Companies Act Section 191

Companies Act, Section 191: Payment to Directors for Loss of Office in Connection with Transfer of Undertaking, Property, or Shares

Section 191 of the Companies Act, 2013, governs the conditions under which a director of a company may receive any payment or compensation for loss of office or retirement in relation to a transfer of the company’s undertaking, property, or shares. The section establishes a clear legal framework to prevent secret or unapproved compensatory payments made to directors in the course of significant corporate transactions such as mergers, acquisitions, or takeovers ensuring transparency and shareholder approval.

1. Prohibition of Unauthorized Payments to Directors in Transfer Scenarios

As per sub-section (1) of Section 191, a director of a company cannot lawfully receive any payment by way of:

Compensation for loss of office, or
Consideration for retirement from office, in connection with any of the following specific transfer scenarios:

(a) Transfer of Assets: When the whole or any part of the undertaking or property of the company is transferred to another entity or person.
(b) Transfer of Shares: When all or part of the shares in the company are transferred to another person or entity, resulting from:
(i) An offer made to the general body of shareholders, such as in a public takeover bid.
(ii) An offer made by or on behalf of another body corporate, intending to make the company a subsidiary of that body corporate or of its holding company.
(iii) An offer made by or on behalf of an individual intending to control at least one-third of the voting power at a general meeting.
(iv) Any other offer which is conditional upon receiving a minimum level of acceptance, i.e., a threshold of shareholder approval.
In all such cases, no payment to a director can be made unless the following two conditions are met:

a. Disclosure of Full Particulars: Detailed disclosure of the proposed payment, including the amount and terms, must be made to the members of the company.
b. Approval by Shareholders: The shareholders must approve the proposed payment by passing a resolution at a general meeting.
If these conditions are not satisfied, any such payment is prohibited by law.

2. Exception for Compensation to Managing or Whole-Time Directors

This prohibition does not apply to payments made by the company to a managing director, whole-time director, or manager by way of:
Compensation for loss of office, or
Retirement-related compensation,
provided that:

The payment adheres to the prescribed limits or priorities under the rules of the Act.
This ensures that legitimate severance or retirement arrangements for executive management are not inadvertently obstructed, while still preserving the need for compliance with regulatory caps.

3. Failure to Approve Payment: Implication of Lack of Quorum

If the required approval resolution is placed before the shareholders in a general meeting (or its adjournment) but the quorum is not met, the proposal shall be deemed not approved.
This provision prevents directors or promoters from misusing procedural loopholes (like lack of quorum) to push through unapproved compensations without proper shareholder oversight.

4. Illegal Payments Deemed Held in Trust

If a director receives any payment:
In violation of sub-section (1), or
Before shareholder approval is obtained, then such payment shall be deemed to be held in trust by the director on behalf of the company.

This effectively means:

The director has no legal right to retain the amount and must return it.
The company may recover the funds, considering them as wrongful gains.
5. Penalty for Non-Compliance

Any director who fails to comply with the provisions of this section shall be liable to a monetary penalty of ?1,00,000 (One Lakh Rupees).
This penalty serves as a deterrent to unauthorized payments and reinforces the need for transparency and shareholder involvement in decisions related to director compensation.

6. No Prejudice to Other Disclosure Laws

The provisions of Section 191 do not override or limit any other laws that require disclosures related to payments made to directors.
In other words:

If other legislation or rules (e.g., under SEBI or stock exchange regulations) require additional or more detailed disclosures, those obligations remain fully enforceable.
This ensures a comprehensive compliance environment where all relevant stakeholders regulators, shareholders, and the public are kept informed of such payments.