A private limited company which is subsidiary of a Foriegn Company (holding 51% of the capital). The balance 49% is held by an Indian unlisted public Company. By virtue of Section 4 subsection 7 of Companies Act, the Company is treated as subsidiary of a Public Company.
The Company has 6 directors, 3 Indian and 3 Foreign Director. Of the three Indian Directors one is a MD. All the Directors including the MD are non-executive and not drawing any remuneration.
The Indian Directors have provided their personal guarantee for the credit facility and the company now wants to pay commission to the Indian Directors, including the MD for providing personal guarantee.
The DCA has issued a circular on basis of a Delhi High Court Judgment that payment of guarantee commission to Director is not remuneration within the meaning of Section 309. Extract of the explanation of the same is given below for your perusal:
The Department had issued earlier Circular No. 14/50-CL.V, dated 16-12-1969 according to which guarantee commission payable to the directors for personal guarantee on loans to the company was to be treated as remuneration under section 309(1) of the Companies Act, 1956. In Sussen Textile Bearings Ltd. v Union of India reported in (1984) 55 Comp Cas 492, it was held by Delhi High Court that guarantee Commission paid by a company to its director for standing surety for loans and credit facilities taken by the company was not a remuneration within the meaning of section 309 of the Companies Act, 1956 and approval of the Central Government was not necessary. [Circular No. 3/94 (F. No. 14/3/87-CL.V), dated 16-2-1994]
Request your kind advise if we can pay guarantee commission to the Indian non-executive Directors and MD.
CAclubindia
