Payments to directors

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REVIEW OF PROVISIONS PERTAINING TO PAYMENTS
TO DIRECTORS UNDER S. 191 AND S. 202
Corporate Law | VIII Trimester.
Swastika Thourwal
I.D. No. 2343
Tenzing Namgyal Bhutia
I.D. No. 2344
Umang Arya
I.D. No. 2345
III Year B.A. L.L.B. (Hons.)
Date of Submission: 17th
December, 2018
NATIONAL LAW SCHOOL OF INDIA UNIVERSITY
BANGALORE
TABLE OF CONTENTS
I. Introduction ................................................................................................................................ 1
II. Present Position Under Companies Act, 2013 .......................................................................... 3
III. Analysis of S 202, Companies Act in regard to compensation to directors for loss of office
......................................................................................................................................................... 9
IV. Common Law on the Remuneration of directors ................................................................... 16
Conclusion .................................................................................................................................... 19
i
TABLE OF AUTHORITIES
CASES
 A.S. Gill v State of Punjab (2006) 132 Comp Cas 759 .
 B.R. Somashekhrappa v Vignan Industries Ltd 68 Comp Cas 264.
 Beach v Reed Corrugated Case Ltd (1956) 2 All ER 652.
 Bell v Lever Bros (1932) AC 161.
 Children's Investment Fund Foundation (UK) v Attorney General [2018] Ch. 371.
 CIT v Bombay Trust Corporation
 Jwala Prasad v Jwala Bank Ltd (1963) 33 Com Cases 446
 Re, Duomatic Ltd. (1969) 1 All ER 161.
 South Hall v. British Mutual Life Insurance Society
 Wright v Atleas Wright (Europe) Ltd (1999) 2 BCLC 301 (CA).
STATUTES
 Companies Act, 1948.
 The Companies Act 2013
 The Companies Act, 1956
 The Indian Contract Act, 1872
 Companies (Meetings of Board and its Powers) Rules, 2014.
1
I. INTRODUCTION
Directors are often considered to be the principal agents of the company, individuals through
whom the decisions of the company are enacted and often times the individuals who make such
decisions. The question of remuneration for directors is an old one and something that has been
dealt with by a majority of legislations including the Companies Act 2013 and the English
Companies Act 2006.
The idea that the director acts as the trustee of the company and not an employee has been an
important distinction drawn while discussing the remuneration that can be provided to Directors.
In this paper we shall be dealing with one aspect of remuneration i.e. payments made to a
director for loss of office. There has been general consensus across jurisdictions that companies
are not liable to pay any compensation for a director’s loss of office. In this paper we shall be
looking at two particular sections, S. 191 and S. 202 of the Companies Act to look at how this
principle is applied in India.
Finally we shall be looking at the landmark case of Children’s Investment Fund Foundation v.
Attorney General, a recent case adjudged by the England and Wales High Court which explicitly
deals with the question of compensation for loss. Through the analysis of this case we hope to
understand the law as it is applied in the UK and compare the same to Indian jurisprudence.
2
II. PRESENT POSITION UNDER COMPANIES ACT, 2013
This section analyses the provisions pertaining to payment of directors under Section 191 of the
Act. This is followed by a brief comparision with the Companies Act of 1956.
Legislative History
In 1945, the Cohen Committee reported that the practice of making payments to directors in connection
with their retirement from office was occasionally abused, and accordingly recommended that such
payments should be subject to the approval of the company.1 The Committee further recommended that
the section be expressly restricted by referring specifically to ‘loss of office as director’ and loss is ‘such
office’. Thus, they were not in the favour of restricting the ambit of the section and preferred a wider
interpretation. The English Parliament, however, in enacting the section, did not adopt the recommended
restriction.2 The discussion and recommendations made by the Committee were incorporated in the form
of S. 191 of the Companies Act, 1948, which formed the basis of similar provisions in the Indian
Companies Act.3
SECTION 191
Section 191 of the Companies Act, 2013, regulates the making of any payment or granting of any
benefit or advantage by a company to directors of the company by way of compensation for loss
of office or as consideration for or in connection with retirement from office. As per the Act,
such payment or granting of benefit or advantage is prohibited unless the required disclosure has
occurred and the required approval has been obtained.4
The essence of Section 191 is as follows:
Directors of a company will not be entitled to compensation for loss of office or consideration
for retirement from office or in connection with such retirement loss or retirement on account of
transfer of whole or any part of undertaking or property of the company. The prohibition of such
DE Nelson, ‘Managing Director: Compensation for Loss of Office’ [1978] The Cambridge Law Journal 30.
Lan Luh, ‘Compensation for Loss of Office’ [1997] Singapore Journal of Legal Studies 343, 348.
3
Companies Act 1948, ss. 191, 192, 193.
4
The Companies Act 2013, s 191(1).
1
2
3
payment also gets extended under clause (b), where there is a transfer of all or any of the shares
of the company being a transfer that results from the following
1. offer made by such person to general body of shareholders
2. offer made to shareholders of a company either by or on account of of some body corporate
with a view to a company becoming subsidiary of such body corporate or the subsidiary of
holding company
3. when an offer is made by or on behalf of an individual with a view to such individual
obtaining the right to exercise or control not less than a third of the total voting power at the
general meeting of the company or;
4. any other offer which is conditional on acceptance to a given extent
Unless,
(i) Particulars as prescribed by rules with the respect to the proposed payment has been disclosed
to the members of the company, and (ii) the proposal has been approved by the company in
general meeting.
However, the provisions mentioned above are inapplicable for any payment made to the
Managing Director or to the Whole-time Director or manager of the company by way of
compensation of office or consideration for retirement from office.5
Section 191 corresponds to Sections 318, 319, 320 and 321(4) of the Companies Act of 1956.
This section is applicable to every company, whether public or private, given that the purpose of
the company is to ensure that in the event there is transfer of an undertaking of the company
there shall be no payment of compensation to the director for loss of his office unless the
particulars as provided in rule 17 of the Companies (Meetings of Board and its Powers) Rules,
2014 are disclosed to the shareholders and the payment of compensation is approved by the
members un a general meeting.6 The contents of rule 17 deal with the particulars to be disclosed
to the members of before any payment of compensation can be made to a director arising out of
5
6
A Ramaiya, Guide to the Companies Act, (18th edn, Vol 2, LexisNexis).
Rule 17(1), Companies (Meetings of Board and its Powers) Rules, 2014.
4
the events specified in Section 191(1).
A. Ambiguities in Clauses Under Section 191(1)
Sub-section (1) is a vaguely worded provision. For instance, clause (iv) which states, “an offer
which is conditional on acceptance to a given extent” lacks clarity. 7 There is no explanation as to
what such an offer entails. Secondly, the words ‘undertaking’ and ‘property’ have been used
interchangeably.8 The property disposed off should be substantial in value so as to disentitle the
payment of compensation. However, as per Section 180(1)(A) of the Act, ‘undertaking’ cannot
be understood as being synonymous to property. 9 It is crucial to understand what kind of
property is envisaged under clause (a) of subsection (1) as it is linked to the payment of
compensation. However, the section is not clear on this issue.
B. Section 191(2) and Section 202
This sub-section stipulates that the compensation to be paid for the loss of office or upon
retirement shall be made to the Managing Director (“MD”) or the Whole-time Director (“WTD”)
or the manager of the company. But the quantum thereof shall be pegged down to the ceiling
imposed in Section 202(3) of the Act. Therefore, S. 191(2) needs to be read in conjunction with
S. 202 of the 2013 Act. Additionally, such payment shall also be contingent upon ensuring
compliance with rule 17 of the Companies Rules, 2014.
C. No Deemed Approval Under Section 191(3)
As per sub-section (3) of s. 191, there shall be no deemed approval of a proposal to pay
compensation either under Section 191(1) or 191(2) of the Act if the meeting is not held due to
want of quorum. Thus the provision will disentitle the director from receiving payment if the
proposal falls though at the general meeting for want of quorum. However, as per Section 202 of
the 2013 Act, payment of compensation to the MD, WTD or manager does not require the
approval of shareholders and hence, reference to s. 191(2) of the Act is not relevant.
7
The Companies Act 2013, s 191(1)(iv).
ibid.
9
The Companies Act 2013, s 180(1)(a).
8
5
D. Contravention of Section 191(1)
Sections 191(4) and (5) of the 2013 Act set forth the consequences of a director contravening
Section 191(1). Where a director receives the payment in contravention of s. 191(1) or if he
receives the payment before seeking approval at the general meeting, then the amount that he or
she has received will be deemed to have been received in trust for the company. The underlying
implication of this sub-section is that receiving approval from the shareholders is not a
precondition to the receipt of payment. Since the payment so received has to held in trust with
the company, this amount cannot be used by the director because he does not have an unqualified
right thereto in the absence of proper authorisation. This position was also summarised in the
case of South Hall v. British Mutual Life Insurance Society,10 where it was held that the payment
made to directors does not come within the provisions of the Act, the amount received shall be
deemed to have been received by the recipient as a trustee of the company. The position was also
affirmed in India in CIT v Bombay Trust Corporation.11
Section 191(5) is the penalty clause. When the provisions of Section 191 are contravened by a
director, she or he shall be punishable with a fine of minimum amount of rupees twenty five
thousand, which may be extended upto rupees one lakh. The offence is compoundable under the
Act.12
E. Section 191(6) of the Companies Act, 2013
This section provides a clarification that Section 191 will not prejudice the operation of any law
in terms of which disclosures are to be made in respect of any payments received under this
section or any other such similar payments that are made to the director.
F. Section 191 and the Companies (Meetings of Board and its Powers) Rules, 2014
It is pertinent to note that while s. 191(1) only deals with payment to a director, rule 17(3) of the
Companies Rules also covers payment of compensation to a manager. Therefore, s. 191(1)
should be read in conjunction with rule 17(3). Furthermore, rule 17 mentions the need for the
10
11
12
The Companies Act 2013, s 441.
6
company members’ approval before any compensation is to be paid to the direction. However,
the subsection does not specify whether the approval of the members has to be by ordinary
resolution by special resolution. In the absence, of any specific provision it can be surmised that
approval by ordinary resolution shall suffice.
ANALYSIS
OF
RELEVANT PROVISIONS
OF
COMPANIES ACT, 1956
VIS-A-VIS THE
2013 ACT
Section 191 of the 2013 Act corresponds to Sections 318, 319 and 320 of the 1956 Act as they
both deal with the payment of directors for loss of office, etc. in connection with transfer of
undertaking, property and shares.
A. Section 318 of Companies Act, 1956
There are two noteworthy aspects in Section 318. First, the section permits payment of
compensation only to a Managing Director or director who is manager or other director in the
whole time employment of the company and second, it does not place any prohibition on
payments being made to the Managing Director or a director who is manager, of any
remuneration for services rendered by him in any other capacity, i.e., any capacity other than as
MD or manager.13 This section also has to be read subject to the provision of s. 321(3), which
exempts bona fide payments in the form of damages for breach of contract or by way of pension
paid for services offered in the past.
B. Section 319 of Companies Act, 1956
S. 319 corresponds to s. 191 of the 2013 Act and places an absolute prohibition on payment of
any compensation to any of its directors by the transfer company for loss of office or on
retirement from office, on transfer of its undertaking or property to another company. However,
such personnel may be compensated by the transferee company, but once the approval of its
members has been secured. The consequences of not seeking the approval of the general meeting
are the same in the 1956 Act. The directors responsible for authorising it shall be considered
13
CR Dutta on Company Law, (7th edn, LexisNexis, 2017).
7
guilty of misfeasance.14 The approval, even if there was no formal resolution, may be manifested
by the consent of the shareholders.15 However this restriction is not applicable to payments that
have been made in good faith by damages upon any breach of contract or say, in the form of
pension, or to payments due under service agreements.16
C. Section 320 of Companies Act, 1956
The director can receive compensation for loss of, or retirement from, the office of director as a
result of any transfer of shares from the transferee or any other person, but not from the company
itself. The director also needs to ensure that all relevant information is disclosed. Failure to do so
is punishable with a fine up to rupees two thousand fine hundred.17 This section corresponds to s.
191(5) of the 2013 Act. The offence, like the one laid down in the 2013 Act, is compoundable.18
14
Re, Duomatic Ltd. (1969) 1 All ER 161.
Wright v Atleas Wright (Europe) Ltd (1999) 2 BCLC 301 (CA).
16
Beach v Reed Corrugated Case Ltd (1956) 2 All ER 652.
17
The Companies Act, 1956, s 320(5).
18
The Companies Act, 1956, s 621A.
15
8
III. ANALYSIS OF S 202, COMPANIES ACT IN REGARD TO
COMPENSATION TO DIRECTORS FOR LOSS OF OFFICE
Legislative history
The corresponding provision of section 202 of Companies Act 2013 (hereinafter referred to as
‘2013 Act’) is section 318 of old Companies Act of 1956 (hereinafter referred to as ‘1956 Act’).
The section is in essence similar to its old counterpart of 1956 Act.19
The Companies Act of 1956 was inspired from s. 191 of the English Act and in para 89 of
Company Law Committees’ Report, the importance of giving compensation to managing
director, whole-time director or manager was laid out while also prohibiting compensation to
other directors. The recommendation of Company Law Committee related to s 191 of English
Act related to the Companies Act of 1956 is:
“Sections 191, 192 and 193 of the English Companies Act, 1948 deal with payments to
directors for loss of office, transfer of a company’s property to them for loss of office and
the disclosure of the payment of compensation in connection with the transfer of shares of
a company. Our own view is that no compensation should be payable to a director of a
company as consideration for or in connection with his retirement from the office of
director, but a managing director or a manager who is also a director, should not be
prohibited from receiving compensation for loss of office in his capacity as managing
director or manager or for any other services which he may have rendered to the
company subject to the limitations recommended by us in Chapter X.”20
(emphasis supplied)
In ‘The Notes on Clauses’ to the Companies Bill 2011, the object of the pertinent section was
said to provide for the circumstances and the particularities in which the managing director,
whole-time director or director who is a manager are entitled to compensation for loss of office,
or as consideration for retirement from office or in connection with such loss or retirement.21
19
C.R. Dutta, Company Law (Vol 2, 7th edn, Lexis Nexis 2017).
Bhabha Committee, Report of the Company Law Committee (1952) para 89.
21
Dutta (n 1) 2134.
20
9
Furthermore, the object of the section is also to lay down the quantum of compensation the
above-mentioned classes of directors are entitled to upon fulfilment of laid out conditions.
Although, it is admitted that s 202 of 2013 Act and s 318 of 1956 Act are similar in essence, but,
it would be useful to look into the subtle aspects of s 202 in which it differ from its old
counterpart.
The small yet interesting difference arises from the different use of words in sub-section 1 of
respective new and its old counterpart section. Section 202(1) of 2013 Act provides for
compensation to managing director, whole-time director or manager, whereas, section 318(1) of
1956 Act provided for compensation to managing director, whole-time director or a director
holding office of a manager.22 Thus, s 202(1) vests inherent right to compensation (subject to
conditions mentioned) in person holding post of manager but s 318(1) mandated that only such
person holding a managerial post who is also a director on the board shall be entitled to
compensation, subject to conditions mentioned.23
A. Section 202(1)
“A company may make payment to a managing 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”24
Sub-section 1 of section 202 stipulates payment by company to director (managing or wholetime) or a manager (who, as mentioned earlier need not be a director) as compensation. Thus, by
implication and reading s 191 co-jointly, it is conspicuous that any other director is not entitled
to compensation as per manner provided for in section 202.25 However, such director may
receive compensation through procedure provided for in s 191 of 2013 Act.
While understanding the implications and nuances of sub-section 1 of s 202, it may be useful to
see that sub-section says that a company ‘may’ provide compensation. Thus, it is important to
understand that it is discretionary for the company to make payment under s 202 of 2013 Act and
22
Dutta (n 1) 2135.
A Ramaiya, Guide to the Companies Act (Vol 2, 18th edn, Lexis Nexis 2015) 3519.
24
The Companies Act 2013, s 202(1).
25
The Companies Act 2013, s 191.
23
10
therefore, by implication, the director (managing or whole-time) or manager does not have
statutory entitlement to compensation.26 In B.R. Somashekhrappa v Vignan Industries Ltd.,27 the
Karnataka High Court held that section 318 of 1956 Act is declaratory in nature authorizing only
the company to pay compensation on its discretion within specified legal conditions mentioned
in the statute. The court held that court cannot go into the question of quantum of compensation
given to the director concerned under pertinent section.
Another important aspect of s 202(1) is that in contrast to s 191 which mandates general meeting
for payment of compensation, it does not mandate such and, therefore, payment under s 202(1)
may be made by the Board of the Company within set out statutory limit under sub-section (3) of
s 202.
Also, while dealing with case A.S. Gill v State of Punjab,28 the High Court of Punjab held that if
termination of the job of concerned managing director is strictly under a contract, then in such
cases, the company is not liable to pay compensation. In this case, the appointment of the
managing director in the government company was purely contractual and the termination was
also strictly as per contract, the court held that in such cases of purely contractual termination,
the court is not correct to intervene.
B. Section 202(2)
The sub-section 2 of s 202 sets out six circumstances wherein the director – either whole-time or
managing director – shall not receive payment of compensation. It must be noted that the six
conditions mention only the director and not manager.29 So, this may be concluded that these
conditions apply only to person holding position of director (managing or whole-time) but not
manager.30
Following are the six circumstances in which director shall not receive compensation as laid out
in s 202(2):
26
Dutta (n 1) 2131.
68 Comp Cas 264 (High Court of Karnataka).
28
(2006) 132 Comp Cas 759 (Punjab and Haryana High Court).
29
The Companies Act 2013, s 202(2).
30
Ramaiya (n 5) 3520.
27
11
“(a) where the director resigns from his office as a result of the reconstruction of the
company, or of its amalgamation with any other body corporate or bodies corporate, and
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 the reconstruction of the
company or its amalgamation as aforesaid;
(c) where the office of the director is vacated under sub-section (1) of section 167;
(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.”31
Amongst the above-mentioned six circumstances, some of the interpretive issues have been
discussed and analysed below.
Clause (c) – vacation of office by director
If there is vacation of office of director as per the provisions of section 167(1), then also the
director is disentitled to payment of compensation. The eventualities when the office of director
is considered vacated are enumerated in sub-section 1 of section 167.32 Some of the situations
like absence of director from all meetings of the Board during a period of 12 months; being
removed in pursuance of the provisions of the Act; or, failing to disclose his or her interest in any
contract in which he or she is directly involved in contravention of s 184, are some of the
eventualities mentioned in s 167(1).33
31
The Companies Act 2013, s 202(2).
The Companies Act 2013, s 167(1).
33
The Companies Act 2013, s 184.
32
12
The provisions relating to vacation of office of director enumerated in s 167(1) include per se
many eventualities covered by different sections like ss. 164, 184, 188 and 152(3). This may be
best understood through a flowchart.
Figure 1: Flowchart depicting various provisions involved in s 167(1)
In this flowchart, the situations sprawled across various provisions which lead to vacation of
office of director under s 167(1) are identified. However, it must be mentioned that the section
167(1) enumerates other eventualities when director’s office may be vacated but those are not
concerned with any specific provision of the Act, thus not mentioned in the flowchart.
Clause (d) – wounding up of company
If the company is being wound up upon order of tribunal or voluntarily due to the negligence or
default of director, then such director shall not receive payment of compensation. In the past,
13
some interpretive issues have arisen in relation to this clause inasmuch it hinges non-payment or
payment of compensation to the director upon his or her negligence or default, which has to be
proved. Thus, in case when negligence or default on part of director is not proved, then this
clause will not apply.
In V. Rajagopal v Salem Provident Society (in liquidation) by its Liquidator (V.R. Srinivasa
Chakravarthi) and others,34 Rajagopal, the petitioner, was secretary and ex-officio director of the
insurance company – the defendant. The insurance company was compulsorily wounded up by
the order of court and therefore, the director was terminated from his position by the Official
Liquidator. The Madras High Court held that if a company is compulsorily wounded up on the
instance of the court, then, there cannot be said that the company has breached the contract of
employment of director because when the company is being compulsorily wounded up, then the
foundational basis on which the parties concerned are trying to carry forward the contract has
itself ceased to exist. In such case, doctrine of frustration as held out in section 56 of Indian
Contract Act, 1872 applies and thus, there is no wrongful termination of the director concerned.35
Hence, the director Rajagopal in the pertinent case was not allowed to claim compensation. In
essence, the court in this case, held out that if company is compulsorily wounded up then there is
no wrongful termination of director and thus no compensation can be claimed as no cause of
action arises on part of director.
However, the case of Jwala Prasad v Jwala Bank Ltd.,36 lays down important layer of nuance on
the Rajagopal case. the Rajagopal case held out that compulsorily wounding up of the company
would not mean wrongful termination of director, but the Jwala case held that the focal issue is
not whether the company is being wounded up compulsorily or voluntarily, but whether such
wounding up is the result of default of default of director or not.
Overall, the law as it stands today, if read alongwith the above-mentioned case laws, says that if
the winding up of company – whether voluntary or compulsory – is result of default of the
director himself (and not of the company, because company is per se a legal person and default
34
(1963) 33 Com Cases 446 (High Court of Madras).
The Indian Contract Act 1872, s 56.
36
AIR 1957 All 143.
35
14
committed by it cannot be imputed directly on director concerned unless there is proof for such),
then the director is not eligible to receive any compensation.
Clause (e) – breach of fiduciary obligations
When the director is found guilty of breach of fiduciary obligations endowed on him or her
regarding his or her actions towards the company’s affairs, then the concerned director shall not
receive compensation for loss of office.37
An important case which deals with the compensation to the director who is found guilty of
breach of trust is Bell v Lever Bros.38 In this case, Lever Bros. company terminates the job of its
Managing Director by paying him compensation. Although, later on company realises that
director had committed many breaches of duty and corrupt practices which if the company would
have known then he would not have been entitled to compensation. The company thus filed suit
for recovery of compensation amount paid to Managing Director. The House of Lords through a
majority decided that a director is not bound to disclose any fraud on his part or breach of
fiduciary obligation which can lead to his or her disentitlement of compensation from company.
Thus, Bell was not bound to return the compensation amount.
37
38
The Companies Act 2013, s 202(2).
(1932) AC 161.
15
IV. COMMON LAW ON THE REMUNERATION OF DIRECTORS
In this section we shall be looking at the case of Children's Investment Fund Foundation (UK) v
Attorney General a recent judgement of the England and Wales High Court which discussed
payments made to directors for the loss of office.
Facts:
The claimant charity Children’s Investment Fund Foundation (herein referred to as C1) sought
the court's approval to the making of a grant of $360 million to another charity Big Win
Philanthropy (herein referred to as C2).
“
C1 was a company limited by guarantee without any share capital. It was founded by the second
defendant and his ex-wife, the third defendant. Over time the second and third defendants grew
apart and their marriage ended in an amicable divorce, the creation of the charity C2 was due to
the deterioration of the personal relationship between defendant’s two and three. The charity C1
at this point of time had three members, defendants number 2 and 3 who started the trust along
with the fourth defendant (Herein referred to as L).L stated that he had an obligation to work
towards the best interests of the beneficiaries of C1 and hence may vote against the approval of
the grant. Various agreements had been entered into between defendants two and three in 2015.
Among other things the agreements proposed that both defendants 2 and 3 would make a grant to
C2, following which defendant number 3 would resign as a member of C1.
Issues in the case:
1. Whether the grant would be a payment for the third defendant's loss of office within the
meaning of the Companies Act 2006 s.215 so as to require the approval of C1's members
under s.217;
2. If the grant did require the approval of C1's members under s.217, whether the second
and third defendants were deprived of the right to vote;
3. Whether the court should approve the making of the grant;
4. Whether the court could and should direct L as to how he should vote.
16
Held:
(1) It was held that the transaction would fall under the definition of compensation of loss of
“
office provided under Section 215 of the English Companies Act, such that the making grant
would need approval from all members under Section 217. The court held that the grant was
made in response to defendant three resigning from her office as member of C1 and to C2 which
was considered in law to be a person connected with her .39
”
(2) A Section 217 resolution needed to be voted upon by the members of the company and hence
defendants two and three were deprived of the right to vote on the grant. The agreements of April
and July 2015 included a letter of intent written by the second and third defendants as both
trustees and members of C1. In it they expressly agreed unconditionally not to vote on the
grant.40
(3) The grant itself was approved by the court taking into account the unique circumstances of
“
the case. The court ruled that the grant would be in C1's best interests as not allowing the grant
would be in violation of the agreements entered into between the parties in April and July 2015.
The court ruled that unless there was a good enough reason as to why the grant should not be
allowed it would take it into consideration however no such reason existed .41
”
(4) The court ruled that it could and would direct L to vote in favour of the resolution to approve
“
the grant. Both the Charity Commission and C1's trustees had decided that their discretion to
approve the grant should be exercised by the court. That discretion had now been exercised. The
discretion so exercised bound the charity and the charitable company, C1. C1's trustees had
bound C1 in relinquishing their discretion to the court, and the court order would bind C1 in
deciding that the grant should be made. That meant that, while the members had to pass a
resolution under s.217 to approve the grant, it was not open to any member to vote against that
resolution, once the court and the Charity Commission had approved the grant. A member of a
company limited by guarantee without a share capital with exclusively charitable objects owed
fiduciary duties; C1's members did not stand outside the charity; they were part of its
administration and could not lay claim to any private interest; C1 was a charity with public
39
[2018] Ch. 371, (Chancery Division)
Id.
41
Supra note 34.
40
17
interests only; C1's members had an obligation to use their rights and exercise their vote in the
best interests of the charity. L did not have a free vote because he was bound by those fiduciary
duties and was subject to the court's inherent jurisdiction over the administration of charities.
When the court had decided what was expressly in the best interests of a charity, a member
would not be acting in the best interests of that charity if he gainsaid that decision. Moreover, the
Charity Commission had approved the instant application. It therefore contemplated that the
court might make directions aimed at procuring the passing of any necessary s.217 resolution. 42
”
Analysis
One of the few cases to discuss the compensation for loss of office under section 215 of the
English Companies act. The case examines the question of whether the grant of 40 million to be
made can be considered to be compensation for loss of office. Here the court ruled that it does
fall under the definition of compensation for loss of office as the payment made was in
connection with the resignation of the director. This decision taken by the court further increase
the expanse of this rule under the act as it prohibits companies and corporations from paying any
money which might be related to the resignation or loss of office of a director.
The United Kingdom unlike India has specifically drafted into its Companies Act various
sections which only deal with the compensation for loss of office.43 The principle behind
prohibiting companies from providing remuneration to directors either for their work and then
subsequently for loss of office comes from the idea of a company as a trust and the director a
trustee.44 Directors therefore are not entitled to any form of compensation unless it is for some
managerial work the directors may have taken along with their duties and obligations as
directors.45
42
[2018] Ch. 371, (Chancery Division)
Paul. L. Davies, Gower and Davies Principles of Modern Company Law, (9th Edition 2012).
44
(n 38) 405.
45
(n 38) 411.
43
18
V: Conclusion
Through the course of this paper the researchers have looked at Sections 191 and 202 and have
provided an in-depth analysis of these sections. A comprehensive look at the legislative history
of these sections along with a comparison of the same to the previous Act has been done, through
this we have tried to understand the provisions as they exist today and how they came to be. The
case of CIFF v. Attorney General a recent case of the England and Wales High Court has also
been analyzed to understand the position of law on compensation for loss of office in common
law.
We can conclusively state that the principle of barring companies from paying directors for loss
of office is one that runs across jurisdictions and in many countries such as India and the UK the
same has been codified in law. We began this paper by trying to understand the rationale behind
barring companies from paying directors for loss of office. The case of CIFF v. Attorney General
provides an interesting nuance which can further add to the reasons why such payments are not
allowed. Here the payment of a certain amount of money was contingent on the director leaving
or resigning. The court held that such a payment would fall under the definition of compensation
for loss.
This particular question of companies ousting directors becomes trickier when we consider that
director’s can be paid upon resignation but the same must only be for services which were
rendered to the company outside of the normal tasks performed by the director. Thus a director
may be compensated if additional burden of managing was also undertaken by the director.
Legislatures have clearly resolved the question regarding payments and directors resigning
through sections such as 191 and 202 however questions regarding other forms of director
remuneration still remain which due to the lack of legislative intent largely has to be dealt with
through in-house procedures of the company itself.
19
VI: References
BOOKS
 A Ramaiya, Guide to the Companies Act, (18th edn, Vol 2, LexisNexis).
 CR Dutta on Company Law, (7th edn, LexisNexis, 2017).
 Paul. L. Davies, Gower and Davies Principles of Modern Company Law, (9th Edition
2012).
ARTICLES

DE Nelson, ‘Managing Director: Compensation for Loss of Office’ [1978] The
Cambridge law Journal 30.

Lan Luh, ‘Compensation for Loss of Office’ [1997] Singapore Journal of Legal Studies
343.
MISCELLANEOUS
 Bhabha Committee, Report of the Company Law Committee (1952).
1
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