1983 (11) TMI 226 - HC - Companies Law

Summary

Issues:
Interpretation of whether the guarantee commission paid to directors for standing as sureties constitutes remuneration under section 309 of the Companies Act, 1956.

Analysis:
The case involved a public company and its directors who had provided personal guarantees for loans taken by the company. The company paid guarantee commission to these directors, prompting a dispute with the Company Law Board regarding the necessity of approval for such payments under the Companies Act, 1956.

The primary issue addressed by the court was whether the guarantee commission paid to directors who stood as sureties for the company constituted remuneration for services rendered under section 309 of the Act. The court delved into the nature of a contract of guarantee, emphasizing the personal liability assumed by the guarantor and the rationale behind a creditor requiring a guarantee. It highlighted that the guarantee commission was consideration for the guarantor's pledge of credit and not for any services rendered in a managerial or supervisory capacity.

The court examined the definition of "director" and the powers vested in the board of directors under the Act. It emphasized that the management and superintendence of a company's affairs lie with the board of directors, and the services typically rendered by a director are of a supervisory or administrative nature for which remuneration is provided.

Section 309 of the Act, which restricts remuneration payable to directors, was analyzed in light of the amendments introduced to prevent evasion of these restrictions. The court interpreted the term "service" within the context of remuneration, concluding that acts involving financial liability, such as providing funds to the company, do not constitute services under section 309.

Ultimately, the court ruled that the guarantee commission paid to directors for standing as sureties did not amount to remuneration for services rendered. Therefore, no approval from the Board was required for such payments, and the impugned order demanding approval was quashed. The court restrained the respondents from taking action against the company for not obtaining approval for the guarantee commission payments.

In conclusion, the court granted the writ petition, declaring that approval from the Central Government or the Board was not necessary for the guarantee commission payments made by the company to its directors. The judgment highlighted the distinction between remuneration for services rendered and payments made in consideration of assuming financial liabilities, providing clarity on the application of section 309 of the Companies Act, 1956.