Officers in Default

I. INTRODUCTION

The term ‘officer in default’ has been defined u/s 2(60) of the Act[1] and it came into force on 12th September 2013 notification vide SO 2754(E). The term default means doing something which is not reasonably expected to be done or not doing anything which ought to be done in normal circumstances.[2] This paper will deal with the broadened scope of ‘officer in default’ in the first part. Second part will deal with the prosecution procedure of such officers. Moreover, how Managing directors can also qualify to such provision will also be dealt with. Lastly, the author will analyze the current position of law on the topic of ‘Officers in default’.

II. 1956 AND 2013 ACT: OFFICER IN DEFAULT

The 1956 Act had ‘Officer in default’ provision u/s 5[3]. It clearly states that ‘intention’ of the officer needs to be established so as to show that the director was at fault. But later on with the 1988 Amendment to the Act, the requirement of intention was dropped[4]. Cases such as SS Jhunjhunwala v. State[5] and Nanjundiah v VG, ROC, Maharashtra[6] show us how the courts showed their understanding of who can be an officer in default post 1956 Act. In the former case, one of the manager had been issuing notices to the company’s member to comply with the principles which need to be followed in the normal circumstances but they weren’t doing so. A case was filed in the court against the manager for such mismanagement but the court didn’t declare him liable for such mismanagement. In the latter case, there were few directors who were made liable for the meetings which they never attended, the court gave relief to the directors by not declaring them to be liable as they never had the knowledge of what’s going in the proceedings.

Whereas,  the  position  has  changed  with  the  SO  2754(E)[7]  of  2013  by  the  Ministry  of Corporate Affairs which has defined the scope of ‘Officer in default’[8] which also includes the term ‘key managerial position’(which is defined u/s 2(51)) under sub clause 2 of S.2(60). Both (51) and (60) of S.2 need to be read concurrently for coming to the meaning which the legislators intent to. Now, the qualification to fall under S.2(60) has been lessened. Sub-clause (v) which speaks “any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity” Shows that people other than categorized officers, if fulfilling the requirements, then they will also be made liable for the mismanagement. ‘Whole time directors’[9], the CS[10], CFO[11], CEO[12], Managing director. Sub-clause (vii) also includes share transfer agents, merchants bankers and registrars as among those who would fall under the ambit of officer in default in matters related to “issue or transfer of shares”[13]. Well, now with the changed position of law w.r.t ‘Officers in default’ ,those directors will also be liable who had some knowledge of the misconduct going on but didn’t came forward with any action to stop it. The new section provides an expanded list of position holders who can be made liable and also provides for sub-clause (iv) & (v) which includes ‘any person’ signifying the clear intent of the legislators of not making the list exhaustive. The courts have the power to interpret in such a way as to serve the very purpose of the Companies Act 2013.

III. HOW TO PROSECUTE THE OFFICERS IN DEFAULT

For there to be prosecution of the officer in default, say of the director, certain conditions need to be fulfilled as per the Act[14]. In the Ravindra Narain v ROC, Jaipur[15] case, a question arose whether an ordinary director can be subjected to the S. 2(60) when there is no MD[16] and WTD[17]. The court decided in the affirmative. Rationale being that since they are the ‘officers’ who have the responsibility of managing the affairs of company, they are liable for the wrongful acts. There can be cases where company’s chairman can be held liable where the chairman has wrongly distributed the share certificates after the process of distribution has been carried out[18].

Well it becomes clear that the courts have interpreted the meaning of the ‘officer in default’ in a very broader sense but the courts need to make sure that ordinary directors are not made liable unnecessarily. Indian courts need to make sure that they are able to establish the default on part of them; otherwise it will be deemed ultra vires use of power by the courts when such hasn’t been intended by the legislators[19].

Lastly, if it is found that the default by the director had been done before coming under the company, then it will be a different case and courts cannot make him liable.

IV. MAKING DIRECTOR’S LIABLE UNDER THE PROVISION

Under normal course when complaints are filed against the people such as the director then the complainant needs to compulsorily do certain things. One cannot simply name him in the complaint, to make him liable for the act. There needs to be clear mention of 2 things:

i. Whether the person alleged (here, it’s the director) was in-charge of the particular department/act on that specific day?

ii. How is the director specifically liable?

This finds clear illustration in the case Nucor Wires Ltd. v. HMT International Ltd[20] in the paragraph:

To launch a prosecution against the directors of the company, there must be specific allegation in the complaint as to the part played by them in the transaction. There must be a clear and unambiguous allegation as to how all the partners are in charge of and responsible for the conduct of the business of the company. There should clear description and also allegations that the offence was committed with their knowledge and that they had exercised due diligence to prevent the commission of such offence.”[21]

Now if the person making the complaints fails/forgets to mention the officer against whom he is making allegations then the court won’t on its own take it as against the director. Specific averments are very necessary to prosecute the director, which can’t be done otherwise. The draft of the complaint should also have the responsibilities that the alleged director holds in the office.

A. DISHONOR OF CHEQUES

An example of ‘dishonor o cheques’ will prove a better tool in solving the doubt as to when director can be made liable. Let us assume that there is a alleged cheque that got dishonored in the bank. Then before making every director liable for such, the complainant needs to allege only those director’s whose sign is on the cheque. Well, director’s who didn’t sign on the disputed cheque wont be liable as per the definition of ‘Officer in default’. Well, if such was done under his order or under his knowledge then he can be made liable. This is because of broadened meaning given to ‘officer in default’ in the 2013 Act.

The courts have reiterated in cases like Saroj Kumar Poddar v. State (NCT of Delhi[22]) that a director who is non-signatory to a cheque cannot be subjected with the liability of the dishonored cheque.

V. DEFAULT ON PART OF THE MANAGING DIRECTOR

As we saw above, that the directors are held responsible for the dishonored cheque’s only in cases where the complainant is able to establish that the director was in charge of issuing cheques and he had knowledge of such cheque being issued, otherwise not( as in the Saroj Kumar Poddar[23] case). But, here we are dealing with the MD who is by default the in-charge of the functions of the company. Therefore, allegation itself can make him liable for the conduct. The MD and the person who has signed the cheque together will be liable under S. 2(60). The Everest Advertising case stated that “directors are deemed to have knowledge of things done on behalf of the company in the ordinary course of its business”[24]. The logic for making director liable is that since he is in a position to stop that default from happening and he didn’t do it by choice, that’s why he is liable, thus making him constructively liable for the acts of the management of the company. The director isn’t tagged with a personal liability and is attributed to him because of his position( and the controlling power he has).

VI. RESIGNATION

Well, major portion of this part has already been discussed above. Through this part, the author intends to clear the position of law when the resignation has been made and the cheque has been presented later. Though, at the time of presentation of cheque the person has no power or authority, but since he was holding the post at the time of issuance of cheque, he will be considered ‘officer in default’ under s. 2(60) read together with clause (51).

VII. CONCLUSION

The drafters of the 2013 Act have taken great consideration of the demand to widen the meaning of the term ‘officer in default’. Even before the coming of this Act, the Amendment of 1988 has dropped the requirement of ‘intention’ from the clause of ‘officer in default’, which was necessary at that time. Legislators have given considerable importance to Company Law and without much politicization of the issue of whether to come up with a completely new Act or not, has come up with a better Companies Act. Specifically talking about widened scope of ‘officer in default’ it can be said that it has been done to increase transparency and accountability in the system. This can be seen by inclusion of clauses (iv) to (vii) which have covered in its ambit-any person, share transfer agents, etc.


[1]. The Companies Act 2013

[2]. Ramaiyya on Companies Act 2013.

[3]. ‘officer in default’means any officer of the company who is knowingly guilty of the default, non-compliance, failure, refusal or contravention mentioned in that provision, or who knowingly and wilfully authorises or permits such default, non-compliance, failure, refusal or contravention.Available at http://www.wipo.int/edocs/lexdocs/laws/en/in/in088en.pdf

[4]. Amended definition of the term ‘officer in default’ as per the Companies (Amendment) Act 1988.

http://bombayhighcourt.nic.in/libweb/actc/yearwise/1988/1988.31.pdf

[5]. 1970 All WR (HC)

[6]. (1986) 59 Com Cases 356 (Bom)

[7]. Ministry of Corporate Affairs. Available at <http://www.mca.gov.in/Ministry/pdf/CommencementNotificationOfCA2013.pdf >

[8]. “Officer who is in default” for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or

otherwise, means any of the following officers of a company, namely:—

  • whole-time director;
  • key managerial personnel;
  • ;where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
  • any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorizes, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
  • any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
  • every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;
  • in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

[9]. Sub-clause (i) of S.2(60)

[10]. Stands for Company Secretary

[11]. Stands for Chief Financial Officer

[12]. Stands for Chief Executive Officer

[13]. Sub-clause (vii) of S.2(60)

[14]. The Companies Act 2013

[15]. (1975) 26 Com Cases 213 (Cal)

[16]. Managing Director

[17]. Whole Time Director

[18]. Supra 11

[19]. Vijayalakshmi v. SEBI, (2000) 100 Com Cases 726:2000 CLC 974: (2000) 25 SCL 183

[20]. (1998) 91 Com Cases 850 (Kant)

[21]. Id.

[22]. (2007) 137 Com Cases 837 (SC)

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