Chapter XIII - Appointment and Remuneration of Managerial Personnel
Section 202
Section 202: compensation for loss of office of managing or whole-time director or manager
Section 202 allows a company to pay compensation for loss of office, or for retirement, only to a managing director, whole-time director or manager, and not to any other director. It bars payment in six situations and caps the amount.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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.
Introduction
The cap is the remuneration the person would have earned for the rest of the term or for three years, whichever is shorter, calculated on average remuneration actually earned over the preceding three years (or the shorter period served). No payment may be made where winding up begins within twelve months after the person leaves and the assets are insufficient to repay share capital.
Section 202 commenced on 12 September 2013 under S.O. 2754(E). The India Code consolidated text shows no amendment, and its text matches the 2013 Gazette.
Key takeaways
Only MD, WTD or manager
No compensation for loss of office to any other director.
Six barred cases
Including resignation on reconstruction or amalgamation, voluntary resignation, vacation under section 167(1), fraud or gross negligence, and instigating one’s own termination.
Cap
Remaining term or three years, whichever is shorter, on average actual remuneration.
Insolvency bar
No payment if winding up begins before, or within twelve months after, the person ceases to hold office and assets cannot repay share capital.
Who may be paid
Under sub-section (1), a company may pay a managing or whole-time director or manager, but not any other director, compensation for loss of office, consideration for retirement, or a payment in connection with such loss or retirement.
When no payment may be made
Sub-section (2) bars payment where: (a) the director resigns as a result of reconstruction or amalgamation and is appointed MD, whole-time director, manager or other officer of the reconstructed or resulting body; (b) the director resigns otherwise than on such reconstruction or amalgamation; (c) the office is vacated under section 167(1); (d) the company is being wound up, by Tribunal order or voluntarily, and the winding up was due to the director’s negligence or default; (e) the director has been guilty of fraud, breach of trust, gross negligence or gross mismanagement in the affairs of the company or its subsidiary or holding company; or (f) the director instigated, or took part directly or indirectly in bringing about, the termination of the office.
How much may be paid
Under sub-section (3), the payment may not exceed the remuneration the person would have earned for the remainder of the term or for three years, whichever is shorter, calculated on the average remuneration actually earned during the three years before ceasing to hold office (or during the shorter period served).
Under the proviso, no payment may be made if winding up of the company commences before, or at any time within twelve months after, the date the person ceased to hold office, and the assets on winding up, after expenses, are not sufficient to repay shareholders their share capital, including premiums contributed.
Remuneration in another capacity
Under sub-section (4), nothing in the section prohibits paying the managing or whole-time director or manager remuneration for services rendered in any other capacity. Payments connected with a transfer of undertaking or shares are also subject to section 191.
Practical preparation
Confirm the person is an MD, whole-time director or manager; test each of the six barred cases; compute the remaining term and the three-year average of actual remuneration; apply the shorter period; assess the company’s solvency against the winding-up proviso; record the calculation in board papers.
Practical checklist
Do
- Keep three years of actual remuneration records to support the calculation.
- Check whether section 191 also applies if the exit is linked to a sale or takeover.
Avoid
- Do not pay loss-of-office compensation to a non-executive director under this section.
- Do not pay where the person resigned voluntarily; clause (b) bars it.
Illustrative example
Hypothetical: early termination of a managing director
A company terminates its managing director, who has two years of his five-year term left, in a restructuring he did not instigate.
Eligibility
He is a managing director and none of the six barred cases applies.
Cap
The remaining term of two years is shorter than three years, so the cap is two years of his average remuneration over the past three years.
Solvency
The Board checks that no winding up is in prospect within twelve months that would trigger the proviso.
Outcome
- The payment is fixed within the cap and the calculation is minuted.
Glossary
- Manager
- Under section 2(53), an individual who, subject to the superintendence, control and direction of the Board, has the management of the whole, or substantially the whole, of the affairs of a company.
- Reconstruction
- Reorganisation of a company’s business or structure, often through a scheme.
- Average remuneration
- The average of remuneration actually earned over the three years (or shorter period) before ceasing office.
Frequently asked questions
Can a company pay compensation to an independent director for loss of office?
Not under section 202. The section permits such payments only to a managing or whole-time director or manager.
What is the maximum compensation?
Remuneration for the remainder of the term or three years, whichever is shorter, based on the average remuneration actually earned in the preceding three years (or shorter period served).
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026