Section 191 Companies Act: Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares

Section 191 of Companies Act: Corporate Governance & Statutory Compliance

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

1. No director of a company shall, in connection with—

a. the transfer of the whole or any part of any undertaking or property of the company; or

b. the transfer to any person of all or any of the shares in a company being a transfer resulting from—

i. an offer made to the general body of shareholders;

ii. an offer made by or on behalf of some other body corporate with a view to a company becoming a subsidiary company of such body corporate or a subsidiary company of its holding company;

iii. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meeting of the company; or

iv. any other offer which is conditional on acceptance to a given extent, receive any payment by way of compensation for loss of office or as consideration for retirement from office, or in connection with such loss or retirement from such company or from the transferee of such undertaking or property, or from the transferees of shares or from any other person, not being such company, unless particulars as may be prescribed with respect to the payment proposed to be made by such transferee or person, including the amount thereof, have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.

2. 2 ) Nothing in sub-section (1 ) shall affect any payment made by a company to a managing director or whole-time director or manager of the company by way of compensation for loss of office or as consideration for retirement from office or in connection with such loss or retirement subject to limits or priorities, as may be prescribed.

3. If the payment under sub-section (1 ) or sub-section (2 ) is not approved for want of quorum either in a meeting or an adjourned meeting, the proposal shall not be deemed to have been approved.

4. Where a director of a company receives payment of any amount in contravention of sub-section (1 ) or the proposed payment is made before it is approved in the meeting, the amount so received by the director shall be deemed to have been received by him in trust for the company.

5. If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

6. Nothing in this section shall be taken to prejudice the operation of any law requiring disclosure to be made with respect to any payment received under this section or such other like payments made to a director.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 191

Section 191 prohibits directors from receiving undisclosed or unauthorized compensation for loss of office or retirement in connection with corporate transfers of undertakings, property, or shares, imposing a constructive trust on any illicitly received funds.

Prohibition of Unauthorized Golden Handshakes in Corporate Transfers: No director of a company may receive any payment by way of compensation for loss of office, retirement, or transfer of the whole or part of the undertaking, property, or shares of the company, unless full disclosure is made to members and prior shareholder approval is obtained.
Mandatory Disclosure Requirements: Particulars of the proposed payment—including amount, rationale, and recipient—must be disclosed in the notice convening the general meeting called to approve the transfer of undertaking or shares.
Statutory Constructive Trust and Disgorgement: If a director receives any compensation without required shareholder approval, the entire sum is statutorily deemed to be held in trust for the company or the transferring shareholders, and must be disgorged forthwith.
Severe Penal Liability for Non-Compliance: Any director who contravenes the section is punishable with a fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Key Landmark Precedents:

Regal (Hastings) Ltd. v. Gulliver, [1942] 1 All ER 378 (HL): The House of Lords established the bedrock fiduciary rule that directors cannot retain secret profits or personal financial advantages derived from corporate transactions or restructuring, holding all such unauthorized sums on constructive trust.
Re: Duomatic Ltd., [1969] 2 Ch 365: Held that informal payments or golden parachute settlements made to directors upon exit without formal, informed shareholder consent are illegal and must be refunded to the corporate estate.

Courtroom Practice & Strategic Litigation Guidance:

In M&A and share transfer transactions, examine all non-compete agreements, retention bonuses, and consulting contracts executed in favor of exiting directors. If side consideration is paid to a director without express Section 191 general meeting approval, plead constructive trust in commercial proceedings and seek an interim order freezing the director's bank accounts to secure disgorgement.

Section 191: Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares

Section 191 of Companies Act: Corporate Governance & Statutory Compliance

Legal Commentary & Landmark Judgments: Section 191