Updated on: Dec 20th, 2021
8 min read
The companies can decide to pay compensation for loss of office to the Key Managerial Personnel (KMP) when discontinuing their services. Compensation for loss of office means a payment made by a company to their senior executive, manager or director who is forced to retire before the expiry of their service contract due to a merger, takeover or any other reason. Section 202 of the Companies Act, 2013 (‘Act’) contains provisions regarding compensation for loss of office of a KMP.
As per Section 202 of the Act, a company can make payment for loss of office to the following KMPs:
A company can give compensation for loss of office or consideration for retirement from office to only the KMPs mentioned above and not to any other director. The company cannot pay compensation for loss of office or consideration for retirement from office to the KMPs who retire voluntarily. Further, the company can pay compensation under Section 202 of the Act only when it decides to remove the KMP for business-related reasons such as a merger or takeover.
As per the Act, a manager means an individual who manages the whole or substantially the whole of the company affairs subject to the Board of Directors’ control, superintendence and direction. A manager includes a director or any other person occupying a manager’s position, by whatever name called, whether under a service contract or not.
The Act defines the whole-time director as a director who is in the whole-time employment of a company. A managing director means a director who is entrusted with the substantial powers of the management of the company’s affairs by virtue of either of the following:
As per the Act, a company cannot make a payment or give compensation for loss of office in the following cases:
The director will be disqualified under the Act to act as director in certain circumstances and will not be eligible to get compensation from the company for the loss of office due to the disqualification. The circumstances where the director is disqualified for appointment as a director are as follows:
Further, Rule 17 of the of the Companies (Meeting of Board and its Power) Rules, 2014 provides that a company will not make payment as compensation for loss of office to a KMP in the following cases:
The Act provides that the payment made to the eligible KMP as compensation for loss of office should not exceed the remuneration which the KMP would have earned if he/she were in the office for the remaining term, or three years, whichever is shorter. Thus, the compensation for loss of office made to the KMP will not exceed the remuneration which he/she would have earned during the following period, whichever is shorter:
The compensation for loss of office is calculated based on the average remuneration earned by the KMP during three years immediately preceding the date on which he/she ceased to hold office or where he/she held the office for a lesser period than three years.
The company will not make the payment for compensation for loss of office to the director upon the commencement of the winding up of the company, and the assets of the company after deducting the expenses are not sufficient to repay the shareholders, including the premiums contributed by them.
As per Rule 17 of the Companies (Meeting of Board and its Power) Rules, 2014, a company’s director will receive any payment as compensation only after passing a resolution at a general meeting approving the payment of such amount. The resolution should disclose the following details:
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