The remuneration paid to a director as a technical adviser is not to be included in the limit of 5% laid down in Section 309 (3) of the Companies Act, 1956, but is to be included in the limit of 10% laid down in Section 348 of the said Act.

Headnote:
COMPANIES ACT - SECTIONS 309, 198, 348 - INTERPRETATION - REMUNERATION OF DIRECTORS AND MANAGING AGENTS - WHETHER AMOUNT PAID TO DIRECTOR AS TECHNICAL ADVISER TO BE INCLUDED IN COMPUTATION OF REMUNERATION.
Fact of the Case:

The plaintiff, a shareholder of the first defendant company, filed a suit against the company and its managing agents, the second defendants, and a partner of the managing agents, the third defendant, seeking a declaration that the remuneration paid to the managing agents and the third defendant was in excess of the limits prescribed by the Companies Act, 1956.
Finding of the Court:

The court held that the remuneration paid to the third defendant as a technical adviser was to be included in the computation of the remuneration of the managing agents for the purpose of determining whether the limit of 10% of net profits prescribed by Section 348 of the Companies Act, 1956, had been exceeded.
Issues: 1. Whether the remuneration of Rs. 3,000/- paid to the third defendant as technical adviser is to be included in the limit of 5% laid down in Section 309 (3) of the Companies Act, 1956? 2. Whether the overall limit of 11% laid down in Section 198 (1) of the Companies Act, 1956, applies to the year 1956 or any part thereof? 3. Whether the remuneration of Rs. 3,000/- paid to the third defendant as technical adviser is to be included in the limit of 10% laid down in Section 348 of the Companies Act, 1956?
Ratio Decidendi: 1. The court held that the remuneration paid to the third defendant as a technical adviser was not to be included in the limit of 5% laid down in Section 309 (3) of the Companies Act, 1956, as the said provision only applied to remuneration paid to a director in his capacity as a director. 2. The court held that the overall limit of 11% laid down in Section 198 (1) of the Companies Act, 1956, did not apply to the year 1956, as the said provision came into force only from the 1st of January 1957. 3. The court held that the remuneration paid to the third defendant as a technical adviser was to be included in the limit of 10% laid down in Section 348 of the Companies Act, 1956, as the said provision prohibited a managing agent from receiving any sum in excess of 10% of the net profits of the company for the financial year, whether in respect of his services as managing agent or in any other capacity.
Final Decision: The court answered the questions as follows: 1. In the negative. 2. Does not arise. 3. Does not arise. 4. In the negative, after deleting Sections 349 and 350. 5. Unnecessary. 6. In the negative. The question to stop at the words "..... referred to in Section 198 (1) of the said Act." The further question "Whether in any event the said overall limit applies for the year 1956 or any part thereof and if so which?" does not apply to the year 1956. 7. In the negative. 12. Whether the remuneration of Rs. 3,000/-paid to the third defendant as technical adviser is to be included in the limit of 10 per cent laid down in Section 348? and answer it in the affirmative. The further question "If so from when? the answer is" From and after the 1st of January 1957.

Judgment

1. This is a special case submitted to us under section go of the Civil procedure Code and it raises questions of construction of certain sections of the new Companies Act, 1956. Counsel have drawn our attention to the extremely unsatisfactory drafting of this Act and We must confess that many of its provisions do not suffer from lucidity. We have been told that the new Act has raised many problems for those who have anything to do with the management or running of companies, and the problems brought before us are only a few of those which have arisen in practice. It seems to us unfortunate that a law which is intended to help in the development of companies in our country and also to put down abuses- which were noticed in the working of companies and especially in the institution of the managing agency which is peculiar to our country, should not have been couched in clear and more precise language. That, however, is a matter for Parliament. Our concern is to take the law as we find it and do the best that we can.

2. The plaintiff in this case is a shareholder of the first defendant company and the second defendants are the managing agents. They were appointed managing agents by an agreement dated the 10th April 1951. The third defendant is a partner of the second defendant firm, the other partner being one Dinubhai Amin. The third defendant is also a Director of the first defendant company and he was also appointed a Technical Adviser, he being qualified as an Electrical and Mechanical Engineer, on a salary of Rs. 3,000/- on the 1st January 1944. His appointment as Director came subsequently, he being appointed in April 1944, and the questions which call for a construction at our hands relate to the remuneration to be paid to the managing agents and the remuneration also to be paid to the third defendant. Under the agreement the managing agents were to receive 10 per cent of the annual net profits and under certain circumstances also a further one-third share in the balance of net profits after making certain deductions as provided in the managing agency agreement.

3. The first relevant section that we have to consider in this connection is Section 309. That section deals with the remuneration of directors and Sub-section (1) provides:

"(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 resolution, passed by the company in general meeting."

Therefore, Section 309 and Section 198 are overriding sections notwithstanding the articles or any resolution with regard to the remuneration to be paid to a director. Sub-section (2) provides for a director receiving remuneration either by way of a monthly payment, or by way of a fee for each meeting attended, or partly by the one way and partly by other. It is clear that as far as this remuneration is concerned the remuneration, is paid to a director as a director managing the affairs of the company. Then Sub-section (3) provides:

"(3) In lieu of or in addition to the remuneration specified in Sub-section (2), remuneration may be paid to a director who is either in the whole-time employment of the company or a managing director, at a specified percentage of the net profits of the company;

Provided that such percentage shall not exceed five for any one such director, or where there is more than one such director, ten for ail of them together."

The controversy centres round this question as to whether the remuneration referred to in this Sub-section is confined to the remuneration paid to the director in his capacity as a director, or whether the Sub-section extends to the remuneration paid to a director in any capacity whatsoever. In other words, when Rs. 3,000/- are being paid to the third defendant as a technical adviser, is tha

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