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Section 314

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Section 314

Postby Muffaddal » Mon May 31, 2010 4:54 pm

Dear All,

1. Section 314 applicable to private cos?

A private company wants to pay directors remuneration to his two directors Mr.A & Mrs.B, who are also their major shareholders of the company & both are husband & wife and relatives of other directors .Mr.A and Mrs.B brings most of the business to the company.
Company wants to pay director's remuneration of Rs.50k each & wants to increase the remuneration to Rs. 1lac each in the near future of Mr.A & Mrs.B. Co. has also appointed Mr.C another relative & director of the company as a CEO of the company and wants to pay Rs.50k to Mr.C.

Do the company requires Central Govt approval for the above directors remuneration?

What to do in this situation?

Please help............
Muffaddal
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Re: Section 314

Postby srinivasaraghavan » Tue Jun 01, 2010 3:44 pm

Section 314 is certainly applicable to private limited companies.

If a private company wants to pay directors remuneration to his two directors Mr.A & Mrs.B, irrespective of whether they are the major shareholders of the company or not , section 314 will be attracted only if the directors receive remuneration over and above what they are entitled to as directors.

But in case the Company has also appointed Mr.C another relative & director of the company as a CEO of the company and wants to pay Rs.50k to Mr.C, section 314 will be attracted.
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Re: Section 314

Postby Muffaddal » Wed Jun 02, 2010 10:54 am

Dear Sir,

How can we come to know that they're getting the salary above to what they're entitled as directors.and in any case section 309 is also not applicable to private cos. Mr.A & Mrs.B brings most of the business to the company.They're the owners and in no way working under the control of the company. As per the Company's articles General Meeting has the powers to determine the remuneration of Directors.

Please elaborate on this matter, as the company wants to enhance their remuneration to Rs.1lac each from Rs.50K at present.

In case of Mr.C he was appointed as a management representative on 24th June, 2009 at a salary of Rs.18000, at that time company has filed a Form-23, In January 2010 his salary has been increased to Rs.30000 & in March, 2010 he has been appointed as CEO & Director with salary of Rs.50k.

What are the compliances require now for Mr.C?
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Re: Section 314

Postby srinivasaraghavan » Wed Jun 02, 2010 11:40 am

Dear Mr. Muffaddal,

You have stated that as per the Company's Articles of Association the General Meeting has the powers to determine the remuneration of Directors. What the General Meeting has decided is what the directors are entitled to as remuneration. Therefore, if the company wants to enhance their remuneration to Rs.1lac each from Rs.50K at present, it can do so following the provisions in the AOA.

In case of Mr.C who is a relative of director, his appointment as a management representative on 24th June, 2009 at a salary of Rs.18000 per month, should be approved by special resolution of the general meeting held for the first time after appointment. Then his elevation as CEO and director with a salary of Rs.50000 per month should follow a similar procedure under sectio 314.
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Re: Section 314

Postby Muffaddal » Wed Jun 02, 2010 12:00 pm

Do i require Central Govt. approval in case of Mr.A & Mrs.B, if their salary is enhanced to Rs.1lac. or only a Special resolution will do?
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Re: Section 314

Postby srinivasaraghavan » Wed Jun 02, 2010 3:19 pm

In the case of private companies which are not governed by sections 198, 269 and 309, a doubt naturally arises as to what is meant by 'remuneration over and above what a director is entitled to'. The department has expressed its views, vide circular No. 14 of 1975 dated 5-6-1975, that in such a case section 314(1-B) would become applicable. According to that view passing of the special resolution in General meeting alone will not be sufficient; approching the central Government where the remuneration is in excess of Rs 50000 per month will be necessary.
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Re: Section 314

Postby Muffaddal » Wed Jun 02, 2010 4:22 pm

Sir,

In case of Mr.C his salary was increased to Rs.50k and reimbursement of car & telephone expenses for office purposes.Do Mr.C also require Central Government approval?

In case we're paying salary of Rs.50k each to Mr.A & Mrs.B and also reimbursing the car & telephone expenses for office use, than also we require Cent. Govt approval or Sp.Resl will do?

There is any way, so that we don't require central govt. approval & we can pay remuneration to above directors.I want to have a look at the circular 14 of 1975, please can u send me.

Section 314(1B) specifically speaks about the relatives of Directors and not about the Directors.So, what to do in this case.

How can we define that Mr.A & Mrs.B are holding an office or place of profit, as they're also the major shareholders of the company and they're bringing business for the company.They're not working under the control of the company.

As per Companies (Amendment) Bill 2003, department has proposed that Section 314 is not applicable to private companies,What to do in this regard?
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Re: Section 314

Postby srinivasaraghavan » Wed Jun 02, 2010 4:45 pm

Dear Mr. Muffaddal,

1. If the reimbursement of car & telephone expenses are exclusively for office purposes, where does the question of perquisite arise to A or B or C?

2. The text of the circular 14 of 1975, is reproduced in Ramaiah book under section 314.

3. Yes, Section 314(1B) specifically speaks about the relatives of Directors. But in your case A and B are relatives to each other themselves.

4. An office or place of profit is defined under subsection (3) of section 314. They may not be answerable to a particular person, but what is the remuneration paid for? Surely they are under the control of the company.

5. The Companies (Amendment) Bill 2003 has not yet come to force Therefore as of now Section 314 is applicable to private companies.
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Re: Section 314

Postby Muffaddal » Wed Jun 02, 2010 6:14 pm

I've read Ramaiah but in that that department answer was reagrding Public cos.

Regarding perquisites, it was just to confirm regarding reimbursement of expenses.

So, at last it means that if we're paying salary more than Rs.50k we've to go for prior Central Govt. approval & Sp. Resl and there is no other way around.
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Re: Section 314

Postby srinivasaraghavan » Thu Jun 03, 2010 10:45 am

Please see para 6 of the circular. It begins with 'in the case of private company'.
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Re: Section 314

Postby ajaygkp » Thu Jun 03, 2010 11:42 am

Dear Muffaddal

Section 314 is applicable to private company also.

As per your queries, Mr. A and Mrs. B is a director of a company at a remuneration of Rs. 50,000 each, and your company want to increase remuneration up to Rs. 1,00,000, your company can increase remuneration without any restriction, because remuneration clause of the Companies Act, 1956 is not applicable to private company, unless your article impose restrictions. Section 314 is not applied to such increase.

In your third case, appointment of Mr. C as CEO relatives of Mr.A and Mrs. B cover under section 314. In this case you comply the procedure of section 314.

As you says in your first reply that Mr. C who is as CEO appointed as Director at Rs. 50, 000. In this case there is no increase in remuneration of director, it is increase in remuneration of CEO not Director, because u appoint him as Director at Rs. 50,000. Your company appoint Mr. C as director subject to new terms and conditions. In future if your company increase remuneration of Mr. C over Rs. 50,000, then such increase will be increase in remuneration of director.

Regards

Cs Ajay Mishra
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Re: Section 314

Postby Muffaddal » Fri Jun 04, 2010 11:40 am

Now the company is a closely held company, and all the directors are relatives of each other. Now as per my conversation with Mr.Sri, Sec 314 is applicable as Directors are also relatives.

As per the section been placed in the Companies Act, it is two folded, in first instance it tells that section 309 which specifically speaks about the % of remn, which does not apply to pvt. cos.and it also says that 314 is far reaching and applicable to all the companies.I've read all the books and circulars and still can't find the conclusion.Circular and section speaks about the remuneration over and above what the director should be entitled comes under office or place of profit. But if articles gives the right to the company to decide director's remuneration, than what to do in that case?Is the articles is useless?

I know that the Articles can't override the Cos. Act but neither the Act speaks firmly and precisely on this matter, when it comes to private cos. In private cos. mostly the directors are also the owners of the company, they neither work under the control of the company.

A pvt co. is entitle to pay directors remn as per the provision given in its articles.

Question arises, if the private company can't follow its articles, and section 309 is also not applicable, than how we'll judge the case regarding Section 314. Because almost in all the private cos. directors are somehow relatives of each other.

Need a firm response from the CS and Legal community on this matter.
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Re: Section 314

Postby srinivasaraghavan » Fri Jun 04, 2010 2:30 pm

Section 314 will be applicable even if the company is a private limited company, no doubt. The difficult situation is really in the interpretation of what is office or place of profit in the case of private ltd companies, with reference to the phrase " in case if the office or place of profit is held by the director, if that director holding it obtains any thing as remuneration over and above the remuneration he is entitled to" as stated in 314(3).

Now in the case of public limited companies the Companies Act itself is prescribing the entitlement in the sections 269 and 309. So there is no difficulty in determining 314 applicability in the case of directors of public limited companies.

In the case of private limited companies, the Act leaves the determination of remuneration of their directors to the private companies themselves. Even in the case of private limited companies, the managing director or manager is exempt from applicability of 314 in view of subsection (1). The confusion arises only in the case of other directors' remuneration. Here in my view the entitlement can be determined by the private companies themselves in view of the subject being left to the private limited companies themselves. In the case of relatives of directors, there is no confusion, as 314 is certainly applicable in view of subsection 314(1B), irrespective of whether the company is private or public limited.

In your given case the problem is that of directors interse related and that is why the applicability of 314(1B)
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Re: Section 314

Postby Muffaddal » Fri Jun 04, 2010 5:19 pm

Sir,

Can you send me the procedure for how to apply to Central Government for increase in Remuneration(24B....etc) as you are now fully aware what is my case.
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