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PETITIONER:

COMPANY LAW BOARD

Vs.

RESPONDENT:

UPPER DOAB SUGAR MILLS LTD. ETC.

DATE OF JUDGMENT17/12/1976

BENCH:

KHANNA, HANS RAJ

BENCH:

KHANNA, HANS RAJ

GUPTA, A.C.

SINGH, JASWANT

CITATION:

1977 AIR 831 1977 SCR (2) 503

1977 SCC (2) 198

ACT:

Companies Act, 1956--Ss. 198, 269, 309 and 637A--Scope

of--Company Law Board--If could fix overall maximum remuner-

ation to managing directors while giving approval under s.

269.

HEADNOTE:

Section 198(1) of the Companies Act, 1956 provides that

the total managerial remuneration payable by a public compa-

ny to its directors in respect of a financial year shall not

exceed eleven per cent of the net profits of that company

for that financial year. Sub-section (3) prescribes that

within 'the limits of the maximum remuneration specified in

sub-s. (1) a company may pay a remuneration to its managing

or whole-time director in accordance with the provisions of

s. 309. Section 309(3) provides that a director who is

either in the whole time employment of the company or a

managing director may be paid remuneration either by way of

monthly payment or at a specified percentage of the net

profits of the company or partly by one way or partly by the

other. The proviso provides that except with the approval

of the Central Government such remuneration shall not exceed

five per cent of the net profits for one such director and

if there is more than one such director ten per cent for all

of them together. Section 637A provides that where the

Central Government is required or authorised by any provi-

sion of the Act to accord approval in relation to any

matter the Central Government may accord such approval

subject to such conditions, limitations, restrictions as it

may think fit to impose.

In 1966 the respondent company appointed two managing

directors and sought the approval of the Central Government

under s. 269 of the Companies Act, 1956 for their appoint-

ment. Granting its approval the Company Law Board fixed a

ceiling on the total remuneration payable to each managing

director by way of commission and salary. The Company's

representation to the Board to raise the ceiling of remuner-

ation was rejected.

In a petition under art, 226 of the Constitution the

High Court held that the action of the Board in reducing the

remuneration was arbitrary and void and that any condition

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regarding the remuneration which is contrary to the provi-

sions of ss. 198 and 309 would not be germane to s. 269 and

that section does not include in its scope any element

regarding the fixation of remuneration.

Allowing the appeals of the Board.

HELD: The High Court was in error in quashing the order

of the Board. In view of the provisions of ss. 269 and 637A

there is no infirmity in the condition imposed by the

Board. [510C; 509H]

Section 309 does not deal with the appointment of manag-

ing directors but pertains to the remuneration of managing

or .whole time directors who had already been appointed..

The effect of the proviso to s. 309(3) is that if the tenure

of a managing director already appointed continued after the

coming into force of the Act, the remuneration to be raid to

such managing director shall not, after the coming into

force of the Act, exceed 5% of the net profits to be paid

for one such director and if there be more than one such

director 10% for all of them together. [509D]

In the instant case since the managing director had been

appointed for the first time after the coming into force of

the Act their .appointment had to be approved in terms of s.

269. The Board, while granting permission, inserted a

condition regarding the total remuneration of each managing

director. In so doing the Board acted well within the

power. [509F-G]

16-1546 SCI/76

504

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1840-

1842/72.

Appeals from the Judgment and Orders dated the 15th

April, 1971 of the Delhi High Court in Civil Writ Petitions

Nos. 54, 1183 and 1184/69.

Mrs. Shyamla Pappu, R.N. Sachthey and Girish Chandra for

the appellant in C.A. 1840/71.

R.N. Sachthey and Girish Chandra for the Appellants in CAs.

1841-42/71.

H.K. Puri for the Respondents.

The Judgment of the Court was delivered by

KHANNA, J.---This Judgment would dispose 0 civil

appeals Nos. 1840, 1841 and 1842 of 1971 which have been

filed on certificate by the Company Law Board against the

common judgment of Delhi High Court in three writ petitions

by the respondent-company and its two managing directors to

challenge order dated September 27, 1967.

The respondent company, Upper Doab Sugar Mills Ltd., is

a public limited company governed by the provisions of the

Companies Act, 1956 (hereinafter referred to as the Act).

The company has its registered office at Shamli, district

Muzaffarnagar (Uttar Pradesh). Its main business is manu-

facture of sugar from sugar cane. It also manufactures

spirits, industrial alcohols and rum from molasses. From

1951 onwards the respondent company was managed by a firm of

managing agents. Two of the partners of that firm were Shri

Rajinder Lal and Shri Nannder Lal. The managing agency

agreement of that firm was to expire on January 14, 1967.

On October 4. 1966 the Board of Directors of the company

resolved not to continue the managing agency of the said

firm and decided to appoint two managing directors to con-

duct and manage the affairs of the company. Accordingly, on

October 8, 1966 in exercise of the powers under article 117

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of the articles of association of the company the Board of

Directors resolved to appoint Shri Rajinder Lal and Shri

Narinder Lal as the two managing directors of the company.

The salary of each of the managing directors was fixed at

Rs. 5,000 per month. In addition to that, each managing

director was to get commission at the rate of 31/2 per cent

of the net profits of the company during a financial year

computed in the manner .laid down in section 309(5) of the

Act. Besides that, other service benefits such as gratuity,

provident fund, free medical treatment, transportation and

free furnished residential accommodation were to be pro-

vided to each of the managing directors. The resolution of

the Board of Directors was placed before the shareholders of

the company in a general meeting. The shareholders approved

the said resolution to appoint Shri Rajinder Lal and Shri

Narinder Lal as managing directors on the terms set out in

that resolution. An application was thereafter made under

section 269 of the Act to Company Law Board, appellant,

for obtaining approval to the appointment of Shri Rajinder

Lal and Shri Narinder Lal as managing directors. The powers

of the Central Government, it may be stated, have been

delegated to the appellant Board for exercising, inter

alia, powers under section 269 of

505

the Act. The appellant Board after obtaining some addition-

al information and after some further correspondence granted

as per letter dated September 28, 1967 approval to the

appointment of Shri Rajinder Lal and Shri Natruder Lal as

managing directors of the company. The said approval was

granted subject to the various terms and included the fol-

lowing condition:

"The total remuneration of each managing

director by way of commission and salary shall

not exceed Rs. 1,20,000 (Rupees one lakh

twenty thousand) per annum."

The company made a representation to the appellant Board

that the aforesaid ceiling of Rs. 1,20,000 would not ade-

quately remunerate the two managing directors and that the

aforesaid ceiling be raised. The Board rejected that repre-

sentation. Three writ petitions were thereafter filed in

January 1969 by the company and Shri Rajinder Lal and Shri

Narinder Lal for restraining the appellant Board from giving

effect to the condition set out above that the total remu-

neration of each managing director should not exceed Rs.

1,20,000 per annum. Prayer was made that the appellant

Board be directed to accord approval for payment to the

managing directors the remuneration as passed in the resolu-

tion of the Board of Directors along with the necessary

perquisites.

The petition was registered by the appellant Board and

the affidavit of the Secretary of the Board was filed in

opposition. At the hearing in the High Court the following

two questions were agitated on behalf of the respondent

company and its managing directors:

"(1) Whether the administrative ceiling

imposed by the Board on 28-9-1967 on the

remuneration payable to the Managing Directors

by the Company is ultra vires or illegal?

(2 ) Whether the refusal by the Board to

enhance the remuneration of the Managing

Directors above the ceiling of Rs. 50,000/-

for the loss year was bad because the Company

was not granted adequate heating and because

the order of refusal did not state the reasons

therefor ?"

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The High Court answered the second question against the

respondent company. This question also no longer survives m

these appeals. On the first question, the High Court after

referring to the various provisions held that the action of

the Board in reducing the remuneration of the managing

directors was arbitrary and void. In this connection, the

High Court observed:

"But any condition regarding remunera-

tion which is contrary to the provisions of

sections 198 and 309 would not be regarded as

germane to section 269 inasmuch as the Legis-

lature has exhaustively dealt with remunera-

tion in sections 198 and 309 with the effect

that section 269 does not include in its scope

any element regarding the fixation of remuner-

ation."

Referring to the general administrative policy of the Gov-

ernment of fixing ceiling on managerial remuneration, the

High Court observed

506

that any such policy which resulted in placing a ceiling

below the legislative ceilings fixed by sections 198 and 309

was illegal as being contrary to sections 198 and 309. In

the result, the High Court quashed the condition imposed by

the Board fixing the remuneration of the managing direc-

tors.

In appeal before us Mrs. Shymala Pappu has assailed the

correctness of the judgment of the High Court. As against

that, Mr. Puri on behalf of the respondents has canvassed

for the correctness of that judgment.

In order to appreciate the respective arguments, it may

be necessary to set out the necessary provisions of the Act,

as they stood at the relevant time. Sub-sections (1), (2)

and (3) of section 198 read as under:

"198. Overall maximum managerial remu-

neration and managerial remuneration in case

of absence or adequacy of profits.--(1) The

total managerial remuneration payable by a

public company or a private company which is a

subsidiary of a public company, to its direc-

tors and its managing agents, secretaries and

treasurers or manager in respect of any finan-

cial 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, except that

the remuneration of the directors shall not be

deducted from the gross profits:

Provided that nothing in this section

shall affect the operation of sections 352 to

354 and 356 to 360.

(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."

Section 269 reads as under:

"269. Appointment or re-appointment of

managing or whole-time director to require

Government approval in certain cases.--( 1 )

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In the case of a public company or a private

company which is a subsidiary of a public

company, whether such public company or pri-

vate company is an existing company or not,

the appointment of a person for the first time

as a managing or whole time director shall not

have any unless approved by the Central Gov-

ernment:

Provided that in the case of a public

company, or a private company which is a

subsidiary of a public company, incorporated

after the commencement of the Companies

(Amendment) Act, 1960, the appointment of a

person as a managing

507

or whole-time director for the first time

after such incorporation may be made without

the approval of the Central Government but

such appointment shall cease to have effect

after the expiry of three months from the date

of such incorporation unless the appointment

has been approved by that Government.

(2) Where a public company or a private

company which is a subsidiary of a public

company, is an existing company, the re-ap-

pointment of a person as a managing or whole-

time director for the first time after the

commencement of the Companies (Amendment) Act,

1960, shall not have any effect unless

approved by the Central Government."

Sub-sections (1), (2) and (3) of section 309

read as under:

"309. Remuneration of directors.--( 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 require, by a special resolu-

tion, 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 profession-

al nature: and

(b) in the opinion of the Central Govern-

ment, the director possesses the requisite

qualifications for the practice of the profes-

sion.

(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 the Companies (Amendment) Act,

1960, fees for meetings of the Board and any

committee thereof, attended by a director are

paid on a monthly basis, such fees may contin-

ue to he paid on that basis for a period of

two years after such commencement or for the

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remainder of the term of office of such direc-

tor, whichever is less, but no longer.

(3) A director who is either in the

whole-time employment of the company or a

managing director may he paid remuneration

either by way of a monthly payment or at a

508

specified percentage of the net profits of the

company or partly by one way and partly by

the other:

Provided that except with the approval

of the Central Government such remuneration

shall not exceed five per cent of the net

profits for one such director, and if there is

more than one such director, ten per cent for

all of them together."

Sub-section (1 ) of sect,ion 637A reads as

under:

"637A. Power of Central Government to

accord approval, etc., subject to conditions

and to prescribe fees oft applications.-( 1 )

Where the Central Government is required or

authorised by any provision of this Act,--

(a) to accord approval, sanction, consent,

confirmation or recognition to or in relation

to, any matter;

(b) to give any direction in relation to any

matter; or

(c) to grant any exemption in relation to any

matter;

then, in the absence of anything to the con-

trary contained in such or any other provision

of this Act, the Central Government may ac-

cord, give or grant such approval, sanction,

consent, confirmation, recognition, direction

or exemption subject to such conditions,

limitations,ions or restrictions as it may

think fit to impose and may, in the case of

contravention of any such condition, limita-

tion or restriction, rescind or withdraw such

approval, sanction, consent, confirmation,

recognition, direction or exemption."

After hearing learned counsel for the parties and giving

the matter our earnest consideration, we are of the opinion

that the view taken by the High Court in quashing the condi-

tion imposed by the appellant Board about the fixation of

the remuneration of the managing directors cannot be sus-

tained. The High Court in arriving at its conclusion took:

the view that section--198 and the proviso to sub-section

(3) of Section 309 specially dealt with the question which

arose for determination. In view of those provisions, the

High Court inferred that sections 269 and 637A upon which

reliance had been placed by the appellant Board could not be

of much avail to the appellant. Mr. Puri on behalf of the

respondents has adopted the same reasoning in this Court and

has contended that sect,ion 198 and the proviso to sub-

sect,ion (3) of section 309 being special provisions relat-

ing to the remuneration of managing directors, they would

exclude so far as that question is concerned, general

provisions like those contained in sections 269 and 637A.

The above reasoning, we find, is vitiated by an innate

fallacy. Section 198 deals with the overall maximum manage-

rial remuneration and managerial remuneration in the case of

absence or adequacy of profits. The total managerial remu-

neration payable by a public company or a private company

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which is a subsidiary of a public company to its managerial

staff, according to sub-section (1) of that section, cannot

exceed 11 per cent of the net profits for a financial year.

The total managerial remuneration covers the remuneration

not merely of the managing

509

directors but also of other managerial personnel like secre-

taries, treasurers and managers. Sub-section (3) of the

section provides that Within the limits of the maximum

remuneration, a company may pay a monthly remuneration to

its managing director in accordance with section 309. Sub-

section (1) of section 309 prescribes the formalities which

have to be complied with for fixing of the remuneration of

a managing or full-time director of a company. We are not

concerned with sub-section (2) of that section. Sub-section

(3). which constitutes the main plank of the case of the

respondents, provides that a director who is either in the

whole-time employment of the company or a managing direc-

tor may be paid remuneration either by way of monthly pay-

ment or at a specified percentage of the net profits of the

company or partly by one way or partly by the other. Ac-

cording to the proviso to that sub-section, except with the

approval of the Central Government, such remuneration of the

whole-time director or managing director shall not exceed 5

per cent of the net profits for one such director and if

there is more than one such director 10 per cent for all of

them together. Perusal of section 309 shows that it does not

deal with the appointment of managing directors. It only

pertains to the remuneration of managing or whole-time

directors who have already been appointed. The effect of

the proviso to sub-section (3) of section 309 is that if the

tenure of a managing director who has already been appointed

continues after the coming into force of the Act, the remu-

neration to be paid to such a managing director shall not

after the coming into force of the Act exceed 5 per cent of

the net profits for one such director, and if there be more

then one such director, 10 per cent for all of them

together.

The present, however, is not a case of managing direc-

tors having been appointed earlier and continuing to act as

such after the coming into force of the Act. Shri Rajinder

Lal and Shri Narinder Lal have been appointed managing

directors of the company for the first time after the coming

into force of the Act. Their appointment as managing

directors had to be approved in terms of section 269 of the

Act. The company consequently applied to the Central Gov-

ernment for approving their appointment. The appellant

Board, to whom the powers of the Central Government have

been delegated for this purpose, while granting approval to

the appointment of the aforesaid two persons as managing

directors, inserted the condition that the total remunera-

tion of each managing director by way of commission and

salary shall not exceed rupees. one lakh twenty thousand per

annum. The above remuneration is in addition to the benefit

of certain perquisites which would be available to the

managing directors. The Board, in our opinion, acted well

within its power in imposing this condition. Section 637A

of the Act makes it clear inter alia that where the Central

Government is required or authorised by any provision of the

Act to accord approval in relation to any matter, then, in

the absence of anything to contrary contained in such or any

other provision of the Act, the Central Government may

accord such approval subject to such conditions, limitations

or restrictions as it may think fit to impose. In view of

the provisions of sections 269 and 637A of the Act, we find

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no infirmity in the condition imposed by

510

appellant Board. The provisions of both sections 269 and

637A expressly deal with the question which arises directly

in this ease.

We may observe that according to the affidavit filed on

behalf of the appellant Board, since 1959 the said Board has

been imposing a maximum administrative ceiling on the total

amounts payable to a managing director. The basic principle

that has been kept in view by the Board is that no individ-

ual should be paid remuneration exceeding Rs. 1,20,000 per

annum or Rs. 10,000 per month. A large number of instances

have also been given by the Board and it would appear there-

from that the maximum remuneration which has been allowed by

the Board to the managing director of any company is Rs.

1,20,000.

The High Court, in our opinion, was in error in quashing

the order of the Board. We accordingly accept the appeals,

set aside the judgment of the High Court and dismiss the

writ petitions. Looking to all the facts, we leave the

parties to bear their own costs throughout.

P.B.R. Appeals allowed.

511