Payment of Sitting Fees to Managing Director

Section 309 of the Companies Act, 1956 in pertinent part, reads as under:

“(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 required, by a special resolution, 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 professional nature, and (b) in the opinion of the Central Government the director possesses the requisite qualifications for the practice of the profession.

(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 of the Companies (Amendment) Act, 1960 (65 of 1960) fees for meetings of the Board and any committee thereof, attended by a director are paid on a monthly basis, such fees may continue to be paid on that basis for a period of two years after such commencement or for the remainder of the term of office of such director, whichever is less, but no longer.”

Section 198 of the Companies Act in relevant part, reads as follows:

“(1) 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 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 and 350, except that the remuneration of the directors shall not be deducted from the gross profits.

(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.”

The very fact that sub-section (2) of Section 309 very clearly talks of “remuneration by way of a fee for each meeting of the board or a committee thereof attended by him” (by the director) gives rise to a necessary implication that sitting fees would amount to remuneration under provisions of Section 309. Further, in view of sub-section (2) of Section 198, which reads as follows: “The percentage aforesaid shall be exclusive of any fees payable to directors under sub-section (2) of Section 309.” It cannot be said that sitting fee would not amount to remuneration for purposes of Section 309 of the Companies Act, 1956.

In view of this legal position, a Managing Director can be paid sitting fees for attending board meetings of the company.

Nominee Director - Officer Who Is In Default?

Can a "Nominee Director" nominated to take care of the interests of a public financial institution be treated as an "officer who is in default?

Section 5 of the Companies Act, 1956 provides the meaning of ‘officer who is in default’. It reads as follows:

“For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression "officer who is in default" means all the following officers of the company, namely:-

(a) the managing director or managing directors;

(b) the whole-time director or whole-time directors;

(c) the manager;

(d) the secretary;

(e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;

(f) any person charged by the Board with the responsibility of complying with that provision: Provided that the person so charged has given his consent in this behalf to the Board;

(g) where any company does not have any of the officers specified in clauses (a) to (c) any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors:

Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.”

Section 5 of the Companies Act is quite unambiguous on this. Normally, a nominee director will not be an officer who is in default unless the board was remiss in nominating a person for this purpose or remiss in specifying one among themselves for that role in the absence of a whole-time director or a managing director or a manager. Section 5 of the Companies Act, 1956 defines the ‘officer who is in default’ as only those directors and officers of the company who are in charge of the management of the company and not the nominee directors.

However, a nominee director could be proceeded against and they cannot claim wholesale exoneration from the proceeding merely by virtue of being nominee directors unless there is an express provision to that effect under the statute for contravention of which the company and the directors can be proceeded against. Further it is for the prosecution to establish that the nominee director was party to the offence. This principle may be widely disregarded in practice and nominee directors may take themselves to be simply as watchdogs for those who put them on the Board. They are wrong, and before accepting office they should remember that the law expects them to devote their loyalty to the company as a whole. They must be careful. They must not represent only those appointing them. They must look to the interest of ‘the company’s employees in general’, and they, like any other director, must also balance these, where necessary, with those of the membership comprising the company. See LORD DENNING in Meyer v. Scottish C.W.S Ltd., (1959) AC 324 at pp. 366, 367 (HL) cited with approval in Selangar United Rubber Estates Ltd. v. Cradock (No. 3), (1968) 1 WLR 1555 : (1969) 39 Comp Cases 485

Further, in the case of Geetanjali Mills Ltd. v. Thiruvengadathan (1989) 1 Comp. L. J, the liability of the nominee directors in the Income Tax Act, 1961 was discussed and it was held that the Nominee Directors of the creditors, institutions, government, joint venture partners etc., generally, do not enjoy any special immunity. Financial Institutions’ nominee directors, however, get immunity under the State Financial Corporation Act. But it has to be established that the accused person has acted in good faith.

Furthermore, Section 5 (g) of the Companies Act, 1956 may be read very carefully. It reads as follows:

“Where any company does not have any of the officers specified in clauses (a) to (c) any director or directors who may be specified by the Board in this behalf or where no director is so specified, “all the directors”.”

Sub-section (13) of Section 2 of the Companies Act, 1956 defines a “director” as ‘director includes any person occupying the position of director, by whatever name called’.

In view of the above and the law evolving on the subject vide various other decisions, it appears that nominee directors are in the same position and they owe same duties to the companies as any other director.

Alternate Director and Form No. 32

'A' Company Ltd. has its Registered Office in Hyderabad. 12 board meetings of the Company are held in a year. Out of the total meetings held, 4 are held at Hyderabad, 4 are held at Delhi, and 4 are held at Pune. One of the directors of 'A' Company Ltd. has been abroad. The board of directors of 'A' Co. Ltd. appointed Mr. 'X' as alternate director in his place whereupon, Form No. 32 was filed. Now, the original director is back to India and is to attend a week-long business conference at Hyderabad. Meanwhile, a board meeting is scheduled to be held at Delhi. In such backdrop, 'A' Company Ltd. seeks legal view on the following Queries:

(1) Since the original director is back to Hyderabad, can Mr. 'X' participate in the board meeting of 'A' Company Ltd.?

(2) Should Form No. 32 be filed for cessation of office of the Alternate Director?

Section 313 of the Companies Act, 1956 provides for the appointment and term of office of alternate directors. The Section reads as follows:

"(1) The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director (hereinafter in this section called "the original director") during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.

(2) An alternate director appointed under sub-section (1) shall not hold office as such for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held.

(3) If the term of office of the original director is determined before he so returns to the State aforesaid, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director."

Alternate director is a person who can act temporarily to fill the position, carry out the duties, etc., of a regular or original director of a company in his absence for more than 3 months from the State where the Board Meetings are ordinarily held.  It is important to note that the power to appoint an alternate director lies exclusively with the board and that neither the original director nor the shareholders have any say in his appointment.  An alternate director vacates his office if and when the original director returns to the State in which the Board meetings are ordinarily held irrespective of the fact whether the original director attends a Board meeting or not. [Circular No. 6/16(313) /63-PR dated 5.2.1963]. The expression "State in which meetings of the Board are ordinarily held" does not necessarily mean the State in which the registered office of the company is situated.  However, such a State must be one in which the meetings of the Board are ordinarily held. A query was made to the department, wherein 12 meetings of the board of a company are held in a year… 4 each in 3 different states.  In such a case where, according to the department, the board meetings of the company can be said to be ordinarily held?  In such a case the State in which the registered office is situated would have to be taken as the State in which meetings of the company can be said to be ordinarily held. [Minutes of meeting of Company Law Sub-Committee of BCCI with Secretary DCA held on 20-06-1972.]

In view of the above, since equal numbers of meetings were held at 3 different states, Hyderabad, where the registered office is situated has to be taken as the state where meetings are ordinarily held. As the original director has returned to Hyderabad, albeit the meeting is scheduled in pune, the office of Mr. X, the alternate director is vacated. Therefore, he could not attend the board meeting in scheduled in Pune.

Accordingly, Query No. 1 is answered.

Sub-section (13) of Section 2 of the Companies Act, 1956 defines a “director” as ‘director includes any person occupying the position of director, by whatever name called’.  Since an alternate director occupies the position of director and performs same duties and is subject to same liabilities as of any director, he shall be treated for all intents and purposes of the Companies Act, 1956 and articles of the company, as a 'director' of the company like any other director.  The provisions of Sections 264, 271 and 303 of the Companies Act, 1956 are to be complied with by, and in respect of, an alternate director. [Circular No. 8/9 (313)/61 – PR, dated 07-08-1961.]  DCA has expressed a view that appointment of an employee as an alternate director will be governed by the provisions of sections 314, 269, 198 and 309 of the Companies Act. [Department of Company Affairs' Circular No. 219/63-PR dated 29 June 1964].

In view of the above, the Registrar of Companies should be notified of the appointment or cessation, as the case may be, vide Form No. 32 along with the requisite filing fees, giving particulars about the cessation from the directorship (including alternate) of the company on the return of the original director, within 30 days of the such cessation. Where an individual’s Form No. 32 for cessation is not filed, and the same individual is subsequently (some months or years later) re-appointed as a director or as an alternate, the electronic system will not permit the filing of the said Form for the fresh appointment, which, in turn, will be construed as a statutory violation.