3.19     Query

Permission of Guarantee Commission paid by a Public Limited Company to its

Directors in the light of Sections 198 & 309 of the Companies Act, 1956

A Public Limited Company passed a resolution under Section 314 and other applicable provisions, if any, of the Companies Act, 1956, for paying guarantee commission to a Director in respect of the guarantee given by him for borrowing facilities.  The guarantee commission is a percentage of the amount guaranteed to the Bankers in connection with the loan taken by the Company.  Opinion is sought whether the amount of guarantee commission payable to a Director is to be included in the remuneration while calculating the managerial remuneration for the purpose of Section 198 of the Companies Act, 1956.

 Secondly, we may be advised whether the remuneration for the services rendered by the Director is attracting the provisions of Section 309 and whether such guarantee commission is remuneration payable to the Director for services rendered by him in any other capacity.

 We may also be advised whether the approval of the Central Government is necessary for the payment of the guarantee commission to the Director and if so, under what section of the Companies Act, 1956?

                                                      Opinion                                                                July 6, 1970

  The Committee has considered the query regarding the treatment of guarantee commission paid by a public limited Company to its Director in the light of the provisions of Sections 198 and 309 of the Companies Act, 1956(hereinafter referred to as the Act).

   The first question of consideration is whether such commission is to be considered while calculating the managerial remuneration for the purpose of Section 198 of the Act.

   In this connection the Committee may draw the attention of the querist to the view expressed by the Central government in their letter dated 10^th March, 1970, to a member of the Bombay Chamber of Commerce & Industry.  A copy of the letter addressed by the member to the Central Government and a copy of the reply of the Central Government follow.  The Committee is in agreement with the view that the guarantee commission paid to a Director is not to be considered while calculating the managerial remuneration for the purpose of Section 198 of the Act.

The further question for consideration is:

   Whether the guarantee commission will be considered as remuneration for services rendered by the Director in other capacity and would attract the provisions of Section 309 (1) of the Act.

    On this question also, the Committee would like to draw the attention of the querist to the circular letter No. 14/50/68-CL.V, dated 16^th December, 1969, issued by the Central Government, copy of which follows. The Committee understands that leading Counsels have expressed differing views on the subject – one view being that giving a guarantee is a service in other capacity under Section 309 and another view being that it is not a service at all and, therefore, provisions of Section 309 are not applicable.  Under the circumstances the Committee would advise the querist to refer to the Government’s circular dated 16^th December, 1969, referred to earlier and also seek legal advice if considered necessary.

Circular letter No.14/50/68—CL.V dated 16th December, 1969,

issued by the Under-Secretary to the Government of India,

Ministry of Industrial development, Internal Trade and

Company Affairs, Government of India, New Delhi.

A Chamber of Commerce has represented to the Department that treating of guarantee commission paid by a company to its directors as part of remuneration of the directors is not proper.  The Department is advised that when a director guarantees a loan granted by a bank to the company, he thereby renders some service to the company in his individual capacity (and not in his capacity as a director).  Any commission paid to him for the purpose is the remuneration payable for “services rendered by him in any other capacity” within the meaning of Section 309(1) of the Companies Act, 1956.  Such Commission is the reward received by him for undertaking liability in respect of guarantee of the loan and is thus remuneration of payment for services rendered to the company.

Text of letter from a member of the Bombay Chamber of

Commerce & Industry to the Under-Secretary to the

Government of India, Ministry of Industrial Develop-

ment, Internal Trade and Company Affairs,

New Delhi.

We refer to your circular no. 14/50/68—CL.V dated 16^th December, 1969, a copy of which was forwarded to us by the Bombay Chamber of Commerce and Industry. In the said circular it is stated that the Department has advised that when a Director guarantees a loan granted by a bank to the company he thereby renders some services to the company in his individual capacity (and not in his capacity as a Director) and any commission paid to him for the purpose is the remuneration payable “for services rendered by him in any other capacity” within the meaning of Section 309(1) of the Companies Act, 1956. It is further stated that such commission is the reward received by a director for undergoing liability in respect of the guarantee of the loan and is thus remuneration payable for services rendered to the company.

In this connection we invite your attention to the provisions of Section 198 of the Companies Act, 1956. Sub-section (1) of this Section provides that total managerial remuneration payable by a public company or private company, which is subsidiary of a public company to its Directors and its managing agent, secretaries and treasures or manager in respect of any financial year shall not exceed 11 per cent of the net profit of the company for that financial year Sub-section (2) of the said Section provides that the percentage of aforesaid shall be exclusive of any fees payable to Directors under Sub-section (2) of Section 309. Sub-section (2) of Section 309 provides for remuneration of a Director by way of a fee for each meeting of the Board of Committee thereof attended by him.

 Thus section 198 provides a ceiling on managerial remuneration and while calculating such remuneration the fees paid to Directors for attending the Board Meeting are to be excluded. The question which needs clarification is whether payment of guarantee commission to any Director is to be included or excluded while calculating the total managerial remuneration payable by a company to its Directors. In our view the guarantee commission paid by a company to a Director cannot be treated as a managerial remuneration and hence should be excluded, like amounts paid by way of meeting fee, while calculating the total managerial remuneration. Your earlier Circular under reference refers to Section 309(1) of the Companies Act, 1956 but does not refer to the provisions of Section 198. We shall therefore thank you to kindly let us have the views of the Department whether  the amount of guarantee commission payable to a Director is to be excluded while calculating the managerial remuneration for the purpose of Section 198 of the companies Act,1956.

Text of reply dated 10^th March, 1970, from the Under-Secretary

to the Government of India, to the members of the Bombay

Chamber of Commerce & Industry.

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