Section 202 of Companies Act 2013 - Compensation for Loss of Office of Managing or Whole-Time Director or Manager
Section 202 of the Companies Act, 2013 deals with payment of compensation by a company to its managing director, whole-time director or manager for loss of office, retirement from office, or matters connected with such loss or retirement. The provision also specifies circumstances in which such compensation cannot be paid and prescribes the maximum amount that may be paid.
- Compensation may be paid to a managing director, whole-time director or manager.
- The provision does not permit such compensation to an ordinary director merely in that capacity.
- Sub-section (2) identifies circumstances in which payment is prohibited.
- Sub-section (3) places a monetary limit on permissible compensation.
- Sub-section (4) preserves payment for services rendered in another capacity.
Meaning and Scope of Section 202
Section 202 forms part of Chapter XIII of the Companies Act, 2013, which deals with appointment and remuneration of managerial personnel. It regulates compensation connected with the cessation of office of specified managerial personnel.
The section should be distinguished from Section 201, which deals with forms and procedure relating to certain applications, and Section 203, which deals with appointment of key managerial personnel.
Section 202 - Compensation for Loss of Office
Section 202(1): A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.
Section 202(2): No payment shall be made under sub-section (1) in the following cases:
(a) Where the director resigns from office as a result of reconstruction of the company or its amalgamation with another body corporate or bodies corporate and is appointed as managing or whole-time director, manager or other officer of the reconstructed company or the body corporate resulting from the amalgamation.
(b) Where the director resigns from office otherwise than on reconstruction of the company or its amalgamation as referred to above.
(c) Where the office of the director is vacated under sub-section (1) of Section 167 of the Companies Act, 2013.
(d) Where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided that the winding up was due to the negligence or default of the director.
(e) Where the director has been guilty of fraud or breach of trust in relation to, or gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof.
(f) Where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.
Section 202(3): Any payment made to a managing or whole-time director or manager under sub-section (1) cannot exceed the remuneration which the person would have earned if he had remained in office for the remainder of his term or for three years, whichever period is shorter.
The amount is calculated on the basis of the average remuneration actually earned during the three years immediately preceding the date on which the person ceased to hold office. Where the person held office for less than three years, the average is calculated with reference to that shorter period.
The proviso to sub-section (3) further restricts payment where winding up commences before, or within twelve months after, the date on which the director ceased to hold office and the assets available on winding up, after deducting winding-up expenses, are insufficient to repay shareholders the share capital, including any premium contributed by them.
Section 202(4): Nothing in Section 202 prohibits payment to a managing or whole-time director or manager of remuneration for services rendered to the company in another capacity.
Who Can Receive Compensation Under Section 202?
Section 202(1) specifically identifies three categories of managerial personnel: a managing director, a whole-time director and a manager. The statutory permission does not extend to another director merely because that person loses or retires from the office of director.
When Compensation Cannot Be Paid
The right to make a payment under sub-section (1) is expressly restricted by sub-section (2). The restrictions cover resignation, vacation of office under Section 167(1), certain winding-up situations, fraud, breach of trust, gross negligence, gross mismanagement and cases where the director participated in bringing about the termination of his own office.
Accordingly, Section 202 should not be read as creating an unconditional entitlement to compensation whenever the office of a managing director, whole-time director or manager comes to an end. The circumstances of cessation of office must first be examined against the statutory restrictions.
Maximum Compensation Permitted
Section 202(3) limits the amount of compensation. The statutory ceiling is linked to the remuneration that would have been earned during the unexpired term or during three years, whichever is shorter.
The calculation is based on average remuneration actually earned during the immediately preceding three-year period. If the managerial person held office for less than three years, the actual shorter period is used for calculating the average.
Compensation and Remuneration for Other Services
Sub-section (4) clarifies that Section 202 does not prohibit a managing director, whole-time director or manager from receiving remuneration for services genuinely rendered to the company in another capacity. Such remuneration is conceptually distinct from compensation for loss of managerial office and remains subject to other applicable provisions of the Companies Act, 2013.
Related Provisions of the Companies Act, 2013
Section 202 should be read with other provisions governing managerial personnel, including Section 196 - Appointment of managing director, whole-time director or manager, Section 197 - Managerial remuneration, Section 198 - Calculation of profits, and Section 203 - Appointment of key managerial personnel.
Official Companies Act Resources
The current text of the Companies Act, 2013 and amendments should be checked from official Government sources before acting on a specific corporate transaction.