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TMI Blog1970 (8) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... rs taking over the management, the Company incurred very heavy losses as stated below : Year Amount of loss 1962 1.62 lakhs 1963 2.75 lakhs 1964 5.77 lakhs 1965 5.71 lakhs It is further claimed that under the management of the present board of directors, the company made trading profits of Rs. 1.70 lakhs and Rs 2.42 lakhs for the years 1966 and 1967 respectively and it is stated that the company is expected to earn even higher profits in the subsequent years and to be put on a sound financial position. In these circumstances it was felt that the directors should be allowed some reasonable remuneration in addition to the sitting fee and accordingly the board of directors recommended that they be paid a commission of 3 per cent, on the net profits as determined under the Companies Act and further that in view of the accumulated losses of the past years as there would be no net profits of the company in the next few years, the directors be jointly paid a minimum remuneration of Rs. 10,000 per annum for a period of five years. This recommendation was placed before the annual general meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner's total accumulated losses brought forward amounted to Rs. 11,41,362 and this fact together with the other liabilities were fully stated in the two applications. This rule was issued on the 18th July, 1969, calling on the respondents, the Company Law Board, the Union of India and the Registrar, Joint Stock Companies, West Bengal, to show cause why appropriate writs and/or directions should not issue for quashing the decision contained in the aforesaid letter dated the 20th July, 1968, and for directing the respondents not to give effect to the said decision and further to show cause why the respondents should not be directed to approve the aforesaid applications by the petitioner. Though practically no reasons were given in the letter dated the 20th July 1968, for refusing sanction to the petitioner's proposal to remunerate its directors, in the affidavit-in-opposition filed on behalf of the respondent Company Law Board, in showing cause reasons have been given for the refusal and both the learned counsel, Mr. A. C. Mitter and Mr. Roy Choudhury, agreed to treat the statements in the said affidavit as the reasons for such refusal. Such reasons are stated in paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g director" is meant a director who is entrusted with substantial power of management. The sections dealing with managerial remuneration are sections 198, 309, 310 and 311. Section 198(1) provides that 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 agent, 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. Section 198(2) lays down that such percentage shall be exclusive of any fees payable to directors under section 309(2). Sub-section (3) of that section provides for payment of monthly remuneration within the limits prescribed above to a managing or a whole-time director or to the manager. Section 198(4) is material for the purpose of this application and is set out in full below: "(4) Notwithstanding anything contained in sub-sections (1) to (3), if in any financial year, a company has no profits or its profits are inadequate, the company may, subject to the approval of the Central Government, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government or, by way of commission, if the company by special resolution authorises such payment, provided that such remuneration shall not exceed one per cent, of the net profits of the company, if the company has a managing or whole-time director, a managing agent or secretaries and treasurers or a manager, and three per cent, of the net profits of the company, in any other case. There is a further proviso that the company in general meeting may, with the approval of the Central Government, authorise the payment of such remuneration at a rate exceeding one per cent, or, as the case may be, three per cent, of its net profits. Sub-section (5) provides that the net profits referred to in the above sub-section shall be computed in the manner referred to in section 198(1). There is a provision in sub-section (5A) that if any director who draws or receives any remuneration in excess of the limit prescribed above, he shall refund the excess to the company and until such sum is refunded, hold it in trust for the company and the company is not entitled to waive the recovery of any sum so refundable. Sub-section (7) provides that the special resolution referred to in sub-section (4) shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration where there is no net profit. The necessary corollary is that until the past losses are wiped out no application for remuneration to directors would be maintainable. Mr. Mitter pointed out that in the Act no distinction has been made anywhere between the so-called part-time directors and the whole-time directors. The applicant is a director managed company and as there are no managing directors or managers or secretaries, the board of directors conduct the management and the affairs of the company. Mr. Mitter pointed out that in rejecting the petitioner's application the respondent-Board has completely overlooked the provisions of section 198(4) that even in any year in which there are no net profits the company is entitled to pay its directors minimum remuneration not exceeding fifty thousand rupees subject to the sanction by the Central Government. The learned counsel argued that the non obstante clause in section 198(4) "notwithstanding anything in sub-sections (1) to (3)" would exclude the operation of sub-section (1) in any event. Mr. Mitter referred me to an extract from Standard Board Practice on the importance of the functions of the board of directors of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non obstante clause in section 198(4). Lastly, Mr. Mitter submitted that if this court was satisfied that the impugned order was bad then it would direct the respondent-Board, to give approval to the petitioner's application for payment of minimum remuneration of Rs. 10,000 per annum to its directors instead of sending it back to the Board for reconsideration. He pointed out that the practice of sending matters back to the authority concerned arose from the procedure prescribed in section 45 of the Specific Relief Act. Under article 226, a High Court is empowered to give such orders and directions as it thinks fit. He referred to the decision of the Supreme Court in P. Bhooma Reddy v. State of Mysore AIR 1969 SC 655, where in an appeal from an order dismissing an application under article 226, the Supreme Court declared the impugned order of cancellation to be invalid and set aside the order. It further issued a writ of mandamus for the grant of licences to the appellant and observed that in order to give effect to the order for the issue of licences in favour of the appellant it is necessary to give the further direction that the licences already issued to respondent No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Mr. Roy Choudhury quoted extensively from the book Law and Practice Relating to Company Directors by Powell-Smith for the proposition that apart from the working or executive directors, that is persons who are full-time executives, it is sometimes desirable to take in "outside" directors who have no association with the company other than as a director. The learned author expresses the opinion that in the competitive work of commerce and industry there should not be room for directors who are merely decorative. But one of the observations therein relied on by Mr. Roy Choudhury seems to me to belie the proposition assumed both by the Board and by Mr. Roy Choudhury that part-time directors are the ordinary directors of a company. The learned author observes that a decision to appoint part-time or outside directors may be made for a wide variety of reasons. So a part-time director is an outsider who is taken into a Board not for the purpose of the management of the company but to add prestige to the board of directors or other extraneous reasons. In a director-managed company which has neither a managing director nor a manager, the board of directors cannot be described as part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 198(1), 309 or 310. So the only provision under which remuneration could be paid to the directors is section 198(4). What is contemplated in that sub-section is payment of minimum remuneration to the directors by the company in a year in which there are no profits. The sub-section cannot apply to a case of remuneration being paid for a period exceeding that year. If at the end of a particular year the company finds that it has earned no profits but that some minimum remuneration should be paid to its directors it can apply for sanction under section 198(4). As such an application would depend on the company suffering a loss of profit in any year it can only be made for a particular year depending on the trading results of the company for that year. If, for instance, in the year 1965 when there was a loss of Rs. 5.71 lakhs the company had applied under section 198(4) for payment of minimum remuneration to its directors the application would be within the subsection. Similarly, such an application for 1967 when there was a loss would also be maintainable for that year. If section 198(4) is not attracted there are no other provisions of the Companies Act which would enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading profits for the years 1968 and 1969 were rupees two lakhs each and that in the balance-sheet and the profit and loss account for the year 1969, the balance of the loss carried over at the end of that year is shown as Rs. 4,96,836. This statement has been verified by me as the said balance-sheet and the profit and loss account was produced for my inspection. While I am of opinion that the Company Law Board has erred in treating both the petitioner's applications in Form No. 25-C and Form No. 26 as applications under the provisions of sections 198(1) and 309 and 310 and in failing to take into consideration the provision of section 198(4), I am unable to accede to the suggestion of Mr. Mitter that I should direct the Board to grant approval to the proposal of the petitioner to allow remuneration to its directors at the rate of Rs. 10,000 per annum for a period of five years as claimed in the petition. Apart from the facts considered by the Board, the further facts disclosed in the affidavit-in-reply of further trading profits being earned in the subsequent years and of the accumulated losses being reduced considerably, should also be taken into consideration in dealing wi ..... 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