Expert Advisory Committee
ICAI-Expert Advisory Committee
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5.4       Query

 

Payment of Fee to Managing Director in Addition

to Commission.

i)         Whether a company; can allow to a Managing Director to receive fees for attending Board Meetings in addition to 5% commission on the net profit?

 

(ii)        If the answer is in the affirmative, then whether the Managing Director will be entitled to receive both fees for attending Board Meetings and commission, which will exceed 5% on the net profit of the company?

 Facts of the Case:

Messrs ‘X’ Ltd., a public limited company, have made a profit of Rs.16.10 lacs for the year ended 30th September, 1964, after charging Managing Director’s remuneration to the extent of Rs. 0.85 of lacs.

Mr. ‘Y’ is the Managing Director of ‘X’ Ltd. According to the terms of appointment (as approved by the Government) he is entitled to receive 5% commission on net profit of the company to be computed in the manner laid down is Section 309(5) of the Companies Act, 1955.

In addition to the above payment of commission, the company also paid the Managing Director by way of fee for attending each Board Meeting. The provision in the Articles for payment of fees is as follows:--

 

“Each Director shall be entiteld to the sum of Rs.100/- for each meeting of the Directors attended by him by way of remuneration for his services. But the shareholders at the General Meeting may increase or decrease the same.”

 

While computing the Managing Director’s commission for the financial year ending on 30th September, 1964, Messrs ‘X’ Ltd. had not deducted the director’s fee drawn by the Managing Director, Mr. Y, amounting to Rs. 700/- The calculation of commission is given below: -

 

A.     Profit as per Profit & Loss Account

.. Rs. 16.10 lacs

Add: Director’s fees

..  ,,   00.04   ,,

Managing Director’s allowance, etc.

..  ,,   00.25   ,,

Managing Director’s commission

..  ,,   00.60   ,,

___________

   Rs. 16.99   ,,

B. Commission @ 5% on 16.99 lacs

.. Rs. 00.85 lacs

Less : Managing Director’s allowance

..  ,,   00.25   ,,

 

Commission payable to Managing Director

   ___________

.. Rs. 00.60 lacs 

 

It will be observed from above that if the commission and fees for attending Board Meetings are taken together then the total amount paid to the Managing Director will be more than 5%.

 

It is contended by the Company that fees paid to the Managing Director for attending Board Meetings are not required to be deducted from 5% commission in terms of Sub-section 2 of Section 198 of the Companies Act, 1956.

 

The point at issue is that whether the Managing Director will be entitled to get commission at 5% of net profit of the company and also fees for attending the Board Meetings, though the two types of payment will exceed 5% of the net profit as given in Section 309 (3) of the Companies Act, 1956.

 

 

 

Opinion                                                                                                           May 18, 1965

 

In the opinion of the Committee, it is permissible for the company to pay a sitting fee to a Director who is the Managing Director in addition to his remuneration for acting as the Managing Director provided sanction has been obtained from the Government for such payments.

In the opinion of the Committee, it is permissible for the company to pay a sitting fee to a Director who is the Managing Director in addition to his remuneration for acting as the Managing Director provided sanction has been obtained from the Government for such payments.

 

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