Section 191 of Companies Act 2013: Payment to Director for Loss of Office
Section 191 of the Companies Act, 2013 regulates certain payments to directors for loss of office, retirement from office, or matters connected with such loss or retirement when there is a transfer of the company's undertaking or property, or a qualifying transfer of shares. The provision is intended to ensure disclosure to members and company approval before covered payments are received.
Law position reviewed with the Companies Act, 2013 and applicable rules available from official India Code sources.
What does Section 191 cover?
The section deals with compensation or consideration connected with a director's loss of office or retirement in specified transfer situations. These include transfer of the whole or part of an undertaking or property of the company and specified transfers of shares resulting from offers described in Section 191(1)(b).
| Provision | Effect |
|---|---|
| Section 191(1) | Requires disclosure of prescribed particulars and approval in general meeting for covered payments connected with specified transfers. |
| Section 191(2) | Preserves permitted company payments to a managing director, whole-time director or manager, subject to prescribed limits or priorities. |
| Section 191(3) | If approval fails for want of quorum at the meeting or adjourned meeting, the proposal is not deemed approved. |
| Section 191(4) | An amount received contrary to sub-section (1), or before approval, is deemed to be received in trust for the company. |
| Section 191(5) | A director making default in compliance is liable to a penalty of Rs. 1,00,000. |
| Section 191(6) | Other laws requiring disclosure of such payments continue to operate. |
Section 191 - statutory provisions
(1) No director of a company shall, in connection with:
(a) the transfer of the whole or any part of any undertaking or property of the company; or
(b) the transfer to any person of all or any of the shares in a company, where the transfer results from:
- an offer made to the general body of shareholders;
- an offer made by or on behalf of another body corporate with a view to the company becoming its subsidiary or a subsidiary of its holding company;
- an offer made by or on behalf of an individual with a view to obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at a general meeting of the company; or
- any other offer conditional on acceptance to a given extent,
receive a payment by way of compensation for loss of office, as consideration for retirement from office, or in connection with such loss or retirement, from the company, the transferee of the undertaking or property, transferees of shares, or another person, unless the prescribed particulars of the proposed payment, including its amount, have been disclosed to the members and the proposal has been approved by the company in general meeting.
(2) Sub-section (1) does not affect a payment made by the company to a managing director, whole-time director or manager as compensation for loss of office, consideration for retirement, or in connection with such loss or retirement, subject to the prescribed limits or priorities.
(3) If a payment under sub-section (1) or sub-section (2) is not approved for want of quorum either at the meeting or an adjourned meeting, the proposal shall not be deemed to have been approved.
(4) If a director receives an amount in contravention of sub-section (1), or the proposed payment is made before approval in the meeting, the amount is deemed to have been received by the director in trust for the company.
(5) If a director makes any default in complying with this section, the director is liable to a penalty of Rs. 1,00,000.
(6) Section 191 does not prejudice the operation of any other law requiring disclosure of a payment received under this section or a similar payment made to a director.
Prescribed particulars for approval
The Companies (Meetings of Board and its Powers) Rules, 2014 prescribe information to be disclosed to members before approval of a payment covered by Section 191. The particulars include:
- name of the director;
- amount proposed to be paid;
- event because of which the compensation becomes payable;
- date of the Board meeting recommending the payment;
- basis used to determine the amount;
- reason or justification for the payment;
- manner of payment, including whether it is payable in cash or otherwise;
- source of payment; and
- other relevant particulars considered appropriate by the Board.
Payments to managing director, whole-time director or manager
The applicable rules link compensation paid by a company to a managing director, whole-time director or manager with the limit under Section 202 of the Companies Act, 2013. Section 202 separately governs compensation for loss of office of a managing or whole-time director or manager and specifies circumstances in which compensation cannot be paid.
The rules also prescribe situations in which such compensation is restricted, including specified defaults by the company. Accordingly, Section 191 should be read together with the applicable rules and Section 202 when the proposed payment is being made by the company to a managing director, whole-time director or manager.
Effect of payment without approval
Section 191(4) creates an important consequence. If a director receives a covered payment contrary to Section 191(1), or receives the proposed payment before the required meeting approval, the amount is deemed to be held by the director in trust for the company. The provision therefore addresses not only disclosure and approval but also the treatment of money received in breach of the statutory process.
Penalty under Section 191(5)
The present sub-section (5), substituted by the Companies (Amendment) Act, 2019, provides that a director who makes any default in complying with Section 191 is liable to a penalty of Rs. 1,00,000. The earlier criminal-fine formulation should not be used as the current text.
Practical compliance checklist
- Identify whether the proposed payment is connected with a transfer covered by Section 191(1).
- Determine the person making the payment and the director or managerial person receiving it.
- Prepare the prescribed particulars, including amount, basis, justification, manner and source of payment.
- Place the proposal before members and obtain approval in general meeting where Section 191 requires it.
- Do not make a covered payment before the necessary approval.
- Where the recipient is a managing director, whole-time director or manager, also examine the applicable rules and Section 202.
- Keep records of disclosures, Board consideration and the general meeting resolution for compliance purposes.
Official legal resources
For the current statutory text and subordinate legislation, refer to the official India Code versions of the Companies Act, 2013 and the Companies (Meetings of Board and its Powers) Rules, 2014.