vil Appeal Nos
1840 184272
Appeals from the Judgment and Orders dated the 15th April 1971 of the Delhi High Court in Civil Writ Petitions Nos 54 1183 and 118469
Mrs Shyamla Pappu RN Sachthey and Girish Chandra for the appellant in CA 184071
RN Sachthey and Girish Chandra for the Appellants in CAs
1841 4271
HK 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 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 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 5000 per month
In addition to that each managing director was to get commission at the rate of 312 per cent of the net profits of the company during a financial year computed in the manner laid down in section 3095 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 120000 Rupees one lakh twenty thousand per annum
 The company made a representation to the appellant Board that the aforesaid ceiling of Rs 120000 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 120000 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 50000 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  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  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 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 section 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 limitationsions 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 section 198 and the proviso to sub section 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 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 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 120000 per annum or Rs 10000 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 120000
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
PBR Appeals allowed


Summary:
Section 1981 of the 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 section
1 a company may pay a remuneration to its managing or whole time director in accordance with the provisions of section 309
Section 3093 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 section 269 of the 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 regarding the remuneration which is contrary to the provi sions of sections 198 and 309 would not be germane to section 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 sections 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 section 3093 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 section 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 SCI76 504