Companies Act, 2013 | Chapter XIII

Section 202 Companies Act 2013: Compensation for Loss of Office

Section 202 of the Companies Act, 2013 governs when a company may compensate a managing director, whole-time director or manager for loss of office or retirement. It specifies who is eligible, when payment is prohibited, the maximum permissible amount and special restrictions on winding up.

Key rule: Compensation is permitted only for the specified managerial positions and is subject to the exclusions and monetary cap in Section 202. It is not an automatic entitlement.

Section 202(1): Who can be paid?

A company may make a payment by way of compensation for loss of office, consideration for retirement from office or a payment connected with that loss or retirement to its managing director, whole-time director or manager. Section 202 does not permit such a payment to another category of director merely by virtue of that directorship. The provision is enabling, not a requirement to compensate in every case.

Section 202(2): Situations where payment is prohibited

No payment under Section 202(1) is permitted in any of the following circumstances:

Section 202(2)(a) - Reconstruction or amalgamation with reappointment: The director resigns because of reconstruction or amalgamation and is appointed as managing director, whole-time director, manager or another officer in the reconstructed or resulting body corporate.
Section 202(2)(b) - Other resignation: The director resigns otherwise than in the reconstruction or amalgamation circumstances described above.
Section 202(2)(c) - Vacation of office: The office is vacated under Section 167(1).
Section 202(2)(d) - Winding up due to fault: The company is being wound up, by Tribunal order or voluntarily, where the winding up resulted from the director's negligence or default.
Section 202(2)(e) - Misconduct: The director is guilty of fraud, breach of trust, gross negligence or gross mismanagement concerning the company or its holding or subsidiary company.
Section 202(2)(f) - Causing termination: The director instigated or directly or indirectly participated in bringing about the termination of the office.

Section 202(3): Maximum compensation and calculation

The payment cannot exceed what the person would have earned as remuneration for the unexpired part of the term or three years, whichever is shorter. The remuneration rate is calculated from the average remuneration actually earned in the three years immediately preceding cessation, or the actual shorter period in office if the person served less than three years.

Illustration: If the average annual remuneration is Rs. 18 lakh and 18 months remain in the term, the statutory cap is Rs. 27 lakh (18 lakh x 1.5 years). If four years remain, the three-year limit caps it at Rs. 54 lakh. These are illustrative maximums, not guaranteed payments; the statutory exclusions must also be checked.

Proviso to Section 202(3): Winding-up restriction

Even an otherwise permissible payment cannot be made if winding up commences before or within 12 months after the person ceases to hold office and, after winding-up expenses, the company's assets are insufficient to repay shareholders their contributed share capital, including any share premium. This proviso operates separately from the misconduct-based winding-up exclusion in Section 202(2)(d).

Section 202(4): Payment for other services

Section 202 does not prohibit remuneration for genuine services rendered to the company in another capacity. Such remuneration should be distinguished from compensation for loss of managerial office and must comply with other applicable provisions of law.

Practical compliance checklist

Confirm that the proposed recipient is a managing director, whole-time director or manager.
Document the cause of cessation and check every exclusion under Section 202(2).
Verify actual remuneration history and the unexpired term before calculating the cap.
Assess any winding-up proceedings and asset sufficiency under the proviso.
Review contractual terms, approvals and any other applicable provisions, including those governing remuneration and related payments.

Official statutory references

Read the Companies Act, 2013 (India Code, official text) and the Ministry of Corporate Affairs publication. For subsequent notifications, rules and amendments, consult the MCA official portal.

Frequently asked questions

Who can receive compensation under Section 202?

Only a managing director, whole-time director or manager may receive the compensation contemplated by Section 202; it does not extend to other directors.

What is the maximum compensation for loss of office?

The cap is the average remuneration actually earned over the preceding three years (or shorter actual tenure), applied to the remaining term or three years, whichever is shorter.

Is compensation payable after a voluntary resignation?

Section 202(2) prohibits compensation in specified resignation cases, including an ordinary resignation and certain reconstruction or amalgamation arrangements.