Kerala High Court
R. Gac Electrodes Ltd. And Anr. vs Union Of India (Uoi) And Ors. on 24 April, 1981
JUDGMENT Narendran, J.
1. A short point in company law arises for consideration in this case. The point is, for payment of remuneration to a director of a company for services of a professional nature rendered by him and for excluding it from his managerial remuneration as a director, is it a certificate of the Central Govt. under Section 309(1), prov. (b) of the companies Act, 1956 (for short " the Act"), that is to be obtained or is it the previous approval of the Central Govt., under Section 310 of the Act that is to be applied for and got.
2. The 1st petitioner is a public limited company with its registered office at Golf Links Road, Kowdiar, Trivandrum, and the 2nd petitioner is a director and shareholder of the 1st petitioner. The 2nd petitioner, who is a solicitor and advocate practising at Bombay, was appointed as a director of the 1st petitioner in 1974. The 2nd petitioner began to render professional services to the 1st petitioner from September, 1976, onwards. The 1st petitioner, through its advocates, by Ex. P-1(c) application, requested the 2nd respondent, Secretary, Company Law Board, for a certificate that the 2nd petitioner possesses the requisite qualifications for the practice of the profession as a solicitor. The 3rd respondent, Under-Secretary, by Ex. P-1(b) letter dated May 10, 1977, informed the 1st petitioner that an application under Form 26 of the Companies (Central Government's) General Rules and Forms, 1956, should be submitted, as Section 310 of the Companies Act, 1956, was attracted. The 1st petitioner's advocate by Ex. P-1(a), letter dated May 18, 1977, pointed out to the 3rd respondent that the application was under Section 309(1) of the Act for the grant of a certificate and for the exclusion of the remuneration paid to the 2nd petitioner for services rendered by him as a solicitor. The 3rd respondent, however, by Ex. P-l letter dated September 30, 1977, insisted that a Form 26 application should be made to the Central Govt. By way of abundant caution, and without prejudice to its contentions, the 1st petitioner filed the application as insisted upon in Ex. P-1 letter. As insisted by the 3rd respondent, the 1st petitioner got a resolution passed by the shareholders sanctioning the said payment and forwarded the same to the 3rd respondent. Later, the 1st petitioner reconsidered the matter and by Ex. P-2(a) letter dated March 15, 1979, withdrew its application submitted under Section 310 of the Act and contended that by the payments in question, no question of any increase in the remuneration of the director within the meaning of Section 310 of the Act arose. On May 31, 1979, Ex. P-2 reminder was also sent to the 3rd respondent.
3. The 2nd petitioner is a director of two other companies and he has been rendering legal services to those companies from 1968 onwards.
Exhibits P-3 and P-4 are certificates issued by the Central Govt. under Section 309(1) of the Act to the said companies.
4. In spite of Ex. P-2 reminder, no sanction was forthcoming from the respondents. It was under the above circumstances that the petitioners approached this court with this original petition. The reliefs prayed for in the original petition are : (1) for a writ in the nature of mandamus or any other writ, direction or order to the respondents to issue a certificate under Section 309(1) of the Act regarding the qualifications of the 2nd petitioner to practise as a solicitor and advocate, and (2) for a writ of certiorari or any other writ, direction or order to quash the orders, Exs. P-1 and P-1(b) (instead of "P-1(b)" it is typewritten " P-1(a)". This can only be a typing mistake).
5. A counter-affidavit has been filed on behalf of respondents Nos. 1 to 3. In the counter-affidavit, it is stated : The respondents have not rejected the application submitted under Section 309(1) of the Act. The powers under Sections 198, 309 and 310 of the Act can be exercised only by the Central Govt. The term " remuneration" given in Section 310 includes all remuneration received in any capacity and includes remuneration received for services rendered of a professional nature. The petitioners should apply under Section 310 of the Act in Form No. 26 if they want an opinion of the Central Govt. under Section 309(1) of the Act. It cannot be denied that there is going to be an increase in the total remuneration received by the director. The petitioners were not justified in assuming that asking to make an application under Section 310 implies that the application under the proviso to Section 309(1) of the Act has been rejected or is likely to be rejected.
6. The 2nd petitioner has filed a reply affidavit answering the averments and controverting the contentions in the counter-affidavit,
7. Section 309(1) of the Companies Act, 1956, reads :
"309. (1) The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance with and subject to the provisions of Section 198 and this section, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting, and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity :
Provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if-
(a) the services rendered are of a professional nature, and
(b) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession."
Section 310 of the Act reads :
"310. In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director including a managing or whole-time director, or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount thereof, whether that provision be contained in the company's memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its board of directors, shall not have any effect unless approved by the Central Government ; and the amendment shall become void if, and in so far as, it is disapproved by that Government:..."
8. Section 309 of the Act as enacted in 1956 came up for consideration in Ramaben A. Thanawala v. Jyoti Ltd. [1957] 27 Comp Cas 105 ; AIR 1958 Bom 214. The Bombay High Court held (p. 108) :
" It will also be noticed that if it was intended by the Legislature that the remuneration referred to in Sub-section (3) should include not only the remuneration paid to the director as a director but also remuneration paid to him in any capacity whatsoever, appropriate language could have been used for that purpose, and, as we shall presently point out, in other sections where the Legislature wanted to convey that meaning, proper language has been used. "
9. In this decision, the Bombay High Court also considered the effect of Section 198(1) and held (p. 110):
" What was sought to be controlled was the cost of management, and if what was sought to be controlled was the cost of management, then what had to be considered was managerial remuneration and not remuneration paid for any other purpose."
10. It was by the 1965 amendment that the words "and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity" were inserted in Section 309(1).
11. Section 198 of the Act fixes a ceiling for managerial: remuneration. Section 309 provides for the determination of the remuneration of directors. Section 309(1), as amended, ropes in the remuneration paid to a director for services rendered by him in any other capacity also. The combined effect of Sections 198 and 309 is that by the payment of remuneration for services rendered by a director in any capacity other than that of a director his total remuneration cannot go above the ceiling fixed by Section 198. In other words, no remuneration can be paid to a director for services rendered by him in any other capacity if he is getting the maximum managerial remuneration he is entitled to under Section 198. But, it is to be noted that there is an exception to the above rule. The exception is that if the services rendered are of a professional nature, the remuneration payable to a director for that, will not come within the restriction imposed by Section 369(1) Provision for this is there in the proviso to Section 309( 1), which was also inserted by the 1965 amendment. But the exception is subject to a condition. The condition is that the Central Govt. should certify that the director concerned possesses the requisite qualifications to practise that profession. So, if a director renders professional service not in his capacity as director and the Central Govt. certifies that he is having the requisite qualifications to practise that profession, the remuneration paid to him for that service will not form part of the managerial remuneration to which he is entitled, and the payment of which is to be limited to the ceiling fixed by Section 198. The net result is that the remuneration for professional service rendered by a director will not be a remuneration to be determined under Section 309 in accordance with Section 198. Then the further question is whether Section 310 which provides for increase of remuneration has anything to do with the payment of remuneration for professional services. The increase can only be an increase of remuneration. As per Section 309, the remuneration payable to a director takes in only managerial remuneration and remuneration for services of a non-professional nature rendered by him in any other capacity, and remuneration the increase for which permission is required under Section 310 will take in only the above remuneration. As remuneration for services of a professional nature will not be a remuneration determined under Section 309(1) the payment of the same to a director will not increase the remuneration he is entitled to under Section 309(1). So, it goes without saying that for the payment of remuneration for services of a professional nature no previous sanction of the Central Govt. under Section 310 is necessary. So, no Form No. 26 application also need be filed. What is required is a certificate from the Central Govt. as insisted by the proviso to Section 309(1).
12. For the reasons stated above, I hold that the Central Govt. cannot insist that the 1st petitioner-company should apply for sanction under Section 310 in Form No. 26 for the exclusion of the payments made to the 2nd petitioner-director for services rendered in his capacity as a solicitor and advocate. It is a certificate under prov. (b) to Section 309(1) that is required. The 1st petitioner has applied for the same by Ex. P-1(c) and that application is pending. In view of Exs. P-3 and P-4, in the normal course, "Ex. P-1(c) cannot be rejected. But if is for the 1st respondent to consider Ex. P-1(c) and take a decision. I direct the 1st respondent to consider Ex. P-1(c) and take a decision as expeditiously as possible and, at any rate, within two months from today. Exhibit P-l is quashed. Exhibit P-1(b) to the extent it insists on the filing of an application under Section 310 of the Act and for furnishing any information not required under Section 309, is also quashed. If any more information is to be furnished by the 1st petitioner, far that one month's time from today is given.
13. The original petition is allowed as above. No costs.