Meaning of Officer and Officer in Default

We have discussed in our various articles and you know that a company or a body corporate is distinct entity from its members, having separate legal status, perpetual succession and right to have its own assets and liabilities. But an entity is not able to acts alone and individual or natural persons are required to carry on its day to day operations. In case of a company theses persons together called Board of Directors and these people are behind success and failure of a company.

The Board of directors and think tanks for a company have duty to formulated plans, policies, appoint various officers and employees for smooth working of the company and deploy the excess funds of the company for safeguarding the interest of the company. They are bind themselves in fiduciary duty with the company and suppose to act for the benefit of the company.

A company is required to carry on its business with the rules and regulations of the law of land and in some circumstances, a company violates the established rules and regulations and is hence penalized by the enforcement authorities.

We can divide the duties and liabilities of directors into two parts as;

1. Duties and liabilities of directors under the Companies Act, 2013;
2. Duties and liabilities of directors under other applicable Indian statutes.

In the recent past large conglomerates such as Satyam, Enron etc. had been closed down due th various types of frauds and diversion of funds by theses companies management for their individual benefits. In various scams the directors of companies and involved and these incidents sacked the trust of general public in large corporates.

The Companies Act, 2013 first time define duties and liabilities of various types of managerial personnel and the directors. The penalties provisions have also significantly amplified. One of the key concept of the Companies Act, is providing the meaning the term' officer in default' and the liability of default by the company will be imposed on the ' Officers in default'.

While it is difficult to provide any particular standard that will determine an individual's exposure to liability, a person will generally be held liable for wrongdoing committed by a company if he or she falls into either of the following categories:

1. any person who, at the time the offense was committed, was in charge of and responsible to the company for the conduct of its business; or
2. any director, manager, secretary, or other officer of the company:
3. with whose consent and connivance the offense was committed,or
4. whose negligence resulted in the offense.

The Indian Supreme Court has, in this context, ruled that a managing director is prima facie in charge of and responsible for the company's business and can be prosecuted for misdeeds by the company. But only those officers of the company who fall within the scope of the definition “officer who is in default” are covered.

Nat'l Small Indus. Corp. Ltd. v. Harmeet Singh Paintal & Anr., (2010) 3 S.C.C. 330 (India); K.K. Ahuja v. V.K. Vora, (2009) 10 S.C.C. 48 (India)

A simple averment in a complaint that a director was in charge of and responsible for the conduct of the business of the company is sufficient to state a claim against an officer who is in default.

In cases of fraud, it may be difficult to have a clear line of demarcation as to whether the director could have prevented the fraud if he or she had used due diligence. While the role of non executive directors may consist of providing strategic guidance, this more limited status may not protect them from liability. Nor will being a nonparticipant at board meetings. The law now requires directors to adopt an inquisitive approach and question the company's background information, how it was obtained, and the decisions that are taken based on such information.

With increasing global interest in Indian companies and a changing legal landscape, new players will continue to enter the domain unaware of the possible consequences. Consequently, director indemnification clauses in shareholder and director agreements should be cautiously and thoroughly negotiated. Directors' and officers' liability insurance is also a tool that is becoming increasingly popular in India. Such insurance and indemnification should sufficiently cover the director even after resignation.

The Indian economy presents myriad and growing opportunities, but would be corporate directors and their lawyers should tread carefully. Rapidly modernizing laws on director and officer liability require their full attention.

As per the provisions of the Companies Act, 2013 , at many places , in case of default , the words used are not 'directors' the words used are, either the' Officer' or the ' Officer in default'. These terms have wider meaning and includes director or the managerial personnel's appointed in various capacity under an organisation.

LET'S CONSIDER SOME DEFINITIONS

SECTION 2(59) defines officer; to include

1. Any director;
2. Manager; or
3. Key Managerial Personnel; or
4. Any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

SECTION 2(60) “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: -

(i) whole-time director;

(ii) key managerial personnel;

(iii) 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;

(iv) 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, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) 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;

(vi) 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;

(vii) 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.

Please Note That: The Directors of a company includes Independent Directors (IDs) and Non-Executive Directors ( NEDs) also.

SECTION 149(12) is a non-obstante clause, which states that an independent director and a non-executive director (not being promoter or key managerial personnel), would be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

The MCA- through its circular dated 2^nd March,2020 provides a clarification on both the prosecution filed and internal adjudication proceedings initiated against Independent Directors, Non-Executive Directors and Non-Promoters and Non-KMPs as follows;

1. Civil or Judicial Proceedings should not unnecessarily be intimidated against IDs or NEDs or Non-Promoters or Non-KMPs unless sufficient evidence exits against them;
2. The Registrar if required to follow Standard Operating Procedures, as prescribed by MCA, while proceedings against 'Officer in default'.

The circular reiterated Section 149(12)[2] of the 2013 Act and clarified that IDs and NEDs (non-promoter and non-KMP) should not be implicated in any criminal or civil proceedings under the 2013 Act, unless they were a part of a default/non-compliance committed by the company.

A default/non-compliance would include such acts of omission or commission by a company which had occurred with the knowledge of the IDs or NEDs attributable through Board processes with their consent or connivance or where they did not act diligently.

For all ongoing cases or cases where proceedings are to be initiated, the registrar should follow the below standard operating procedures:

1. Ascertain the nature of the default: The registrar should determine the nature of default in a company.
2. Ascertain officers in default: At the time of serving notices to the company, during inquiry, inspection, investigation, or adjudication proceedings, registrar should seek necessary documents, to ascertain the involvement of the concerned officers of the company. (Records available in the office of the registrar, including e-forms DIR-11 or DIR-12, along with copies of the annual returns or financial statements should be examined to ascertain whether a particular director or KMP was serving in the company as on the date of default.)
3. Proceedings against IDs or NEDs: Where lapses are attributable to the decisions taken by the Board or its committees, all care must be taken to ensure that civil or criminal proceedings are not unnecessarily initiated against IDs or the NEDs unless sufficient evidence exists to the contrary.
4. Guidance from MCA on proceedings: In case of any doubts with regard to the liability of any person, for proceedings to be initiated, guidance may be sought from MCA (through the office of the Director General of Corporate Affairs). Consequently, any such proceedings must be initiated after receiving due sanction from the MCA.

Cases which are already under prosecution, but which do not meet the criteria mentioned in the circular, then those cases should be submitted to MCA for necessary examination and further direction thereon.

CONCLUSION

it is necessary and in the interest of the nation, the public and all stakeholders to regulate the conduct of large business organisations, especially those in which the public are substantially interested. A corporate house in using various types of resources such as human, social, natural , minerals etc. for its profitability and development. They should be responsible and accountable to the nation, social and environment. The directors are the mind behind all types of big or small companies and their duties and actions should be regulated for the benefits of the company. The Companies Act, 2013 defined first time the duties and liabilities of directors and KMPs. First time definition of ' Officer' and ' Officer in default' has been given in the Companies Act, 2013. Directors of the company are also included in ' Officer in default' and it also includes Independent Directors (IDs), Non-Executive Directors ( NEDs) , Non-Promoter Directors and Non-KMPs. The MCA has issued circular and provides that the IDs, NEDs and Non-KMPs should be prosecuted if an only if there will be evidence of their insolvent in the fraud or default. An Independent Director and an Executive directors are positioned on different positions in an organisation because of information asymmetry . An Executive Director is more informed on internal position of an organisation than an Independent Director and hence the treatment of these directors (IDs, NEDs & Non-KMPs) should on different footings than other directors.

DISCLAIMER: The article produced above is only for information and knowledge of readers. The views expressed are the personal vies if the author and same should not be considered as p[professional. Advise. It is advisable to consult with professional before taking any action on above article.