 2.5 lakhs is ₹ 122.5 Lakhs.

Question 37.
Excel limited is a listed company with a turnover of ₹ 60 crores in the FY 2020-2021. The company appoints Ms. R as the women director on 1st March, 2021. Ms. R is chartered accountant in practice.

Further, also, Ms. R, is a director in Supreme Ltd. where he is acting in a professional capacity. Since lots of proposal for the holding of directorship in various companies are lined up before the Ms. R, so in order to retain her, Remuneration and nomination committee proposed to enhance the remuneration of Ms. R from 4 Lac per month to 6 Lac per month. However, Supreme Limited was running in losses for last 2 years.
Analysis the proposition of enhancement of the remuneration of Ms. R in Supreme Ltd. [MTP-April 18, RTP-May 18, Nov. 20-New Syllabus (2 Marks)]
Answer:
Managerial Remuneration in case of company running in losses:

Item B of Section II of Part II of Schedule V provides that in case of a managerial person who is functioning in a professional capacity, remuneration as per item (A) may be paid, if such managerial person,

is not having any interest in the capital of the, company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and

not having any, direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last 2 years before or on or after the date of appointment and

possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates.

As per Item (A) of Section II of Part II of Schedule V, where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person on the basis of effective capital.

Conclusion: As Ms. R is working in professional capacity and the remuneration has been proposed by the remuneration Committee, remuneration based on effective capital may be paid.

If effective capital of the company is negative or less than ₹ 5 Crore, remuneration upto ₹ 60 Lacs can be paid by ordinary resolution; for remuneration in excess of ₹ 60 lacs, special resolution will be required. However, if effective capital is ₹ 5 Cr. or above but less than ₹ 100 Crores, remuneration upto ₹ 84 lacs can be paid by ordinary resolution.

Question 38.
Venus Limited is a widely held lilsted company having two executive directors who are technocrats. The company has suffered losses In the last four years. The company wants to enhance the remuneration of the executive directors to ₹ 6,00,000 p.m. from existing remuneration of ₹ 4,00,000, The audited balance sheet as on 31st March 2021 reveals that the paid up capital of the company is ₹ 15 crores, accumulated losses ₹ 11 crores and secured long term borrowings ₹ 5 crores.

Besides, the company has long term investments of ₹ 11 crores. The company’s remuneration committee has recommended the proposal and the company is regular in repayment of its debts analyse the proposition with reference to the provisions of the Companies Act 2013. ‘‘ [Nov. 17 (6 Marks))
Answer:
Managerial Remuneration in case of company running in losses:

Item B of Section II of Part II of Schedule V provides that in case of a managerial person who is functioning in a professional capacity, remuneration as per Item (A) may be paid, if such managerial person,

is not having any interest in the capital of the company or its holding company or any of its subsidiaries directly or indirectly or through any other statutory structures and

not having any direct or indirect interest or related to the directors or promoters of the company or its holding company or any of its subsidiaries at any time during the last 2 years before or on or after the date of appointment and

possesses graduate level qualification with expertise and specialised knowledge in the field in which the company operates.

As per Item (A) of Section II of Part II of Schedule V, where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may pay remuneration to the managerial person on the basis of effective capital.

Effective capital of the company arrived in this case is negative (Paid up capital ₹ 11 Cr. + Borrowings ₹ 5 Cr. – Accumulated losses ₹ 11 Cr. – long term investments ₹ 11 Cr.).
In case of negative effective capital, remuneration upto ₹ 60 Lacs can be paid by ordinary resolution; for remuneration in excess of ₹ 60 lacs, special resolution will be required.
Limits specified under Section II of Part II of Schedule V shall apply if following conditions are satisfied:

(i) payment of remuneration is approved by a resolution passed by the Board and, in the case of a company covered u/s 178(1) also by the Nomination and Remuneration Committee;

(ii) the company has not committed any default in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, and in case of default, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting

The total remuneration that Venus Limited is intending to pay to two technocrats is ₹ 144 lakhs p.a., from the current remuneration of ₹ 96 lakhs p.a.

Conclusion: Considering the requirements of Schedule V as discussed above, a maximum remuneration of ₹ 120 lakhs may be paid to both directors. For paying remuneration of ₹ 144 Lakhs, special resolution will be required.
Assumption: The term technocrat used for the directors has been interpreted as that the directors are ‘functioning in a professional capacity’.

Question 39.
Mr. X, a Director of MJV Ltd., was appointed on 1st Apr11, 2020, one of the terms of appointment was that in the absence of adequacy of profits or if the company had no profits in a particular year, he will be paid remuneration in accordance with Schedule V. For the financial year ended 31st March, 2021, the company suffered heavy losses. The company was not in a position to pay any remuneration but he was paid 50 lacs for the year, as paid to other directors.

The effective capital of the company is ₹ 150 crores. Referring to the provisions of Companies Act, 2013, as contained in Schedule V, examine the validity of the above payment of remuneration to Mr. X. [Nov.18-old Syllabus (4 Marks), MTP – March 19, RTP – May 191
Answer:
Managerial Remuneration in case of company running in losses:

Section 11 of Part II of schedule V provides that where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person not exceeding ₹ 120 Lakhs for the year if the effective capital of the company is ₹ 100 crores and above but less than ₹ 250 crores.

In the instant case, company is running in losses and paid ₹ 50 lacs to the director for the year.

Question 40.
Shining star limited, a listed company, deals in sole business of trading of Aluminium foils and sheets. Due to economic slowdown and less domestic consumption company was running into the losses. Hr- Chander, an eminent professional with vast experience in cost management, was appointed on the Board of company as whole time director. He enjoyed his 75th birthday on the same date of his appointment i.e. 18.07.2020.

Following relevant extracts from latest audited financial statements (as on 31 March 2019), were;

Authorised Share capital is ₹ 390 crores,.out of which paid up share capital was ₹ 215 crores; company was in process of FPO, hence had balance of ₹ 15 crores in share application money account.
Balance of reserve and surplus was ₹ 170 crores, out of which ₹ 150 crores was general reserve and ₹ 20 crores was on accounts of revaluation reserve.
Outstanding amount for long term loans was ₹ 200 crores.
Company had investment of ₹ 40 crores at book value; due to economic slowdown same is not liquid investment.
Accumulated losses were of ₹ 10 crores.

In the light of the stated facts, evaluate the given situations in terms of the relevant provisions of the Companies Act, 2013-

(i) As to the validity of appointment of Mr. Chander, as managerial person in office of whole time director in Shining Star Limited.
(ii) Compute the Effective capital of Shining Star Limited for payment of managerial remuneration.
(iii) Since Shining Star was running in loss, state the maximum amount of remuneration to be paid on yearly basis to each managerial person. [MTP-Oct. 19, RTP-May 20]
Answer:
Appointment and Remuneration of managerial Personnel:

(i) As per Sec. 196(3) of the Companies Act, 2013, no company shall appoint or continue the employment of any person as managing director, whole-time director or manager who is below the age of 21 years or has attained the age of 70 years, unless that appointment of a person who has attained the age of 70 years may be made by passing a special resolution in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such person.

Where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast against the motion and the Central Government is satisfied, on an application made by the Board, that such appointment is most beneficial to the company, the appointment of the person who has attained the age of 75 years may be made.

Conclusion: Appointment of Mr. Chander in the shining Ltd. being of 75 years, is valid if provisions as stated in Sec. 196(3) are being complied with.

(ii) As per Section II of Part II of Schedule V to the Companies Act, 2013, “effective capital” means the aggregate of the paid-up share capital (excluding share application money); securities premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.
Effective capital may be computed as:

Particulars	Amounts (₹ in Cr.)
Paid up share capital (Excluding share application money) (215-15)	200
General Reserve (Excluding Revaluation Reserve) (170-20)	150
Long term loans	200
Less: Investments (40) and Accumulated losses (10)	(50)
Effective Capital	500

(iii) As per Section II of Part II of Schedule V to the Companies Act, 2013, incase of no or inadequate profits, if effective capital of company is ₹ 250 crore or more then, yearly remuneration per person payable shall not exceed by ₹ 120 lakh plus 0.01% of the effective capital in excess of ₹ 250 crore.
The maximum remuneration that may be paid to each managerial person will be [120 lakh+ (0.01% × 250 cr)] = ₹ 122.5 lakh:

Provided that the remuneration in excess of above limits may be paid if the resolution passed by the shareholders is a special resolution.

Question 41.
The effective capital of Goldsmith Ornaments Limited at the end of the financial year ending 31st March, 2020 is ₹ 4.5 Crores and it has been increased to ₹ 5.5 Crores on 30th June, 2020 by way of rights issue of equity shares. The company proposes to appoint Mr. Edward and Mr. Robinson as whole time directors for a period of three years with effect from 1st November, 2020. The company proposes to pay a consolidated salary of ₹ 2,00,000 per month to each of them.

Advise the company explaining the relevant provisions, whether it can pay the proposed salary and also on the steps to be taken to comply with the requirements of Section 197 read with Schedule V of the Companies Act, 2013 with regard to the proposed appointment of Mr. Edward and Mr. Robinson as whole time directors. [Nov. 19 – Old Syllabus (5 Marks)]
Answer:
Remuneration payable to Managerial Personnel:

As per Schedule V, Part II, Section 11(A), if the effective capital is Negative or less than ₹ 5 crores, yearly remuneration payable shall not exceed ₹ 60 lakhs.

According to Explanation of Schedule V, the effective capital shall be calculated as on the last date of the financial year preceding the financial year in which appointment is made. In this case, the effective capital on 31st March, 2020 (i.e. the last date of the preceding financial year) is ₹ 4.5 crores. The right issue of shares in June, 2020 is not relevant here for the purpose of ascertaining effective capital. This ceiling shall apply for each Managing Director and/or wholetime director.

In the given case, Goldsmith Ornaments Limited proposes to appoint two whole-time Directors on a consolidated salary of ₹ 2,00,000 per month to each of them, which is within the limit specified above.

Conclusion: The appointment of two whole time directors can be made complying the following requirements under section 197 read with Schedule V.
(a) Remuneration approved by Board and remuneration committee (if exists).
(b) Board meeting must be convened to appoint them as additional directors if they are not directors.
(c) Approval should be obtained in general meeting by ordinary resolution.

Question 42.
Mr. Talented was a director ina holding company and also in its subsidiary company. He was drawing his managerial remuneration from both the companies in his capacity as a director. It was brought to the attention of the company that he cannot draw remuneration from both the companies because of virtue of relationship as a holding and subsidiary company. Discuss on the legality of drawing managerial remuneration by Mr. Talented from both the companies. [MTP-Oct. 20]
Answer:
Remuneration payable to a managerial person in two companies:

Sec. 197(14) of Companies Act, 2 013 requires that any director who is in receipt of any commission from the company and who is managing or whole-time director of the company shall not be disqualified from receiving any remuneration of .commission from-any holding or subsidiary company of such company subject to its disclosure by the company in the Board’s report.

As per Section V of Part II of Schedule V, a managerial person shall draw remuneration from one or both companies, provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is managerial person.

Conclusion: Based on the provisions as stated above, Mr. Talented is advised to check that it does not exceed the higher maximum limit admissible in any of the companies i.e. either holding or subsidiary.

Appointment and Remuneration of Managerial Personnel – CA Final Law Study Material

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