Compensation for Loss of Office: Section 202

Compensation for loss of office is permitted by section 202 of the Companies Act, 2013 for three roles only, blocked outright in six situations, and capped by a formula in sub-section (3). 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, as consideration for retirement from office, or in connection with such loss or retirement.

Who may receive compensation for loss of office?

Three roles, named in sub-section (1): managing director, whole-time director and manager. The words "but not to any other director" are in the sub-section itself, so a non-executive or independent director is outside it. That exclusion is consistent with the rest of the Chapter, where the same three roles carry the term cap in section 196(2) and the five per cent sub-limit in section 197(1).

The permission is bounded on three sides at once, and it helps to see them as one structure rather than three rules.

In which six cases can nothing be paid?

Sub-section (2) lists them, and they divide into exits the person chose and exits the person caused.

1. Resignation on reconstruction or amalgamation, where the director resigns as a result of the reconstruction of the company or its amalgamation with another body 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. The office continues in substance, so nothing is lost.
2. Resignation otherwise than on such a reconstruction or amalgamation. A plain resignation earns no compensation.
3. Vacation of office under section 167(1), which is the automatic vacation by operation of law. Vacation of office of a director covers those grounds.
4. Winding up, whether by order of the Tribunal or voluntary, provided the winding up was due to the negligence or default of the director.
5. Fraud or breach of trust in relation to, or gross negligence in or gross mismanagement of, the conduct of the affairs of the company or any subsidiary or holding company.
6. Self-inflicted termination, where the director has instigated, or taken part directly or indirectly in bringing about, the termination of his own office.

Case (3) is the one that connects this section to the wider director machinery: an office vacated under section 167(1), including on a disqualification under section 164, produces no compensation at all. Director disqualification under section 164 covers the grounds that feed it.

How is the cap in sub-section (3) calculated?

The formula has two limbs, and it is a ceiling rather than an entitlement. Any payment made under sub-section (1) shall not exceed the remuneration the person 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 during the three years immediately preceding the date on which he ceased to hold office. Where the office was held for less than three years, the average is taken over that shorter period.

Because the remainder of the term is one limb, the cap cannot be computed without knowing the term, and the term is in the service contract that section 190 requires the company to keep at its registered office for inspection by members without fee. Contract of employment with a managing director covers that record. The term itself cannot exceed five years at a time under section 196(2), which appointment of a managing director under section 196 covers.

The proviso to sub-section (3) adds a winding-up condition. No such payment shall be made where winding up commences before, or at any time within twelve months after, the date the person ceased to hold office, if the assets of the company on winding up, after deducting the expenses, are not sufficient to repay the shareholders their share capital including any premiums. That is a solvency test applied after the fact, with a twelve-month look-forward.

Sub-section (4) preserves other payments: nothing in the section prohibits paying a managing or whole-time director or manager any remuneration for services rendered to the company in any other capacity.

What do the rules add?

Rule 17 of the Companies (Meetings of Board and its Powers) Rules, 2014 sits across section 191 and section 202. As notified, rule 17(2) states that any payment by a company by way of compensation for loss of office, or as consideration for retirement or in connection with such loss or retirement, to a managing director, whole-time director or manager shall not exceed the limit set out under section 202.

Rule 17(3) then adds a default-based bar of its own. No such payment shall be made, other than notice pay and statutory payments in accordance with the terms of appointment, where the company is in default in repayment of public deposits or interest on them; in redemption of debentures or interest on them; in repayment of any secured or unsecured liability payable to any bank, public financial institution or other financial institution; in payment of income tax, VAT, excise duty, service tax or any other tax or duty payable to the Central Government, a State Government, a statutory authority or a local authority, other than where the company has disputed the liability; where statutory dues to employees or workmen are outstanding and unpaid, again other than where disputed; or where the company has not paid dividend on preference shares or not redeemed preference shares on the due date.

On the rules cited here. The rule text on this page comes from the copy of the Companies (Meetings of Board and its Powers) Rules, 2014 that thc.nic.in serves, and it is a notification text rather than a consolidation. Its body is the principal notification, G.S.R. 240(E) dated 31 March 2014, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), and made under sections 173, 175, 177, 178, 179, 184 to 189 and 191 read with section 469 of the Act. Bundled after it is a separate, later notification, G.S.R. 811(E) dated 3 November 2025, the Companies (Meetings of Board and its Powers) Amendment Rules, 2025, which substitutes sub-rule (2) of rule 11 and nothing else. The footer note on that 2025 notification records the principal rules as last amended by G.S.R. 409(E) dated 15 June 2021. So the rule text in the body is the 2014 text as originally notified, the amendments made between 2014 and June 2021 are not incorporated in it, and a rule quoted from it is not by itself evidence of the rule in force today. Check the amending notifications before relying on any rule text here for a filing. The section text on this page is the Companies Act, 2013 as consolidated on India Code, with each amendment footnote resolved on its own page.

How does section 202 differ from section 191?

Section 191 is the transfer-linked provision: it bars any director from receiving a payment for loss of office in connection with a transfer of the company's undertaking or property, or a covered share offer, unless prescribed particulars are disclosed and the members approve. Section 191(2) then carves the section 202 payment out of that bar, subject to prescribed limits and priorities, and rule 17(2) supplies the limit by pointing back at section 202. Payment to a director for loss of office under section 191 covers the transfer case, including the nine particulars a notice must carry.

The short version: section 202 asks whether the company may pay its own chief executive on the way out, and section 191 asks whether anyone at all may pay any director in the middle of a control transaction.

Where compensation for loss of office shows up in a filing

For a listed company the payment lands in the remuneration disclosures rather than in a filing of its own. Section 197(12) requires the Board's report to carry the ratio of each director's remuneration to the median employee's remuneration, and section 197(16) requires the auditor to state whether remuneration paid is in accordance with section 197. Managerial remuneration under section 197 covers both. Where the payment is made in a transfer context, section 191 forces it into a general meeting notice instead, which is the one route by which the amount, the basis and the source become visible to members before the money moves.

Where this sits in the disclosure picture

• Payment to a director for loss of office under section 191 covers the transfer-linked bar that section 191(2) carves this payment out of.
• Appointment of a managing director under section 196 covers the five-year term the cap is measured against.
• Managerial remuneration under section 197 covers the ceilings and disclosures on ordinary pay.
• Vacation of office of a director covers section 167(1), which is one of the six bars.
• Contract of employment with a managing director covers the document that records the remaining term.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.