In: Finance
Q.3)
Marios and Andreas were very good friends since childhood and have always been thinking to incorporate their own business offering IT services to clients. At first the two friends decided to create a partnership sharing profits equally due to tax reasons but as business continued to grow they have been advised that it would be more tax efficient if the business would have been incorporated into a company.
The two friends took the advice of their tax consultant and formed a limited liability company each holding 50% of the share capital.
After some time, Peter, another good friend of Marios and Andreas, proposed to become part of the company by paying an amount of money to the two shareholders for the purchase of 30% of the share capital. Peter has paid each shareholder an amount of €40.000 to acquire 15% of their holding.
Peter was later approached by Marios and together they agreed to remove Andreas from the position of the director. Andreas was therefore not able to receive a salary as a director nor could he receive profits from the company since the current directors were extracting all the company’s profits in the form of salaries and were not paying out dividends.
Required:
Discuss the issues surrounding the case and provide your opinion whether a claim can be brought against the other two shareholders
Yes, a case can be filed againts two sharehoders who are paying all the profits in form of salaries and not distributing dividends. As per the law of jurisdiction where company is registered legal action can be taken against both the directors.
As per the prevailing law, a limit is fixed on the directors remuneration and company can not pay salaries to directors in excess of that limit.
Eg. In india as per Section 197(1) of companies Act 2013 following is the maximum limit on directors remunertaion:
Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits
The total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect of any
financial year shall not exceed eleven per cent. of the net profits of that company for that
financial year computed in the manner laid down in section 198 except that the remuneration
of the directors shall not be deducted from the gross profits:
Provided that the company in general meeting may, with the approval of the Central
Government, authorise the payment of remuneration exceeding eleven per cent. of the net
profits of the company, subject to the provisions of Schedule V:
Provided further that, except with the approval of the company in general meeting,—
(i) the remuneration payable to any one managing director; or whole-time director
or manager shall not exceed five per cent. of the net profits of the company and if there
is more than one such director remuneration shall not exceed ten per cent. of the net
profits to all such directors and manager taken together;
(ii) the remuneration payable to directors who are neither managing directors
nor whole-time directors shall not exceed,—
(A) one per cent. of the net profits of the company, if there is a managing
or whole-time director or manager;
(B) three per cent. of the net profits in any other case.