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TMI Blog1983 (11) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactures textile equipment. For its business it took loans and arranged credit facilities, which were provided, inter alia , by the Gujarat State Financial Corporation, Bank of India and Central Bank of India to the tune of Rs. 42.5 lakhs to Rs. 95.85 lakhs during the relevant years, i.e. , year ending September 30, 1965, up to September 30, 1971. While allowing these loans and credit facilities these financial institutions insisted on personal guarantees and the personal guarantees were furnished by petitioners Nos. 2 to 4 and Hansmukhlal Gordhandas Dalai and Shantilal Jivraj Mehta, respondents Nos. 3 and 4 herein. On February 24, 1965, the board of directors of the company adopted a resolution authorising the payment of guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the company Law Board (for short "the Board") for increasing the minimum remuneration payable to petitioner No. 3 as joint-managing director. The Board, vide its letter dated March 1, 1968, raised certain queries and asked the company to intimate the Board about the circumstances in which the approval of the Board was not obtained for payment of the guarantee commission to certain directors of the company. The company, by its letter dated June 15, 1968, explained that the guarantee commission could not be regarded as remuneration within the meaning of section 309 of the Act. The Board, however, by its letter dated August 2, 1968, took the stand that the provisions contained in section 309 were attracted to the payment of guarantee commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee commission paid to the directors, who had stood surety for the company prior to the coming into force of the Amending Act, XXXI of 1965, was outside the purview and ambit of section 309(1) or section 310. The guarantee commission paid or payable to the guarantor-directors was not remuneration payable to directors for services rendered by them within the meaning of the amended section 309. It was not covered by the term "remuneration of any director" within the meaning of section 310 and, consequently, the company was entitled to pay the guarantee commission to the guarantor-directors without the approval of the Central Govt. or the Board. It was also averred that the impugned order dated May 5, 1971, had been passed without affording any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Contract Act, is a contract to perform the promise, or discharge the liability, of a third person in case of his default. It is, in essence, a contract whereby the guarantor/surety agrees to be answerable for some liability of the principal debtor to the creditor. The assumption of personal liability is a necessary element in a contract of guarantee. The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract (section 128 of the Indian Contract Act). In the absence of some special equity the surety has no right to restrain an action against him on the ground that the principal debtor is solvent or that the creditor may have relief against the principal debtor in some ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to Stroud's Judicial Dictionary, Fourth Edition " . Director", inter alia , means : "the directors of a company are the persons having the direction, conduct, management, or superintendence" of its affairs. Under section 291 of the Act, subject to the provisions of the Act, the board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things as the company is authorised to do so. It is thus apparent that the management and superintendence of the affairs of the company vests in the board of directors. A director thus acting with other directors manages and supervises the affairs of the company. This is the service he ordinarily renders. In other words, a director renders supervisory or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration paid for services rendered by him. The Board has itself taken a decision that payment of interest to directors for the amounts advanced by them would not be attracted by section 309(1). The payment of guarantee commission, in my view, stands on the same footing. Here the company is in need of finances. The financial institutions are not prepared to advance money on the credit of the company. It agrees to advance the amount on the condition that the director/directors stand surety for the amount. In other words, it is prepared to advance the money and advances the money on the credit of the company plus the credit of the director/directors. The directors thus assume the liability of the principal debtor, which liability, as observed e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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