1970 (8) TMI 55 - HC - Companies Law

Summary

Issues Involved:
1. Approval of remuneration to directors.
2. Financial position and accumulated losses of the company.
3. Application of Sections 198(4), 309, and 310 of the Companies Act.
4. Distinction between part-time and whole-time directors.
5. Judicial review of administrative decisions.

Issue-wise Detailed Analysis:

1. Approval of Remuneration to Directors:
The petitioner-company sought approval from the Company Law Board to pay its directors a commission of 3% on net profits and a minimum remuneration of Rs. 10,000 per annum due to accumulated losses. The Company Law Board rejected the application, suggesting the appointment of a managing or whole-time director instead. The court reviewed the provisions of the Companies Act, emphasizing that under Section 198(4), a company may pay minimum remuneration to its directors even in the absence of net profits, subject to Central Government approval.

2. Financial Position and Accumulated Losses of the Company:
The company had significant accumulated losses amounting to Rs. 11,41,362, which exceeded its paid-up capital and reserves. Despite earning trading profits in 1966 and 1967, the company was still operating on loan capital. The court noted that the Company's financial position and past losses were critical factors in the Board's decision to reject the remuneration proposal.

3. Application of Sections 198(4), 309, and 310 of the Companies Act:
Sections 198(1), 309, and 310 govern the remuneration of directors, linking it to the profitability of the company. Section 198(4) allows for minimum remuneration in the absence of profits, subject to Central Government approval. The court found that the Company Law Board failed to consider Section 198(4) adequately and instead focused on Sections 309 and 310, which require net profits for director remuneration.

4. Distinction between Part-time and Whole-time Directors:
The Company Law Board and respondents treated the petitioner's directors as part-time directors, arguing that sitting fees were adequate compensation. The court clarified that the Companies Act does not distinguish between part-time and whole-time directors for remuneration purposes. The petitioner's directors, responsible for the company's management, should not be considered part-time directors.

5. Judicial Review of Administrative Decisions:
The court emphasized that administrative decisions, like the one made by the Company Law Board, must be based on a proper understanding of the law and relevant facts. The court found that the Board's decision was influenced by a misapprehension of the applicable legal provisions, particularly Section 198(4). The court set aside the Board's decision and directed it to reconsider the application in light of the correct legal provisions.

Conclusion:
The High Court of Calcutta quashed the Company Law Board's decision rejecting the petitioner's application for director remuneration. The court directed the Board to reconsider the application, taking into account the provisions of Section 198(4) of the Companies Act and the financial position of the company. The rule was made absolute, and all interim orders were vacated without any order as to costs.