1956 (10) TMI 22 - HC - Companies Law

Court clarifies remuneration for director as technical adviser not under Companies Act, 1956 Section 309.

The court ruled that the remuneration paid to a director as a technical adviser does not fall under Section 309 of the Companies Act, 1956. Section 309 ... Remuneration of directors - managerial remuneration - remuneration of managing agents - place of profit - temporal operation of provisions in respect of financial year beginning at or after commencement - computation of net profits for managerial limitsRemuneration of directors - place of profit - Whether section 309(3) extends to remuneration paid to a director in any capacity other than as a director (for example, as a technical employee). - HELD THAT: - Section 309(3) must be read with subsection (2), which refers to remuneration payable to a director in his capacity as a director. The expression 'wholetime director' is juxtaposed with 'managing director' and, in context, denotes a director who devotes his whole time to management. By contrast, where the Legislature intended to exclude remuneration paid in another capacity it has expressly done so elsewhere (see section 318(5)). Thus subsection (3) is confined to remuneration relating to the director's capacity as a director (i.e., for management services) and does not extend to sums paid to a director in a separate capacity such as a technical adviser. The safeguards against evasion of managerial limits lie elsewhere in the Act (for example, the requirement of a special resolution under section 314 for holding an office or place of profit).Section 309(3) does not cover remuneration paid to a director for services in any capacity other than that of a director; negative answer.Managerial remuneration - computation of net profits for managerial limits - temporal operation of provisions in respect of financial year beginning at or after commencement - Whether the monthly salary paid to the third defendant as technical employee (also a director) is to be included in the overall managerial remuneration limit of 11% under section 198(1). - HELD THAT: - Section 198 is aimed at controlling the cost of management and applies to managerial remuneration. The marginal note and context indicate the section regulates remuneration paid for management services. The sum paid to the third defendant as a technical adviser is remuneration for services other than managerial services and therefore does not fall within the managerial remuneration cap of section 198(1). Further, sections which compute net profits require consideration of an entire financial year; applying section 198 to a financial year that partly preceded commencement would give retrospective effect, which the scheme of the Act does not support. Thus, as regards this company, section 198 operates from the financial year beginning on or after commencement of the Act.The technical adviser's salary is not includible within the 11% managerial remuneration limit under section 198(1); section 198 operates in respect of financial years beginning on or after commencement (here, from 1 January 1957).Remuneration of managing agents - temporal operation of provisions in respect of financial year beginning at or after commencement - Whether the remuneration of Rs. 3,000 paid to the third defendant as technical adviser must be taken into account for the purpose of the 10% limit on managing agent remuneration under section 348, and from when that limit applies. - HELD THAT: - Section 348 expressly provides that a managing agent shall not receive by way of remuneration, whether in respect of his services as managing agent or in any other capacity, any sum in excess of 10% of the net profits for the financial year. The legislative language is clear and must be given full effect: it prevents circumvention of the 10% cap by paying partners of a managingagent firm separately. The absence of the word 'associate' in section 348 does not permit a different construction because other provisions that intended a wider prohibition used the term 'associate'. The temporal saving in section 348 itself limits its operation to financial years beginning at or after commencement; accordingly, for this company the restriction under section 348 applies from 1 January 1957.The Rs. 3,000 paid to the third defendant is includible within the 10% limit of section 348 for managing agent remuneration; the limitation applies from and after 1 January 1957.Temporal operation of provisions in respect of financial year beginning at or after commencement - Whether sections 309, 198 and 348 (and related provisions) operate retrospectively for the calendar year 1956 or for the period 1 January 1956 to 31 March 1956 in respect of this company. - HELD THAT: - Sections 309 and 348 contain express provisions that their operation is with reference to financial years beginning at or after commencement of the Act; computation of net profits (sections 349 et seq.) likewise contemplates whole financial years. Applying these provisions to part of a financial year antecedent to commencement would produce retrospective effect and require examination of the company's working before the Act came into force, which the scheme does not support. Section 331's general application of provisions from commencement cannot override the specific temporal operation embedded in sections such as 348. Consequently, as to this company the operative date for those limitations is the start of the first financial year falling on or after commencement, namely 1 January 1957.The questioned provisions do not apply to the year 1956 or to the period 1 January-31 March 1956 for this company; they operate from 1 January 1957.Final Conclusion: The Court held that section 309(3) governs remuneration only in the director's capacity as director and does not cover remuneration paid to a director in another capacity; sums paid to a director as a technical adviser are not includible within the 11% managerial remuneration cap under section 198, but such sums are includible within the 10% limit on remuneration payable to a managing agent under section 348. The temporal operation of these limits is with reference to financial years beginning on or after commencement of the Act; for the company before the Court, the limits apply from 1 January 1957. Issues Involved:1. Applicability of Section 309 of the Companies Act, 1956, to remuneration paid to a director in capacities other than as a director.2. Applicability of Section 309 for the calendar year 1956.3. Applicability of Section 309 for the period from January 1, 1956, to March 31, 1956.4. Applicability of Sections 348, 349, and 350 to the remuneration of managing agents for the year 1956.5. Applicability of Sections 348, 349, and 350 for the period from January 1, 1956, to March 31, 1956.6. Inclusion of the monthly salary paid to a director as a technical employee in the overall managerial remuneration limit of 11% of net profits as per Section 198(1).7. Applicability of the overall managerial remuneration limit for the year 1956 or any part thereof.8. Inclusion of remuneration paid to a technical adviser in the 10% limit laid down in Section 348.Issue-wise Detailed Analysis:1. Applicability of Section 309 of the Companies Act, 1956, to remuneration paid to a director in capacities other than as a director:The court examined whether the remuneration paid to a director in capacities other than as a director, such as a technical adviser, falls under Section 309. The judgment clarified that Section 309(3) refers to remuneration paid to a director in his capacity as a director managing the affairs of the company. The court observed that the language of Section 309(3) does not extend to remuneration paid to a director in any other capacity. Therefore, the Rs. 3,000 paid to the third defendant as a technical adviser does not fall under the purview of Section 309.2. Applicability of Section 309 for the calendar year 1956:The court stated that Section 309(1) refers to Section 198, and both sections are overriding sections concerning the remuneration to be paid to a director. Since the financial year of the company is the calendar year, Section 309 would apply to the company from January 1, 1957, as the new Act came into force in April 1956. Hence, Section 309 does not apply to the remuneration for the calendar year 1956.3. Applicability of Section 309 for the period from January 1, 1956, to March 31, 1956:Given that Section 309 would apply to the company from January 1, 1957, the court concluded that Section 309 does not apply to the remuneration for the period from January 1, 1956, to March 31, 1956.4. Applicability of Sections 348, 349, and 350 to the remuneration of managing agents for the year 1956:The court examined Section 348, which deals with the remuneration of managing agents, stating that the managing agent cannot receive remuneration exceeding 10% of the net profits of the company for the financial year. The court highlighted that Section 348 applies to the company from January 1, 1957. Therefore, Sections 348, 349, and 350 do not apply to the remuneration of managing agents for the year 1956.5. Applicability of Sections 348, 349, and 350 for the period from January 1, 1956, to March 31, 1956:As Sections 348, 349, and 350 would apply to the company from January 1, 1957, the court concluded that these sections do not apply to the remuneration for the period from January 1, 1956, to March 31, 1956.6. Inclusion of the monthly salary paid to a director as a technical employee in the overall managerial remuneration limit of 11% of net profits as per Section 198(1):The court considered whether the Rs. 3,000 paid to the third defendant as a technical adviser should be included in the 11% limit of net profits for managerial remuneration under Section 198. The court noted that Section 198 deals with managerial remuneration and aims to control the cost of management. It concluded that the Rs. 3,000 paid to the third defendant as a technical adviser should not be included in the 11% limit under Section 198.7. Applicability of the overall managerial remuneration limit for the year 1956 or any part thereof:The court clarified that Section 198 would come into operation for the company from January 1, 1957. Therefore, the overall managerial remuneration limit does not apply to the year 1956 or any part thereof.8. Inclusion of remuneration paid to a technical adviser in the 10% limit laid down in Section 348:The court emphasized that Section 348 clearly states that the managing agent cannot receive more than 10% of net profits, whether in the capacity of managing agent or any other capacity. Therefore, the Rs. 3,000 paid to the third defendant as a technical adviser must be included in the 10% limit laid down in Section 348. This provision would apply to the company from January 1, 1957.Conclusion:The court answered the questions as follows:1. In the negative.2. Does not arise.3. Does not arise.4. In the negative, after deleting sections 349 and 350.5. Unnecessary.6. In the negative. The question to stop at the words 'referred to in section 198(1) of the said Act.' The further question 'whether in any event the said overall limit applies for the year 1956 or any part thereof and if so whichRs.'-does not apply to the year 1956.7. In the negative.8. The remuneration of Rs. 3,000 paid to the third defendant as a technical adviser is to be included in the limit of 10% laid down in Section 348, effective from January 1, 1957.No order as to costs.