Here are the notes on compensation for loss of office in a company, with MCQs and answers:
Notes
- Compensation for loss of office is a payment made by a company to a director who is forced to retire before the expiry of their term of office.
- The Companies Act, 2013 allows a company to make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.
- The amount of compensation that can be paid is limited to the remuneration that the director would have earned if they had been in office for the remainder of their term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by them during a period of three years immediately preceding the date on which they ceased to hold office, or where they held the office for a lesser period than three years, during such period.
- The company cannot make payment of compensation for loss of office to a director if the director has instigated, or has taken part directly or indirectly in bringing about, the termination of their office.
MCQs
- Can a company make payment to a director by way of compensation for loss of office?
- Yes
- No
Answer: Yes. A company can make payment to a managing or whole-time director or manager, but not to any other director, by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement.
- What is the maximum amount of compensation that can be paid to a director?
- The remuneration that the director would have earned if they had been in office for the remainder of their term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by them during a period of three years immediately preceding the date on which they ceased to hold office, or where they held the office for a lesser period than three years, during such period.
- The remuneration that the director would have earned if they had been in office for the remainder of their term.
- The remuneration that the director would have earned if they had been in office for three years.
Answer: The maximum amount of compensation that can be paid to a director is the remuneration that the director would have earned if they had been in office for the remainder of their term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by them during a period of three years immediately preceding the date on which they ceased to hold office, or where they held the office for a lesser period than three years, during such period.
- Can a company make payment of compensation for loss of office to a director if the director has instigated, or has taken part directly or indirectly in bringing about, the termination of their office?
- Yes
- No
Answer: No. The company cannot make payment of compensation for loss of office to a director if the director has instigated, or has taken part directly or indirectly in bringing about, the termination of their office.
Conclusion
Compensation for loss of office is a complex area of corporate law, and it is important for companies to be aware of the legal requirements before making any payments to directors. By understanding the law, companies can help to ensure that they are complying with the law and protecting their interests.
Here are some additional things to keep in mind about compensation for loss of office:
- The payment of compensation for loss of office must be approved by the board of directors of the company.
- The payment of compensation for loss of office must be disclosed in the company’s financial statements.
- The payment of compensation for loss of office may be taxable to the director.
By following these guidelines, companies can help to ensure that they are making payments of compensation for loss of office in a compliant and informed manner.