SECTION 309

REMUNERATION OF DIRECTORS

Interest on advances / guarantee commission paid to directors - Whether the same are to be included in remuneration of directors for purposes of the section.

Query : Section 309 provides, inter alia, that the remuneration payable to the directors of a company as determined by sub-section (1) of section 309 shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. Directors in their day-to-day business normally render advances of a temporary nature to the company. Would interest that accrues on such advances when paid to the directors be included in the expression "remuneration" for purposes of section 309? In other words, the question is whether the services rendered by a director in any other capacity include financial services as well.

Again, payment of guarantee commission to a director on the guarantee furnished by him to the banks for credit facilities granted by the bank to the company every year would appear to fall within the purview of section 309 read with section 310. This needs to be clarified in view of the fact that financial services of this nature may not be rendered by directors in any other capacity.

Answer : Payment of guarantee commission to a director of the company is a remuneration received by him for doing some service to the company, viz., undertaking liability in respect of the guarantee of the loan taken by the company. Such a remuneration would, therefore, fall within the purview of section 309. The payment of interest to directors for advancing loans to the companies, on the other hand, is a return for investment which they could have even otherwise earned by investing their money either in a bank or at any other place. Such an amount, therefore, cannot be termed as "remuneration" within the meaning of section 309

* LETTER NO 8/26(309)/76-CL-V, DATED 9.1.1978.

Condition restricting travelling / daily allowances to limits laid down in Income-tax-Rules - Whether to be imposed while giving approval under the section

Whether the condition restricting travelling and daily allowance, which may be paid to the directors of the company for performing journeys on the business of the company, to the limits laid down in rule 6D of the Income-tax Rules, 1962 should be imposed, has been considered in consultation with the Company Law Advisory Committee. Having regard to the various practical difficulties faced by the companies in complying with the aforesaid condition, the Central Government have decided that no such condition need be imposed. The companies may, however, be advised to ensure that the payment will be on the basis of actual expenditure and expenditure kept to the minimum.

* CIRCULAR NO.5/75, DATED 1.2.1975.

Prerequisite for Central Government's approval under sub-section (4)

Clarification 1

Query : Under the provisions of the Act, where a company has a managing director, commission of 1 per cent is permitted to be paid to the other directors and where there is no managing director, commission upto 3 per cent can be paid. Where commission was previously not paid because of financial difficulties and the company subsequently applies for payment of commission as per the agreement, articles or resolution of the board of directors, the Department refuses sanction and questions about additional specific duties and functions performed by the directors. There is no justification for this and the commission should in the normal course be sanctioned under the provisions of the Act.

Answer : The matter regarding the payment of commission to directors has since been considered. The Department is not in favour of allowing this commission to ordinary directors in companies which are managed by managing / whole-time directors. In case where the companies are not managed by managing/whole-time directors and some specific duties have been entrusted to the directors, this Department has been allowing commission of 1 per cent subject to a ceiling of Rs.10,000 per annum.

* LETTER NO.S/2///MISC.0/75-CL-SV, DATED 31.3.1976

Clarification 2

If the company desires to pay commission of 1 per cent on net profits to its directors under sub-section (4), it should be able to bring out what specific services are being rendered by the directors and also furnish adequate justification in support of the proposals. Otherwise the payment of a commission to ordinary directors would not be approved.

*CLARIFICATION GIVEN BY DEPARTMENT OF COMPANY LAW ADMINISTRATION./

Clarification on amendments in section 310/311 by the Companies (Amendment) Act, 1988.

Approval of the Central Government will not be required in cases where the increase in remuneration is in accordance with the terms and conditions specified in Part II read with Part III of Schedule XIII. However, no return is required to be filed with the concerned Registrar of Companies and no further resolution in respect of paragraph 1 of Part III will be required to be passed if the proposed increase is already covered by an earlier resolution of the shareholders. Similarly, resolution regarding 10% cut will also not be required, if covered by an earlier resolution.

* CIRCULAR NO. 3, DATED 13.4.198921