Payment to directors for loss of office
Updated: Oct 3, 2022
One of the most important aspects of corporate governance is contracts with directors. Many corporate failures can be traced back to contracts involving directors that are inconsistent with directors' fiduciary responsibilities.
Payment to directors for loss of office (section 191) -
No director of a company shall, in connection with—
(a) the transfer of the whole or any part of any undertaking or property of the company; or
(b) the transfer to any person of all or any of the shares in a company being a transfer resulting from—
an offer made to the general body of shareholders;
an offer made by or on behalf of some other body corporate with a view to a company becoming a subsidiary company of such body corporate or a subsidiary company of its holding company;
an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meeting of the company; or
any other offer which is conditional on acceptance to a given extent, receive any payment by way of compensation for loss of office or as consideration for retirement from office, or in connection with such loss or retirement from such company or the transferee of such undertaking or property, or from the transferees of shares or any other person, not being such company, unless particulars, as may be prescribed concerning the payment, proposed to be made by such transferee or person, including the amount thereof, have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.
There are two pre-conditions:
General meeting approval.
This allows a company to compensate a managing director, whole-time director, or manager for the loss of office or as a consideration for retirement from office, subject to certain limitations and priorities.
A general meeting or adjourned meeting with a sufficient quorum should approve these payments under this clause.
Any money received by a director before the approval or in violation of this provision is considered money obtained in trust for the firm.