Understanding Directors Remuneration and Disqualifications
Directors’ remuneration is the mechanism by which a company’s directors are paid, either by compensation, salaries, or the use of the company’s properties, with the consent of shareholders and board of directors.
The process of remuneration of directors came about because of shareholder fears that directors were charging themselves high compensation while producing low income or revenue. Thus, the mechanism was introduced by which shareholders might accept or refuse fees charged to directors in general. This number is the upper limit payable to the board of directors in the businesses with private limited company registration.
Director fees and remuneration
In addition, the Board of Directors decides how such fees are split between administrators, including the company’s general manager.
On the other hand, the remuneration of the director, that is to say, the wages and bonuses paid to employees, is part of the employment contract negotiated by the director with the company. The Board of Directors is then directly regulated by this payment arrangement.
Shareholders will sue managers if they pay huge amounts above the negotiated salary or if they pay overly large quantities of income rather than distributing them as dividends to the shareholders.
Directors Remuneration in Private Limited Company
The Director’s remuneration means to pay for an administrative person’s job. A company’s related forms of usage are often called administrative remuneration. The following types of benefits available to Directors in cash or kind are also considered as Remuneration:
- Company’s total money expended on rent-free compensation, or any other benefit or privilege, for nothing out of pocket, to every director and administrator.
- Use made by the company to offer any company’s director or administrator some other benefit or pleasantry complimentary or concessional cost.
- The Company’s spending on any undertaking or administration obtained by any of the Company’s Directors or Supervisors for such use by the Company.
- Expenditure incurred by the company to influence or provide any profit, annuity or tip to the life of any company’s director and administrator or his / her life partner and the child.
- Expenditure incurred by the Company to compensate its administrator for any risk of carelessness, negligence, mistake, breach of duty or breach of trust for which they may be liable in connection with the Company and if such person is liable, the premium charged for such insurance will be considered as part of the director’s remuneration.
- Usage of automobiles to personally help the company-caused owner.
Payment of Remuneration of Directors in a Private Company
Either a company’s managing director or full-time director may be paid: by the Monthly Payment system At a predefined percentage of the company’s net income, mainly by one and incompletely by the other.
Because, apart from the Central Govt’s approval, this award does not exceed 5% of the net profit for such an executive and 10% for each. In case of inadequate benefits, the organization may pay less salary to its supervisory director and other management personnel, subject to the Central government’s approval, not exceeding Rs. 50,000 per year. This whole will be selective on any manager’s charges. Increasing supervisory directors’ pay needs Central Govt approval.
Any agreement or rearrangement of any such director for higher compensation than his ancestor’s compensation would not be convincing without Central Govt’s approval. Moreover, if the Central Govt opposes it, it would be prevented.
DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR
A person shall not be qualified for appointment as a director of an organization, if:
- He is of unsound mind and stands so declared by a competent court;
- He is an undischarged insolvent;
- He has applied to be adjudicated as an insolvent and his application is pending;
- He has been indicted by a court of any offense, regardless of whether including moral turpitude or something else and sentenced in regard thereof to detainment for at the very least six months and a time of five years has not slipped by from the date of expiry of the sentence.
- An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
- He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
- He has been convicted of the offense dealing with related party transactions under section 188 at any time during the last preceding five years; or
- He has not got the DIN.
Thus, a private limited company must have transparent and reliable policy in accounting for the remuneration of a private limited company. Directors cannot simply transfer the funds from corporate accounts to their personal accounts in the name of remuneration just to avoid tax burdens. All the above provisions must be considered while providing remuneration to directors along with verifying that the director is not disqualified under the Companies Act, 2013.
Devarshi Dave is an Associate Company Secretary and has completed his Masters and SAP (FiCo) from Ahmedabad. Having experience in handling Private Limited Company and LLP incorporation processes is currently working with LegalWiz as an ACS with the Business Advisory team.