Company Law Board Vs. Upper Doab Sugar
Mills Ltd. [1976] INSC 337 (17 December 1976)
KHANNA, HANS RAJ KHANNA, HANS RAJ GUPTA, A.C.
SINGH, JASWANT
CITATION: 1977 AIR 831 1977 SCR (2) 503 1977
SCC (2) 198
ACT:
Companies Act, 1956--Ss. 198, 269, 309 and 637A--Scope
of--Company Law Board--If could fix overall maximum remuneration to managing
directors while giving approval under s. 269.
HEADNOTE:
Section 198(1) of the Companies Act, 1956
provides that the total managerial remuneration payable by a public company to
its directors in respect of a financial year shall not exceed eleven per cent
of the net profits of that company for that financial year. Sub-section (3)
prescribes that within 'the limits of the maximum remuneration specified in
sub-s. (1) a company may pay a remuneration to its managing or whole-time
director in accordance with the provisions of s. 309. Section 309(3) provides
that a director who is either in the whole time employment of the company or a
managing director may be paid remuneration either by way of monthly payment or
at a specified percentage of the net profits of the company or partly by one
way or partly by the other. The proviso provides that except with the approval
of the Central Government such remuneration shall not exceed five per cent of
the net profits for one such director and if there is more than one such
director ten per cent for all of them together. Section 637A provides that
where the Central Government is required or authorised by any provision of the
Act to accord approval in relation to any matter the Central Government may
accord such approval subject to such conditions, limitations, restrictions as
it may think fit to impose.
In 1966 the respondent company appointed two
managing directors and sought the approval of the Central Government under s.
269 of the Companies Act, 1956 for their appointment. Granting its approval the
Company Law Board fixed a ceiling on the total remuneration payable to each
managing director by way of commission and salary. The Company's representation
to the Board to raise the ceiling of remuneration was rejected.
In a petition under art, 226 of the
Constitution the High Court held that the action of the Board in reducing the
remuneration was arbitrary and void and that any condition regarding the
remuneration which is contrary to the provisions of ss. 198 and 309 would not
be germane to s. 269 and that section does not include in its scope any element
regarding the fixation of remuneration.
Allowing the appeals of the Board.
HELD: The High Court was in error in quashing
the order of the Board. In view of the provisions of ss. 269 and 637A there is
no infirmity in the condition imposed by the Board. [510C; 509H] Section 309
does not deal with the appointment of managing directors but pertains to the
remuneration of managing or .whole time directors who had already been
appointed..
The effect of the proviso to s. 309(3) is
that if the tenure of a managing director already appointed continued after the
coming into force of the Act, the remuneration to be raid to such managing
director shall not, after the coming into force of the Act, exceed 5% of the
net profits to be paid for one such director and if there be more than one such
director 10% for all of them together. [509D] In the instant case since the
managing director had been appointed for the first time after the coming into
force of the Act their .appointment had to be approved in terms of s.
269. The Board, while granting permission,
inserted a condition regarding the total remuneration of each managing
director. In so doing the Board acted well within the power. [509F-G] 16-1546 SCI/76
504
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 18401842/72.
Appeals from the Judgment and Orders dated
the 15th April, 1971 of the Delhi High Court in Civil Writ Petitions Nos. 54,
1183 and 1184/69.
Mrs. Shyamla Pappu, R.N. Sachthey and Girish
Chandra for the appellant in C.A. 1840/71.
R.N. Sachthey and Girish Chandra for the
Appellants in CAs. 1841-42/71.
H.K. Puri for the Respondents.
The Judgment of the Court was delivered by
KHANNA, J.---This Judgment would dispose 0 civil appeals Nos. 1840, 1841 and
1842 of 1971 which have been filed on certificate by the Company Law Board
against the common judgment of Delhi High Court in three writ petitions by the
respondent-company and its two managing directors to challenge order dated
September 27, 1967.
The respondent company, Upper Doab Sugar
Mills Ltd., is a public limited company governed by the provisions of the
Companies Act, 1956 (hereinafter referred to as the Act).
The company has its registered office at
Shamli, district Muzaffarnagar (Uttar Pradesh). Its main business is manufacture
of sugar from sugar cane. It also manufactures spirits, industrial alcohols and
rum from molasses. From 1951 onwards the respondent company was managed by a
firm of managing agents. Two of the partners of that firm were Shri Rajinder
Lal and Shri Nannder Lal. The managing agency agreement of that firm was to
expire on January 14, 1967.
On October 4. 1966 the Board of Directors of
the company resolved not to continue the managing agency of the said firm and
decided to appoint two managing directors to conduct and manage the affairs of
the company. Accordingly, on October 8, 1966 in exercise of the powers under
article 117 of the articles of association of the company the Board of
Directors resolved to appoint Shri Rajinder Lal and Shri Narinder Lal as the
two managing directors of the company.
The salary of each of the managing directors
was fixed at Rs. 5,000 per month. In addition to that, each managing director
was to get commission at the rate of 31/2 per cent of the net profits of the
company during a financial year computed in the manner .laid down in section
309(5) of the Act. Besides that, other service benefits such as gratuity,
provident fund, free medical treatment, transportation and free furnished
residential accommodation were to be provided to each of the managing
directors. The resolution of the Board of Directors was placed before the
shareholders of the company in a general meeting. The shareholders approved the
said resolution to appoint Shri Rajinder Lal and Shri Narinder Lal as managing
directors on the terms set out in that resolution. An application was
thereafter made under section 269 of the Act to Company Law Board, appellant,
for obtaining approval to the appointment of Shri Rajinder Lal and Shri
Narinder Lal as managing directors. The powers of the Central Government, it
may be stated, have been delegated to the appellant Board for exercising, inter
alia, powers under section 269 of 505 the Act. The appellant Board after obtaining
some additional information and after some further correspondence granted as
per letter dated September 28, 1967 approval to the appointment of Shri
Rajinder Lal and Shri Natruder Lal as managing directors of the company. The
said approval was granted subject to the various terms and included the following
condition:
"The total remuneration of each managing
director by way of commission and salary shall not exceed Rs. 1,20,000 (Rupees
one lakh twenty thousand) per annum." The company made a representation to
the appellant Board that the aforesaid ceiling of Rs. 1,20,000 would not adequately
remunerate the two managing directors and that the aforesaid ceiling be raised.
The Board rejected that representation. Three writ petitions were thereafter
filed in January 1969 by the company and Shri Rajinder Lal and Shri Narinder
Lal for restraining the appellant Board from giving effect to the condition set
out above that the total remuneration of each managing director should not
exceed Rs.
1,20,000 per annum. Prayer was made that the
appellant Board be directed to accord approval for payment to the managing
directors the remuneration as passed in the resolution of the Board of
Directors along with the necessary perquisites.
The petition was registered by the appellant
Board and the affidavit of the Secretary of the Board was filed in opposition.
At the hearing in the High Court the following two questions were agitated on
behalf of the respondent company and its managing directors:
"(1) Whether the administrative ceiling
imposed by the Board on 28-9-1967 on the remuneration payable to the Managing
Directors by the Company is ultra vires or illegal? (2 ) Whether the refusal by
the Board to enhance the remuneration of the Managing Directors above the
ceiling of Rs. 50,000/for the loss year was bad because the Company was not
granted adequate heating and because the order of refusal did not state the
reasons there for ?" The High Court answered the second question against
the respondent company. This question also no longer survives m these appeals.
On the first question, the High Court after referring to the various provisions
held that the action of the Board in reducing the remuneration of the managing
directors was arbitrary and void. In this connection, the High Court observed:
"But any condition regarding remuneration
which is contrary to the provisions of sections 198 and 309 would not be
regarded as germane to section 269 inasmuch as the Legislature has exhaustively
dealt with remuneration in sections 198 and 309 with the effect that section
269 does not include in its scope any element regarding the fixation of remuneration."
Referring to the general administrative policy of the Government of fixing
ceiling on managerial remuneration, the High Court observed 506 that any such
policy which resulted in placing a ceiling below the legislative ceilings fixed
by sections 198 and 309 was illegal as being contrary to sections 198 and 309.
In the result, the High Court quashed the condition imposed by the Board fixing
the remuneration of the managing directors.
In appeal before us Mrs. Shymala Pappu has
assailed the correctness of the judgment of the High Court. As against that,
Mr. Puri on behalf of the respondents has canvassed for the correctness of that
judgment.
In order to appreciate the respective
arguments, it may be necessary to set out the necessary provisions of the Act,
as they stood at the relevant time. Sub-sections (1), (2) and (3) of section
198 read as under:
"198. Overall maximum managerial remuneration
and managerial remuneration in case of absence or adequacy of profits.--(1) The
total managerial remuneration payable by a public company or a private company
which is a subsidiary of a public company, to its directors and its managing
agents, secretaries and treasurers or manager in respect of any financial year
shall not exceed eleven per cent of the net profits of that company for that
financial year computed in the manner .laid down in sections 349, 350 and 351,
except that the remuneration of the directors shall not be deducted from the
gross profits:
Provided that nothing in this section shall
affect the operation of sections 352 to 354 and 356 to 360.
(2) The percentage aforesaid shall be
exclusive of any fees payable to directors under sub-section (2) of section
309.
(3) Within the limits of the maximum
remuneration specified in sub-section (1) a company may pay a monthly
remuneration to its managing or whole-time director in accordance with the
provisions of section 309 or to its manager in accordance with the provisions
of section 387." Section 269 reads as under:
"269. Appointment or re-appointment of
managing or whole-time director to require Government approval in certain
cases.--( 1 ) In the case of a public company or a private company which is a
subsidiary of a public company, whether such public company or private company
is an existing company or not, the appointment of a person for the first time
as a managing or whole time director shall not have any unless approved by the
Central Government:
Provided that in the case of a public
company, or a private company which is a subsidiary of a public company,
incorporated after the commencement of the Companies (Amendment) Act, 1960, the
appointment of a person as a managing 507 or whole-time director for the first
time after such incorporation may be made without the approval of the Central
Government but such appointment shall cease to have effect after the expiry of
three months from the date of such incorporation unless the appointment has
been approved by that Government.
(2) Where a public company or a private
company which is a subsidiary of a public company, is an existing company, the
re-appointment of a person as a managing or whole time director for the first
time after the commencement of the Companies (Amendment) Act, 1960, shall not
have any effect unless approved by the Central Government." Sub-sections
(1), (2) and (3) of section 309 read as under:
"309. Remuneration of directors.--( 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.
(2) A director may receive remuneration by
way of a fee for each meeting of the Board, or a committee thereof. attended by
him:
Provided that where immediately before the
commencement the Companies (Amendment) Act, 1960, fees for meetings of the
Board and any committee thereof, attended by a director are paid on a monthly
basis, such fees may continue to he paid on that basis for a period of two
years after such commencement or for the remainder of the term of office of
such director, whichever is less, but no longer.
(3) A director who is either in the
whole-time employment of the company or a managing director may he paid
remuneration either by way of a monthly payment or at a 508 specified
percentage of the net profits of the company or partly by one way and partly by
the other:
Provided that except with the approval of the
Central Government such remuneration shall not exceed five per cent of the net
profits for one such director, and if there is more than one such director, ten
per cent for all of them together." Sub-section (1 ) of section 637A reads
as under:
"637A. Power of Central Government to
accord approval, etc., subject to conditions and to prescribe fees oft
applications.-( 1 ) Where the Central Government is required or authorised by
any provision of this Act,-(a) to accord approval, sanction, consent,
confirmation or recognition to or in relation to, any matter;
(b) to give any direction in relation to any
matter; or (c) to grant any exemption in relation to any matter;
then, in the absence of anything to the contrary
contained in such or any other provision of this Act, the Central Government
may accord, give or grant such approval, sanction, consent, confirmation,
recognition, direction or exemption subject to such conditions, limitations ions
or restrictions as it may think fit to impose and may, in the case of
contravention of any such condition, limitation or restriction, rescind or
withdraw such approval, sanction, consent, confirmation, recognition, direction
or exemption." After hearing learned counsel for the parties and giving
the matter our earnest consideration, we are of the opinion that the view taken
by the High Court in quashing the condition imposed by the appellant Board
about the fixation of the remuneration of the managing directors cannot be sustained.
The High Court in arriving at its conclusion took:
the view that section--198 and the proviso to
sub-section (3) of Section 309 specially dealt with the question which arose
for determination. In view of those provisions, the High Court inferred that
sections 269 and 637A upon which reliance had been placed by the appellant
Board could not be of much avail to the appellant. Mr. Puri on behalf of the
respondents has adopted the same reasoning in this Court and has contended that
section 198 and the proviso to subsection (3) of section 309 being special
provisions relating to the remuneration of managing directors, they would
exclude so far as that question is concerned, general provisions like those
contained in sections 269 and 637A.
The above reasoning, we find, is vitiated by
an innate fallacy. Section 198 deals with the overall maximum managerial
remuneration and managerial remuneration in the case of absence or adequacy of
profits. The total managerial remuneration payable by a public company or a
private company which is a subsidiary of a public company to its managerial
staff, according to sub-section (1) of that section, cannot exceed 11 per cent
of the net profits for a financial year.
The total managerial remuneration covers the
remuneration not merely of the managing 509 directors but also of other
managerial personnel like secretaries, treasurers and managers. Sub-section (3)
of the section provides that Within the limits of the maximum remuneration, a
company may pay a monthly remuneration to its managing director in accordance
with section 309. Subsection (1) of section 309 prescribes the formalities
which have to be complied with for fixing of the remuneration of a managing or
full-time director of a company. We are not concerned with sub-section (2) of
that section. Sub-section (3). which constitutes the main plank of the case of
the respondents, provides that a director who is either in the whole-time
employment of the company or a managing director may be paid remuneration
either by way of monthly payment or at a specified percentage of the net
profits of the company or partly by one way or partly by the other. According
to the proviso to that sub-section, except with the approval of the Central
Government, such remuneration of the whole-time director or managing director
shall not exceed 5 per cent of the net profits for one such director and if
there is more than one such director 10 per cent for all of them together.
Perusal of section 309 shows that it does not deal with the appointment of
managing directors. It only pertains to the remuneration of managing or
whole-time directors who have already been appointed. The effect of the proviso
to sub-section (3) of section 309 is that if the tenure of a managing director
who has already been appointed continues after the coming into force of the
Act, the remuneration to be paid to such a managing director shall not after
the coming into force of the Act exceed 5 per cent of the net profits for one
such director, and if there be more then one such director, 10 per cent for all
of them together.
The present, however, is not a case of
managing directors having been appointed earlier and continuing to act as such
after the coming into force of the Act. Shri Rajinder Lal and Shri Narinder Lal
have been appointed managing directors of the company for the first time after
the coming into force of the Act. Their appointment as managing directors had
to be approved in terms of section 269 of the Act. The company consequently
applied to the Central Government for approving their appointment. The
appellant Board, to whom the powers of the Central Government have been
delegated for this purpose, while granting approval to the appointment of the
aforesaid two persons as managing directors, inserted the condition that the
total remuneration of each managing director by way of commission and salary
shall not exceed rupees. one lakh twenty thousand per annum. The above
remuneration is in addition to the benefit of certain perquisites which would
be available to the managing directors. The Board, in our opinion, acted well
within its power in imposing this condition. Section 637A of the Act makes it
clear inter alia that where the Central Government is required or authorised by
any provision of the Act to accord approval in relation to any matter, then, in
the absence of anything to contrary contained in such or any other provision of
the Act, the Central Government may accord such approval subject to such
conditions, limitations or restrictions as it may think fit to impose. In view
of the provisions of sections 269 and 637A of the Act, we find no infirmity in
the condition imposed by 510 appellant Board. The provisions of both sections
269 and 637A expressly deal with the question which arises directly in this
ease.
We may observe that according to the
affidavit filed on behalf of the appellant Board, since 1959 the said Board has
been imposing a maximum administrative ceiling on the total amounts payable to
a managing director. The basic principle that has been kept in view by the
Board is that no individual should be paid remuneration exceeding Rs. 1,20,000
per annum or Rs. 10,000 per month. A large number of instances have also been
given by the Board and it would appear therefrom that the maximum remuneration
which has been allowed by the Board to the managing director of any company is
Rs. 1,20,000.
The High Court, in our opinion, was in error
in quashing the order of the Board. We accordingly accept the appeals, set
aside the judgment of the High Court and dismiss the writ petitions. Looking to
all the facts, we leave the parties to bear their own costs throughout.
P.B.R. Appeals allowed.
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