Case: Company Law Board Vs. Upper Doab Sugar Mills Limited Etc

This Judgment would dispose 0 civil appeals Nos. 1840, 1841 and 1842 of 1971 which have been file d 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,respondent company, Upper Doab Sugar Mills Ltd., is a public limited company governed by the provisions ofthe 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 manufacture of sugar from sugar cane. It also manufactures spirits, industrial alcohols and rum from molasses. From 1951 onwards the respondent comp any 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 conduct 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. 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 o f 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 shareholder s 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 the Act. The appellant Board after obtaining some additional 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 followingtotal remuneration of each managing director by way of commission and salary shall not exceed Rs. 1, 20, 000 (Rupees one lakh twenty thousand) percompany made a representation to the appellant Board that the aforesaid ceiling of Rs. 1, 20, 000 would not adequately remunerate the two managing directors and that the afores aid ceiling be raised. The Board rejected that representation. 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 remuneration 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 resolution of the Board of Directors along with the necessarypetition 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 managingWhether 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 w as bad because the Company was not granted adequate heating and because the order of refusal did not state the reasons thereforeHigh 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 Courtany condition regarding remuneration which is contrary to the provisions of sections 198 and 309 would not be regarded as germane to section 269 inasmuch as the Legislature has exhaustively dealt with remuneration in sections 198 and 309 with the effect that section 269 does not include in its scope any element regarding the fixation ofto the general administrative policy of the Government of fixing ceiling on managerial remuneration, the High Court observed 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 directors.

Court's reasoning:
After hearing learned counsel for the parties and giving the matter our earnest consideration, w e are of the opinion that the view taken by the High Court in quashing the condition imposed by the appellant Board about the fixation of the remuneration of the managing directors cannot be sustained. 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 relating 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 managerial remuneration and managerial remuneration in the case of absence or adequacy of profits. The total managerial remuneration 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 directors but also of other managerial personnel like secretaries, 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 director 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. According 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 pro fits 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 perta ins 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 remuneration 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 Government 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 remuneration 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 t o 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 appellant Board. The provisions of both sections 269 and 637A expressly deal with the question which arises directly in thismay 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 individual 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 therefrom 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.