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PETITIONER: COMPANY LAW BOARD

       Vs.

RESPONDENT: UPPER DOAB SUGAR MILLS LTD. ETC.

DATE OF JUDGMENT17/12/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ GUPTA, A.C. SINGH, JASWANT

CITATION:  1977 AIR  831            1977 SCR  (2) 503  1977 SCC  (2) 198

ACT:             Companies  Act, 1956--Ss. 198, 269, 309 and  637A--Scope         of--Company Law Board--If could fix overall maximum remuner-         ation  to managing directors while giving approval under  s.         269.

HEADNOTE:             Section 198(1) of the Companies Act, 1956 provides  that         the total managerial remuneration payable by a public compa-         ny to its directors in respect of a financial year shall not         exceed  eleven per cent of the net profits of  that  company         for  that financial year.  Sub-section (3)  prescribes  that         within ’the limits of the maximum remuneration specified  in         sub-s. (1) a company may pay a remuneration to its  managing         or whole-time director in accordance with the provisions  of         s.  309.   Section 309(3) provides that a  director  who  is         either  in  the whole time employment of the  company  or  a         managing director may be paid remuneration either by way  of         monthly  payment  or at a specified percentage  of  the  net         profits of the company or partly by one way or partly by the         other.   The proviso provides that except with the  approval         of the Central Government such remuneration shall not exceed         five  per cent of the net profits for one such director  and         if there is more than one such director ten per cent for all         of  them  together.  Section 637A provides  that  where  the         Central  Government is required or authorised by any  provi-         sion  of  the  Act to accord approval  in  relation  to  any         matter  the  Central  Government may  accord  such  approval         subject to such conditions, limitations, restrictions as  it         may think fit to impose.             In  1966 the respondent company appointed  two  managing         directors and sought the approval of the Central  Government         under  s. 269 of the Companies Act, 1956 for their  appoint-         ment.   Granting its approval the Company Law Board fixed  a         ceiling  on the total remuneration payable to each  managing         director  by  way of commission and salary.   The  Company’s         representation to the Board to raise the ceiling of remuner-         ation was rejected.             In  a  petition under art, 226 of the  Constitution  the         High Court held that the action of the Board in reducing the         remuneration  was arbitrary and void and that any  condition

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       regarding the remuneration which is contrary to  the  provi-         sions of ss. 198 and 309 would not be germane to s. 269  and         that  section  does  not include in its  scope  any  element         regarding the fixation of remuneration.         Allowing the appeals of the Board.             HELD: The High Court was in error in quashing the  order         of the Board. In view of the provisions of ss. 269 and  637A         there  is  no  infirmity in  the condition  imposed  by  the         Board.  [510C; 509H]             Section 309 does not deal with the appointment of manag-         ing  directors but pertains to the remuneration of  managing         or  .whole time directors who had already  been  appointed..         The effect of the proviso to s. 309(3) is that if the tenure         of a managing director already appointed continued after the         coming into force of the Act, the remuneration to be raid to         such  managing  director shall not, after  the  coming  into         force  of the Act, exceed 5% of the net profits to  be  paid         for  one  such director and if there be more than  one  such         director 10% for all of them together.  [509D]             In the instant case since the managing director had been         appointed for the first time after the coming into force  of         the Act their .appointment had to be approved in terms of s.         269.   The  Board,  while granting  permission,  inserted  a         condition regarding the total remuneration of each  managing         director.   In  so  doing the Board acted  well  within  the         power.  [509F-G]         16-1546 SCI/76         504

JUDGMENT:         CIVIL  APPELLATE  JURISDICTION:  Civil  Appeal  Nos.   1840-         1842/72.             Appeals  from  the Judgment and Orders  dated  the  15th         April, 1971 of the Delhi High Court in Civil Writ  Petitions         Nos. 54, 1183 and 1184/69.             Mrs. Shyamla Pappu, R.N. Sachthey and Girish Chandra for         the appellant in C.A. 1840/71.         R.N. Sachthey and Girish Chandra for the Appellants  in CAs.         1841-42/71.         H.K. Puri for the Respondents.         The Judgment of the Court was delivered by             KHANNA,  J.---This  Judgment  would  dispose   0   civil         appeals  Nos.  1840, 1841 and 1842 of 1971 which  have  been         filed  on certificate by the Company Law Board  against  the         common judgment of Delhi High Court in three writ  petitions         by the respondent-company and its two managing directors  to         challenge order dated September 27, 1967.             The respondent company, Upper Doab Sugar Mills Ltd.,  is         a  public limited company governed by the provisions of  the         Companies  Act, 1956 (hereinafter referred to as  the  Act).         The  company has its registered office at  Shamli,  district         Muzaffarnagar  (Uttar Pradesh).  Its main business is  manu-         facture  of  sugar  from sugar cane.  It  also  manufactures         spirits,  industrial  alcohols and rum from  molasses.  From         1951 onwards the respondent company was managed by a firm of         managing agents.  Two of the partners of that firm were Shri         Rajinder  Lal  and Shri Nannder Lal.   The  managing  agency         agreement  of that firm was to expire on January  14,  1967.         On  October  4. 1966 the Board of Directors of  the  company         resolved  not  to continue the managing agency of  the  said         firm  and decided to appoint two managing directors to  con-         duct and manage the affairs of the company.  Accordingly, on         October 8, 1966 in exercise of the powers under article  117

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       of  the articles of association of the company the Board  of         Directors  resolved  to appoint Shri Rajinder Lal  and  Shri         Narinder  Lal as the two managing directors of the  company.         The  salary of each of the managing directors was  fixed  at         Rs.  5,000 per month.  In addition to that,  each   managing         director was to get commission at the rate of 31/2 per  cent         of  the net profits of the company during a  financial  year         computed  in the manner .laid down in section 309(5) of  the         Act.  Besides that, other service benefits such as gratuity,         provident  fund, free medical treatment, transportation  and         free  furnished residential accommodation were  to  be  pro-         vided to each of the managing directors.  The resolution  of         the Board of Directors was placed before the shareholders of         the company in a general meeting.  The shareholders approved         the  said resolution to appoint Shri Rajinder Lal  and  Shri         Narinder  Lal as managing directors on the terms set out  in         that  resolution. An application was thereafter  made  under         section  269 of the Act to Company  Law   Board,  appellant,         for  obtaining approval to the appointment of Shri  Rajinder         Lal and Shri Narinder Lal as managing directors.  The powers         of  the  Central  Government, it may be  stated,  have  been         delegated   to   the appellant Board for  exercising,  inter         alia, powers under section 269 of         505         the Act.  The appellant Board after obtaining some addition-         al information and after some further correspondence granted         as   per   letter dated September 28, 1967 approval  to  the         appointment  of Shri Rajinder Lal and Shri Natruder  Lal  as         managing  directors of the company.  The said  approval  was         granted  subject to the various terms and included the  fol-         lowing condition:                             "The total remuneration of each managing                       director by way of commission and salary shall                       not   exceed   Rs. 1,20,000 (Rupees  one  lakh                       twenty thousand) per annum."         The  company  made a representation to the  appellant  Board         that  the aforesaid ceiling of Rs. 1,20,000 would  not  ade-         quately  remunerate the two managing directors and that  the         aforesaid ceiling be raised.  The Board rejected that repre-         sentation.  Three  writ petitions were thereafter  filed  in         January  1969 by the company and Shri Rajinder Lal and  Shri         Narinder Lal for restraining the appellant Board from giving         effect  to the condition set out above that the total  remu-         neration  of  each managing director should not  exceed  Rs.         1,20,000  per  annum.  Prayer was made  that  the  appellant         Board  be  directed to accord approval for  payment  to  the         managing directors the remuneration as passed in the resolu-         tion  of  the Board of Directors along  with  the  necessary         perquisites.             The  petition was registered by the appellant Board  and         the  affidavit  of the Secretary of the Board was  filed  in         opposition.  At the hearing in the High Court the  following         two  questions  were agitated on behalf  of  the  respondent         company and its managing directors:                             "(1) Whether the administrative  ceiling                       imposed  by  the  Board on  28-9-1967  on  the                       remuneration payable to the Managing Directors                       by the Company is ultra vires or illegal?                             (2 ) Whether the refusal by the Board to                       enhance  the  remuneration  of  the   Managing                       Directors  above the ceiling of  Rs.  50,000/-                       for the loss year was bad because the  Company                       was  not granted adequate heating and  because                       the order of refusal did not state the reasons                       therefor ?"

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       The  High  Court answered the second  question  against  the         respondent company. This question also no longer survives  m         these  appeals. On the first question, the High Court  after         referring to the various provisions held that the action  of         the  Board  in  reducing the remuneration  of  the  managing         directors  was arbitrary and void. In this  connection,  the         High Court observed:                             "But  any condition regarding  remunera-                       tion  which is contrary to the  provisions  of                       sections 198 and 309 would not be regarded  as                       germane to section 269 inasmuch as the  Legis-                       lature  has exhaustively dealt with  remunera-                       tion  in sections 198 and 309 with the  effect                       that section 269 does not include in its scope                       any element regarding the fixation of remuner-                       ation."         Referring  to the general administrative policy of the  Gov-         ernment   of fixing ceiling on managerial remuneration,  the         High Court observed         506         that  any  such policy which resulted in placing  a  ceiling         below the legislative ceilings fixed by sections 198 and 309         was  illegal as being contrary to sections 198 and 309.   In         the result, the High Court quashed the condition imposed  by         the  Board fixing the remuneration  of  the managing  direc-         tors.             In appeal before us Mrs. Shymala Pappu has assailed  the         correctness  of the judgment of the High Court.  As  against         that,  Mr. Puri on behalf of the respondents  has  canvassed         for the correctness of that judgment.             In order to appreciate the respective arguments, it  may         be necessary to set out the necessary provisions of the Act,         as  they stood at the relevant time.  Sub-sections (1),  (2)         and (3) of section  198  read  as under:                             "198.  Overall maximum managerial  remu-                       neration  and managerial remuneration in  case                       of  absence or adequacy of  profits.--(1)  The                       total  managerial  remuneration payable  by  a                       public company or a private company which is a                       subsidiary of a public company, to its  direc-                       tors and its managing agents, secretaries  and                       treasurers or manager in respect of any finan-                       cial year shall not exceed eleven per cent  of                       the  net  profits  of that  company  for  that                       financial  year computed in the  manner  .laid                       down in sections 349, 350 and 351, except that                       the remuneration of the directors shall not be                       deducted from the gross profits:                             Provided  that nothing in  this  section                       shall affect the operation of sections 352  to                       354 and 356 to 360.                             (2)  The percentage aforesaid  shall  be                       exclusive  of  any fees payable  to  directors                       under sub-section (2) of section 309.                             (3)  Within  the limits of  the  maximum                       remuneration  specified in sub-section  (1)  a                       company may pay a monthly remuneration to  its                       managing or whole-time director in  accordance                       with  the provisions of section 309 or to  its                       manager  in accordance with the provisions  of                       section 387."                       Section 269 reads as under:                             "269.  Appointment or re-appointment  of                       managing  or  whole-time director  to  require                       Government  approval in certain cases.--( 1  )

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                     In  the case of a public company or a  private                       company  which  is a subsidiary  of  a  public                       company,  whether such public company or  pri-                       vate  company is an existing company  or  not,                       the appointment of a person for the first time                       as a managing or whole time director shall not                       have  any unless approved by the Central  Gov-                       ernment:                             Provided  that in the case of  a  public                       company,  or  a  private company  which  is  a                       subsidiary  of a public company,  incorporated                       after   the  commencement  of  the   Companies                       (Amendment)  Act, 1960, the appointment  of  a                       person as a managing                       507                       or  whole-time  director for  the  first  time                       after  such incorporation may be made  without                       the  approval  of the Central  Government  but                       such  appointment shall cease to  have  effect                       after the expiry of three months from the date                       of  such incorporation unless the  appointment                       has  been  approved  by  that Government.                             (2) Where a public company or a  private                       company  which  is a subsidiary  of  a  public                       company,  is an existing company,  the  re-ap-                       pointment of a person as a managing or  whole-                       time  director  for the first time  after  the                       commencement of the Companies (Amendment) Act,                       1960,  shall  not   have   any  effect  unless                       approved by the Central Government."                       Sub-sections  (1), (2) and (3) of section  309                       read as under:                             "309. Remuneration of directors.--( 1  )                       The remuneration payable to the directors of a                       company, including any managing or  whole-time                       director,  shall be determined, in  accordance                       with and subject to the provisions of  section                       198  and  this section, either by the articles                       of the company, or by a resolution or, if  the                       articles  so require, by  a  special   resolu-                       tion, passed by the company in general meeting                       and  the  remuneration  payable  to  any  such                       director  determined  as  aforesaid  shall  be                       inclusive of the remuneration-payable to  such                       director  for services rendered by him in  any                       other capacity:                             Provided   that  any  remuneration   for                       services rendered by any such director in  any                       other capacity shall not be so included if---                       (a) the services rendered are of a profession-                       al nature: and                          (b)  in the opinion of the Central  Govern-                       ment,  the  director possesses  the  requisite                       qualifications for the practice of the profes-                       sion.                       (2) A director may receive remuneration by way                       of  a fee for each meeting of the Board, or  a                       committee thereof. attended by him:                       Provided  that  where immediately  before  the                       commencement  the Companies  (Amendment)  Act,                       1960,  fees for meetings of the Board and  any                       committee thereof, attended by a director  are                       paid on a monthly basis, such fees may contin-                       ue  to he paid on that basis for a  period  of                       two  years after such commencement or for  the

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                     remainder of the term of office of such direc-                       tor, whichever is less, but no longer.                             (3)  A  director who is  either  in  the                       whole-time  employment  of the company  or   a                       managing  director  may he  paid  remuneration                       either by way of a monthly payment or at  a                       508                       specified percentage of the net profits of the                       company   or partly by one way and  partly  by                       the other:                             Provided  that except with the  approval                       of  the Central Government  such  remuneration                       shall  not  exceed five per cent  of  the  net                       profits for one such director, and if there is                       more than one such director, ten per cent  for                       all of them together."                       Sub-section  (1  ) of sect,ion 637A  reads  as                       under:                             "637A.  Power of Central  Government  to                       accord  approval, etc., subject to  conditions                       and to prescribe fees oft applications.-( 1  )                       Where  the Central Government is  required  or                       authorised by any provision of this Act,--                          (a) to accord approval, sanction,  consent,                       confirmation or recognition to or in  relation                       to, any matter;                       (b)  to give any direction in relation to  any                       matter; or                       (c) to grant any exemption in relation to  any                       matter;                       then,  in the absence of anything to the  con-                       trary contained in such or any other provision                       of  this Act, the Central Government  may  ac-                       cord,  give or grant such approval,  sanction,                       consent, confirmation, recognition,  direction                       or  exemption  subject  to  such   conditions,                       limitations,ions  or  restrictions as  it  may                       think  fit to impose and may, in the  case  of                       contravention  of any such condition,  limita-                       tion or restriction, rescind or withdraw  such                       approval,  sanction,  consent,   confirmation,                       recognition, direction or exemption."             After hearing learned counsel for the parties and giving         the matter our earnest consideration, we are of the  opinion         that the view taken by the High Court in quashing the condi-         tion  imposed by the appellant Board about the  fixation  of         the  remuneration of the managing directors cannot  be  sus-         tained.  The High Court in arriving at its conclusion  took:         the  view that section--198 and the proviso  to  sub-section         (3)  of Section 309 specially dealt with the question  which         arose  for determination. In view of those  provisions,  the         High  Court inferred that sections 269 and 637A  upon  which         reliance had been placed by the appellant Board could not be         of  much avail to the appellant. Mr. Puri on behalf  of  the         respondents has adopted the same reasoning in this Court and         has  contended  that sect,ion 198 and the  proviso  to  sub-         sect,ion (3) of section 309 being special provisions  relat-         ing  to the remuneration of managing directors,  they  would         exclude  so  far as that  question  is   concerned,  general         provisions  like those contained in sections 269  and  637A.         The  above  reasoning,  we find, is vitiated  by  an  innate         fallacy.  Section 198 deals with the overall maximum manage-         rial remuneration and managerial remuneration in the case of         absence  or adequacy of profits. The total managerial  remu-         neration  payable by a public company or a  private  company

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       which is a subsidiary of a public company to its  managerial         staff, according to sub-section (1) of that section,  cannot         exceed 11 per cent of the net profits for a financial  year.         The  total managerial remuneration covers  the  remuneration         not merely  of  the  managing         509         directors but also of other managerial personnel like secre-         taries,  treasurers  and managers.  Sub-section (3)  of  the         section  provides   that Within the limits  of  the  maximum         remuneration,  a company may pay a monthly  remuneration  to         its managing director in accordance with section 309.   Sub-         section (1) of section 309 prescribes the formalities  which         have to be complied with for fixing of the remuneration   of         a  managing or full-time director of a company.  We are  not         concerned with sub-section (2) of that section.  Sub-section         (3).  which  constitutes the main plank of the case  of  the         respondents,  provides that a director who is either in  the         whole-time employment of the  company  or  a managing direc-         tor  may be paid remuneration either by way of monthly  pay-         ment or at a specified percentage of the net profits of  the         company  or partly by one way or partly by the  other.   Ac-         cording to the proviso to that sub-section, except with  the         approval of the Central Government, such remuneration of the         whole-time director or managing director shall not exceed  5         per  cent  of the net profits for one such director  and  if         there is more than one such director 10 per cent for all  of         them together. Perusal of section 309 shows that it does not         deal  with the appointment of managing directors.   It  only         pertains  to  the  remuneration of  managing  or  whole-time         directors  who have already been appointed.  The  effect  of         the proviso to sub-section (3) of section 309 is that if the         tenure of a managing director who has already been appointed         continues after the coming into force of the Act, the  remu-         neration  to be paid to such a managing director  shall  not         after the coming into force of the Act exceed 5 per cent  of         the net profits for one such director, and if there be  more         then  one  such  director, 10 per cent for   all   of   them         together.             The  present, however, is not a case of managing  direc-         tors having been appointed earlier and continuing to act  as         such after the coming into force of the Act.  Shri  Rajinder         Lal  and  Shri  Narinder Lal have  been  appointed  managing         directors of the company for the first time after the coming         into  force  of the  Act.  Their  appointment   as  managing         directors had to be approved in terms of section 269 of  the         Act.   The company consequently applied to the Central  Gov-         ernment  for  approving their  appointment.   The  appellant         Board,  to  whom the powers of the Central  Government  have         been delegated for this purpose, while granting approval  to         the  appointment  of the aforesaid two persons  as  managing         directors,  inserted the condition that the total  remunera-         tion  of  each managing director by way  of  commission  and         salary shall not exceed rupees. one lakh twenty thousand per         annum. The above remuneration is in addition to the  benefit         of  certain  perquisites  which would be  available  to  the         managing  directors.  The Board, in our opinion, acted  well         within  its power in imposing this condition.  Section  637A         of the  Act makes it clear inter alia that where the Central         Government is required or authorised by any provision of the         Act  to accord approval in relation to any matter, then,  in         the absence of anything to contrary contained in such or any         other  provision of the Act,  the Central   Government   may         accord such approval subject to such conditions, limitations         or  restrictions as it may think fit to impose.  In view  of         the provisions of sections 269 and 637A of the Act, we  find

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       no infirmity in the condition imposed by         510         appellant  Board.  The  provisions of both sections 269  and         637A expressly deal with the question which arises  directly         in this ease.             We may observe that according to the affidavit filed  on         behalf of the appellant Board, since 1959 the said Board has         been imposing a maximum administrative ceiling on the  total         amounts payable to a managing director.  The basic principle         that has been kept in view by the Board is that no  individ-         ual should  be paid  remuneration exceeding Rs. 1,20,000 per         annum or Rs. 10,000 per month.   A large number of instances         have also been given by the Board and it would appear there-         from that the maximum remuneration which has been allowed by         the  Board  to the managing director of any company  is  Rs.         1,20,000.             The High Court, in our opinion, was in error in quashing         the order of the Board.  We accordingly accept the  appeals,         set  aside  the judgment of the High Court and  dismiss  the         writ  petitions.   Looking to all the facts,  we  leave  the         parties to bear their own costs throughout.         P.B.R.                                     Appeals allowed.         511