Expert Advisory Committee

3.14 Query

Payment to Directors for Professional Services –1.

(1) (i) “X” a public limited company paid professional fees to “A”, one of the directors, for his technical services, which were duly approved by the Central Government under Section 309 (1) of the Companies Act, 1956.

(ii) It also paid legal fees and expenses including retainer to another director “B”, who is an advocate and practicing in the name of the firm “Z & Co.” of which he is the sole proprietor.

2) According to the requirements as to the profit & Loss Account given in Part II of the Schedule VI to the Companies Act 1956, as quoted below, the payments to directors are to be disclosed in the Profit & Loss Account in certain cases.

“4. The Profit & Loss Account shall also contain or give by way of a note detailed information showing separately, the following payments provided or made during the financial year to the directors, (including managing directors), the managing agent, secretaries and treasurers or manager, if any, by the company, the subsidiaries of the company and any other person: -

(i) managerial remuneration under Section 198 of the Act paid or payable during the financial year to the directors (including managing directors), the managing agent, secretaries and treasurers or manager, if any;

(ii) expenses reimbursed to the managing agent under Section 354;

(iii) commission or other remuneration payable separately to a managing agent or his associate under Section 356, 357 and 358;

(iv) commission received or receivable under Section 359 of the Act by the managing agent or his associate as selling or buying agent of other concerns in respect of contracts entered into by such concerns with the company;

(v) the money value of the contracts for the sale or purchase of goods and materials or supply of services entered into by the company with the managing agent or his associate under Section 360 during the financial year;

(vi) other allowances and commission including guarantee commission (details to be given);

(vii) any other perquisites or benefits in cash or in kind (stating approximate money value where practicable);

(viii) pensions, etc:-

(a) pensions,

(b) gratuities,

(d) compensation for loss of office,

(e) consideration in connection with retirement from office.”

(3) (i) Whether the payment made to the two directors for their professional services and for legal services rendered as stated above are to be disclosed in the Profit & Loss Account and if so, under what clause of item 4.

(ii Whether the legal fees and retainer paid to the Director “B” require the sanction of the Central Government under Section 309(1) of the Companies Act, 1956.

It is contended by the company “X” that the legal fees and retainer paid to the Director “B” in his professional capacity in the ordinary course of his business do not require the sanction of the Central Government in terms of Section 309(1) of the Companies Act, 1956, as he has the requisite qualification for practicing as an advocate. (He actually practices in High Court as well as in Supreme Court).

Opinion July 7, 1969

(1) Payments to Directors by way of professional fees for technical or legal services rendered by them do not fall under any of the clauses of paragraph 4 of Part II of Schedule VI to the Companies Act, 1956, and therefore do not require disclosure in the Profit and Loss Account of the company.

(2) Under the proviso to sub-section (1) of Section 309, no sanction is required from the Central Government in respect of payment of remuneration for professional services rendered by Directors. All that is required is the expression of opinion by the Central Government to the effect that the Director possesses the requisite professional qualifications. In other words, the Central Government’s approval is required merely by way of confirmation of the Director’s professional qualification and not in respect of the specific remuneration paid of the Director for his professional services. Such approval and confirmation by the Central Government may well be implied in the case of those professions-such as the legal profession and the accountancy profession-where the practice of the profession is not legally possible unless the person concerned is a member of a recognized institute or body. In the question under consideration, therefore, the Central Government’s approval of the Director’s legal qualifications may well be implied by the very fact that the Director is an advocate practicing in the High Court as well as the Supreme Court. However, although such approval by the Central Government of the Director’s professional qualifications may be implied by virtue of his having a recognized professional standing, the Companies Act itself does not indicate whether specific approval is required , or implied approval is sufficient. Consequently, the safer course of the company would be to seek a specific confirmation from the Central Government approving the Director’s professional qualifications. Thereafter, the payment or remuneration to such Director for his professional services would not require any further permission by the Central Government in respect of the amount of that remuneration.

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