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Greetings Tutor, I hope you are doing well, can you help me in understanding what is “Director’s Service Contract”?
I’m really confused with the above mentioned term.
Is it relate to appointment of a person as Director (Executive or Non-Executive Director)?
or Do they relate to that typical Employment Contract of Executive Director?Although as per CA 2006, ” Directors’ Service Contract lasting more than 2 years must be approved by the Members”, how is that possible when the Directors are to be typically retire on a rotational basis after every 3 years. What will happen if the Service Contract is only for 2 years? Are they require to leave office on completion of 2nd year ?
Hi Vikas
No, retirement after two years is not a requirement. When a person is appointed as a director, that’s a position wherein the director becomes a member of the Board and is part of the collective responsibility of running the company and safeguarding its assets for the benefit of the company’s members.
But there’s nothing within that act of appointing that dictates the terms under which the director is to operate – for example, there is no determination of salary, pension, bonus, holidays, duties, restrictions nor other relevant terms of employment.
Looking at that (non-exhaustive) list of potential matters to include in a contract of employment (for that is what a director’s service contract is) it would be potentially available for a company to set an extraordinary salary level for an extraordinary period of time, thus locking the company into an outrageous contractual situation with that director.
Thus, any service contract with the director would not normally exceed one year. But two is a possibility. However, anything over two years would require the express consent of the members.
Does that explain it for you?
Thank you Tutor, in regards to the same, does Non-Executive Directors also have such Contracts? because as far as i know they are not considered to be an Employee of the Company (rather an outsider appointed mainly for the purpose of Corporate Governance).
Do they have a Salary Package? because while i was preparing for BT i studied that they are paid “sitting fees” rather than salary.
The remuneration of a non-executive director varies from company to company. Some may be paid a fixed amount for, say, a year where others may be aid on a pro-rata attendance basis.
No hard and fast rules about that.
Yes, non-executive directors will have a service contract.
Just because a non-executive director is not an employee does not preclude the possibility of a service contract. Imagine a self-employed electrician whose services are widely used by a company. That electrician, not being an employee, will nevertheless have a service contract.
Is that ok?
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