PETITIONER:
COMPANY LAW BOARD
Vs.
RESPONDENT:
UPPER DOAB SUGAR MILLS LTD. ETC.
DATE OF JUDGMENT17/12/1976
BENCH:
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 remuner-
ation 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 compa-
ny 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 provi-
sion 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 appoint-
ment. 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 remuner-
ation 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 provi-
sions 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 manag-
ing 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
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1840-
1842/72.
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 manu-
facture 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 con-
duct 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 pro-
vided 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 addition-
al 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 fol-
lowing 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 ade-
quately remunerate the two managing directors and that the
aforesaid ceiling be raised. The Board rejected that repre-
sentation. 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 remu-
neration 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 resolu-
tion 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
therefor ?"
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 remunera-
tion which is contrary to the provisions of
sections 198 and 309 would not be regarded as
germane to section 269 inasmuch as the Legis-
lature has exhaustively dealt with remunera-
tion in sections 198 and 309 with the effect
that section 269 does not include in its scope
any element regarding the fixation of remuner-
ation."
Referring to the general administrative policy of the Gov-
ernment 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 direc-
tors.
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 remu-
neration 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 direc-
tors and its managing agents, secretaries and
treasurers or manager in respect of any finan-
cial 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 pri-
vate 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 Gov-
ernment:
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-ap-
pointment 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 resolu-
tion, 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 profession-
al nature: and
(b) in the opinion of the Central Govern-
ment, the director possesses the requisite
qualifications for the practice of the profes-
sion.
(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 contin-
ue 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 direc-
tor, 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 sect,ion 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 con-
trary contained in such or any other provision
of this Act, the Central Government may ac-
cord, 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, limita-
tion 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 condi-
tion imposed by the appellant Board about the fixation of
the remuneration of the managing directors cannot be sus-
tained. 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 sect,ion 198 and the proviso to sub-
sect,ion (3) of section 309 being special provisions relat-
ing 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 manage-
rial remuneration and managerial remuneration in the case of
absence or adequacy of profits. The total managerial remu-
neration 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 secre-
taries, 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. Sub-
section (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 direc-
tor may be paid remuneration either by way of monthly pay-
ment or at a specified percentage of the net profits of the
company or partly by one way or partly by the other. Ac-
cording 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 remu-
neration 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 direc-
tors 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 Gov-
ernment 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 remunera-
tion 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 individ-
ual 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 there-
from 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.
511