Payment to Director

Hi

1. A pvt ltd. co has been sanctioned loan by bank. One of the Property mortgaged to bank is the personal property of the Director( He is non executive director and dont want to make him executive director). Now Company wants to pay him some consideration (for mortgaging his property to Bank) monthly until the loan is paid.

Whether such type of transaction is possible? Also tell which sections of companies act are applicable?

2. Similarly A Pub ltd. co has been sanctioned loan by bank. One of the Property mortgaged to bank is the personal property of the Director say "A"( He is non executive director). Now Company wants to pay to Sole proprietorship firm (Proprietor is "B") some consideration monthly until the loan is paid. "B" is the person who has arranged property to be mortgaged to Bank and who is non executive director of the Company.

Whether such type of transaction is possible? Also tell which sections of companies act are applicable?

ITS URGENT

Regards

Reply Follow

6 Replies

sugandh (student) 11 February 2010

gud question... :)

A V Vishal (Advocate) 11 February 2010

There is no bar to a company paying a guarantee commission to its employees.

The original position was that payment in the form of guarantee commission was to be treated as 'remuneration.' Thus, it was subject to all the limitations of the Companies Act, like Section 198, Section 309 and the XIII Schedule. (Department Circular, dated 16/2/1969).

This position was reversed in 1984 when the Delhi High Court pointed out that a guarantee commission, paid to directors, would not be 'remuneration for services provided' and hence, was not subject to the limitations of the Companies Act. ''Services provided' would involve manual, clerical, technical, supervisory or administrative work. On the other hand, a guarantee commission was for a pledge of credit and not for services rendered.

Thus, the payment of guarantee commission will not be considered to be part of a director''s 'remuneration'. Consequently, it was not subject to the limitations in Section 198, Section 309 and the XIII Schedule.

All the main restrictions on managerial/directors remuneration are contained in s. 198 and s. 309, read with the XIII Schedule.

Note: the limitations on remuneration, contained in sections 198, 309, etc. do not apply to private companies.

Suresh CSLLM (Service) 12 February 2010

I think Mr. Vishal paved the way forward.

I think both the transaction is possible. Its simply a person/director is lending property to the Company to use it by way mortgage in fovor of lender. Nothing wrong in commercial sense, if the person/director giving his property to company, is compenseted by the company.

Suresh

Suman Khurana (Company Secretary) 15 February 2010

Then whether section 314 is applicable?????????????

Payment to Director is to be made on monthly basis till the time loan is not repaid.

Regards

Suresh CSLLM (Service) 16 February 2010

It should not be paid on monthly basis. it can be paid in any other way viz 2 or 3 installment.

Suman Khurana (Company Secretary) 16 February 2010

To pa y Guarantee commission, director himself must provide some security. But if he arranges some property of some other person and for arranging such property, he wants monthly payment till the time loan is not repaid by Company to Bank then will it amount to Guarantee commission????????? If not, then how we will treat this transaction. Please give your views taking into consideration that Company involved is PUBLIC LIMITED COMPANY and Director is NON-EXECUTIVE DIRECTOR.