1. A company may 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.
2. No payment shall be made under sub-section (1 ) in the following cases, namely:—
a. where the director resigns from his office as a result of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing or whole-time director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
b. where the director resigns from his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
c. where the office of the director is vacated under sub-section (1 ) of section 167;
d. where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;
e. where the director has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary company or holding company thereof; and
f. where the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.
3. Any payment made to a managing or whole-time director or manager in pursuance of sub-section (1 ) shall not exceed the remuneration which he would have earned if he had been in office for the remainder of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately preceding the date on which he ceased to hold office, or where he held the office for a lesser period than three years, during such period:
Provided that: no such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the premiums, if any, contributed by them.
4. Nothing in this section shall be deemed to prohibit the payment to a managing or whole-time director, or manager, of any remuneration for services rendered by him to the company in any other capacity.
Legal Commentary & Landmark Judgments: Section 202
Section 202 governs compensation for loss of office, strictly limiting severance and golden handshake payments exclusively to Managing, Whole-time Directors, and Managers, while imposing exhaustive statutory disqualifications and monetary ceilings.
When negotiating executive exit agreements or defending against wrongful dismissal claims brought by terminated MDs, scrutinize the disqualification triggers under Section 202(2). If the executive committed any governance breach or if the company entered liquidation within 12 months, plead the statutory bar under Section 202 to defeat severance claims.