Section 202 Of Companies Act 2013: Compensation For Loss Of Office

Eligibility of Compensation for Loss of Office

A company can make payment for loss of office to the following Key Managerial Personnel (KMP):

• A managing director;
• A manager; and
• A full-time director.

Permissible Timeline for claiming Loss of Office

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Conditions to not Pay for Compensation for Loss of Office

Sub-section : From a director’s perspective:

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Sub-section: From company’s perspective:

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A company need not pay under the following circumstances:

• The director resigns from his position as a result of the reconstruction or amalgamation of the company and is reappointed.
• The director resigns from his position other than reconstruction or amalgamation of the company.
• The director had to resign by provisions of section 167 of the act.
• The company winds up as per the order of the tribunal or voluntarily provided that it was the director’s fault that caused the winding.
• The director has resigned or been removed from his position as he’s been guilty of fraud, breach of trust, gross negligence, or gross mismanagement while performing his duties as a director.
• The director has instigated or played a role directly or indirectly in getting terminated.

The payment made to the director shouldn’t exceed his remaining term or a span of 3 years, whichever is shorter. Such payment shall not be made if the process of winding up has started before or within 12 months of his loss of office.

This section doesn’t prohibit the payment to a manager, managing or full-time director, any remuneration for services provided by him to the company in any other ability.

Procedure for payment to director for loss of office

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Payment Limit on Compensation for Loss of Office

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Section 202 of the Companies Act, 2013

[Compensation for Loss of Office of Managing or Whole-time Director or Manager.]

202. (1) A company may make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.

(2) No payment shall be made under sub-section (1) in the following cases, namely:—

(a) where the director resigns from his office as a result of the reconstruction of the company, or its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing or whole-time director, manager, or another officer of the reconstructed company or the body corporate resulting from the amalgamation;

(b) where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;

(c) where the office of the director is vacated under sub-section (1) of section 167;

(d) where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;

(e) where the director has been guilty of fraud or breach of trust about, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; and

(f) where the director has instigated or has taken part directly or indirectly in bringing about, the termination of his office.

(3) Any payment made to a managing or whole-time director or manager in pursuance of sub-section (1) shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter, calculated based on the average remuneration earned by him during three years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than three years, during such period:

Provided that no such payment shall be made to the director in the event of the commencement of the winding-up of the company, whether before or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding-up, after deducting the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the premiums, if any, contributed by them.

(4) Nothing in this section shall be deemed to prohibit the payment to a managing or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity.

FAQ’s

1. What is meant by compensation for loss of office?
   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
2. What is section 202 of the Companies Act 2013?