A ceiling does not create an entitlement
Under Companies Act section 202, a company may pay qualifying loss-of-office or retirement compensation to its managing director, whole-time director or manager, but not another director under this provision. The payment must first survive the prohibited circumstances in subsection (2). Only then calculate the subsection (3) ceiling. A contract promising three years’ pay cannot override a statutory prohibition. This analysis is checked as of 24 October 2026.
Review the reason for the exit before the amount
The prohibited cases include the specified reconstruction/amalgamation resignation followed by appointment in the successor, other resignation by the director, vacation under section 167(1), winding up due to the director’s negligence or default, the stated fraud/breach-of-trust/gross-negligence/gross-mismanagement cases, and the director instigating or participating in bringing about termination. Preserve the actual legal route and evidence; re-labelling a resignation as retirement is not an eligibility analysis.
The categories and exact conditions should be read in the section. Do not simplify the reconstruction clause into an assumption that every restructuring exit is payable or that any resignation earns severance. A non-executive director is not brought within subsection (1) merely because a settlement uses the words loss of office. Other contractual claims, employment dues and services in another capacity require their own legal classification.
Compute the shorter period and the historic average
| Input | Statutory question | Control |
|---|---|---|
| Time remaining | What remains of the existing term? | Appointment and cessation documents |
| Maximum period | Is the remaining term shorter than three years? | Explicit shorter-period comparison |
| Remuneration base | What was actually earned in the immediately preceding three years, or shorter service? | Complete remuneration history |
| Final payment | Is the proposed amount within the cap and otherwise permissible? | Eligibility, approvals and contract analysis |
Use remuneration actually earned over the relevant historic service period, not merely the current salary or next year’s expected bonus. If the office was held for less than three years, use that shorter period. The examples assume complete years or months and uniform accrual for fractional periods to make the arithmetic transparent. For irregular accrual, disputed awards or partial dates, build the actual period calculation rather than treating a simplified monthly convention as law.
The winding-up proviso is an additional bar
No such payment is to be made to the director if winding up commences before, or within twelve months after, cessation and the assets after winding-up expenses are insufficient to repay contributed share capital including premiums. This is not the same as the three-year compensation cap. Check the separate twelve-month risk and solvency facts; a positive cap calculation does not answer it.
Keep genuine other-capacity remuneration separate
Subsection (4) preserves remuneration for services rendered in another capacity to the managing or whole-time director or manager. It does not authorise relabelling an impermissible exit payment as consultancy. Retain the actual services, contract, approvals and performance evidence. Section 202 also does not calculate payroll tax or establish every approval required under other applicable provisions. Separate the maximum under this section, the amount contractually due, and the amount lawfully approved.
The six fictional cases below assume all relevant eligibility and approvals except the expressly tested bar. They calculate ceilings rather than promise mandatory payments. Rupee amounts are gross remuneration, with taxes and unrelated dues excluded.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Two years remain
An eligible MD earned ₹24 lakh, ₹30 lakh and ₹36 lakh in the immediately preceding three years. Average annual remuneration is ₹30 lakh. With two years remaining, shorter than three, the ceiling is ₹60 lakh. A lower contractual entitlement would not automatically rise to that ceiling.
Illustrative example 2: Long remaining term
Using an independently established ₹30 lakh annual historic average, an eligible WTD has four years remaining. The multiplier is three years, not four, giving ₹90 lakh. The cap is not a fresh extension of the office term.
Illustrative example 3: Short historic service
An eligible manager earned ₹18 lakh over eighteen months, and eighteen months remain. The assumed uniform annualised average is ₹12 lakh. The shorter remaining period is 1.5 years, so the ceiling is ₹18 lakh. Do not divide the short-service total by three years.
Illustrative example 4: Winding-up insufficiency
Assume a director otherwise has a valid compensation working, but winding up commences six months after cessation. Assets after winding-up expenses are ₹48 lakh; contributed share capital plus premium is ₹55 lakh. The shortfall is ₹7 lakh. On these stated facts the proviso bars the payment; a positive remuneration cap does not cure the insufficiency.
Illustrative example 5: Six months remain
An eligible MD earned ₹12 lakh, ₹18 lakh and ₹24 lakh over the immediately preceding three years. The annual average is ₹18 lakh. With six months remaining, the ceiling is ₹9 lakh, not three times the latest ₹24 lakh salary.
Illustrative example 6: Separate another-capacity service
Assume a lawfully payable exit amount of ₹20 lakh and independently established ₹5 lakh remuneration for services genuinely rendered in another capacity, with all applicable conditions met. Total settlement cash is ₹25 lakh, but the file must show the separate ₹20 lakh and ₹5 lakh bases. The separate service label alone would not establish the ₹5 lakh entitlement.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Identify the precise office held | Appointment and role documents |
| 2 | Establish the legal cessation route | Resignation, removal or retirement records |
| 3 | Test each subsection (2) prohibition | Reasoned eligibility checklist |
| 4 | Read the appointment and compensation contract | Term and entitlement clauses |
| 5 | Determine remaining term | Cessation-to-expiry calculation |
| 6 | Reconcile historic remuneration actually earned | Three-year or shorter-service ledger |
| 7 | Calculate the shorter-period ceiling | Independent period and average working |
| 8 | Review the winding-up proviso | Twelve-month timeline and capital/premium sufficiency analysis |
| 9 | Separate other-capacity remuneration | Services, invoices and approvals |
| 10 | Approve the final lawful settlement | Cap, contract, tax and payment reconciliation |
Sixteen practitioner FAQs
1. Does the section require three years’ compensation?
No. It states a ceiling for otherwise permissible payments.
2. Can every director use subsection (1)?
No. The provision identifies MDs, WTDs and managers, not all directors.
3. Is resignation automatically compensated?
No. The specific resignation prohibitions must be examined before any calculation.
4. Can a successor appointment matter in reconstruction?
Yes. The reconstruction/amalgamation resignation and successor appointment are expressly addressed.
5. Does section 167 vacation need separate review?
Yes. Subsection (2) expressly includes vacation under section 167(1).
6. Does a contract override a prohibition?
No. Contractual wording cannot make a barred payment permissible under section 202.
7. Is current salary the historic average?
Not automatically. Reconcile remuneration actually earned over the prescribed lookback.
8. What if service was shorter than three years?
Use the actual shorter service period for the average.
9. What if four years of the term remain?
The compensation period is capped at three years, subject to every other condition.
10. What if six months remain?
Use the shorter remaining period, with an appropriately supported average.
11. Does a positive cap settle winding-up risk?
No. The proviso imposes a separate sufficiency and timing safeguard.
12. Does the capital comparison include share premium?
The proviso expressly includes premiums contributed by shareholders.
13. Can gross misconduct affect eligibility?
The specified fraud, breach-of-trust, gross-negligence and gross-mismanagement grounds require review.
14. Is genuine other-capacity pay always exit compensation?
Subsection (4) preserves genuine services remuneration; prove the separate entitlement and applicable conditions.
15. Can an exit payment simply be renamed consultancy?
No. Evidence of actual services and lawful terms is required.
16. Does this working settle payroll tax?
No. Withholding and tax treatment require their own applicable-period analysis.
Conclusion
Approve eligibility first, then reconcile the historic average and shorter remaining period. Keep the winding-up bar and genuine other-capacity services visible in the settlement file.