Officer in Default – An Overview
Meaning of 'officer'
Section 2(30) of the Companies Act, 1956, provides that officer includes any director, manager, secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the director is or are accustomed to act. Therefore, it refers only to the officers of the company and not subordinate staff.
Definition of the term 'officer' is to be read in the context provided and not independently thereof. [Haryana Seeds Development Corpn. Ltd. v Aggarwal (J.K.) (1989) 65 Comp Cas 95 (P&H)].
The definition of 'officer' cannot be taken as exhaustive or conclusive and, therefore, Secretary, Assistant Secretary, accountant and cashier of a bank are all officers of bank. [Hanuman Bank Ltd., In re (1964) 34 Comp Cas 640 (Mad); Official Liquidator, Golcha Properties (P.) Ltd. v Dhadda (P.C.) (1980) 50 Comp Cas 175 (Raj)]
Meaning of 'officer who is in default'
The Companies Act, 1956 in number of sections uses the term 'officer in default' when affixing a person with liability for offences, i.e. if default is made in complying with a section, the company and every officer of the company who is in default shall be guilty of an offence under that section. This is followed by the specified penalty consisting of fine or fine and imprisonment in certain cases.
Section 5 of the Companies Act, provides that, for the purpose of any provisions in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression 'officer who is in default' means all the following officer of the company, namely:—
(a) the managing director or managing directors;
(b) the whole-time director or whole-time directors;
(c) the manager;
(d) the secretary;
(e) any person in accordance with whose directions or instructions the Board of directors of the company are accustomed to act;
(f) any person charged by the Board with the responsibility of complying with that provisions:
Provided that the person so charged has given his consent in this behalf to the Board;
(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors:
Provided that where the Board exercises any power under clause (f) or clause (g), it shall within 30 days of the exercise of such powers, file with the Registrar a return in the prescribed form.
Therefore, all the above said seven specified categories of officers of the company would be deemed to be an officer who is in default irrespective of whether they were party to the default or not. It would be enough to show that a statutory provision has not been complied with in order to bring them under the mischief of the section. However, section 5 applies only to those provisions of the Act, which uses the expression 'officer who is in default'.
A close analysis of section 5 reveals the following:—
(a) Liability as officer in default is fastened on all the officers specified in clauses (a) to (g) collectively.
(b) If a person is shown as director in return, he is officer of the company. [Marthanda Varma (H.H.) v Registrar of Companies (1988) 64 Comp Cas 125 (Kar)]
(c) Liquidator is an officer of the company. [Official Liquidators, Baroda Batteries Ltd. v Registrar of Companies (1978) 48 Comp Cas 120 (Guj); Prahallad Bai Lath v Registrar of Companies (1979) 49 Comp Cas 317 (Ori)]
(d) If company have any of the officers specified in clauses (a) to (c), the other directors will not be held as officers in default.
(e) A company which does not have any of the officers, specified in clauses (a) to (c), any director or directors specified by the Board will be held as officers in default.
(f) If there is no officer as mentioned in clauses (a) to (c) and also the Board has not specified any of them, then all the directors will be held as officer in default, it may include employee directors, part-time directors and nominee directors as in default. Nominee directors of creditors, institutions, government, joint venture partners etc, generally, do not enjoy any special immunity. Financial institution nominee directors, however, get immunity under the State Financial Corporation Act but it has to be established that the accused person has acted in good faith. [Geethanjali Mills Ltd. v Thiruvengadathan (1989) 1 Comp LJ]
(g) When the directors on the Board of a company are in fact dummy persons and other person who remain behind the scene control the act of directors, such a person may perhaps include a company or firm, in which case the directors of that company or partners of that firm would be treated as persons in accordance with whose directions or instructions the Board of directors of the other company are accustomed to act.
(h) The expression 'any person charged by the Board' refers only to officers of the company and not to sub-ordinate staff. Further, the Board should charge a person with the responsibility of complying with any specific responsibility by passing a resolution (see Appendix 1) and the person so charged is required to give consent in Form 1AB. Thus, where a company has not obtained consent of the person as prescribed, he cannot be charged by the Board.
(i) The consent of the person as mentioned in clause (f) shall be filed electronically with the Registrar within 30 days in an e-Form 1AA with the filing fee enclosed with Form 1AB.
Interpretation of "person in accordance with whose directions or instructions directors are accustomed to Act"
Section 7 provides that except, where the Companies Act expressly provides otherwise, a person shall not be deemed to be, within the meaning of any provisions in this Act, a person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, by reason only that the Board acts on the advice given by him in a professional capacity.
Therefore, the professional advisors, auditors, debenture trustees, bankers, are not covered under the officers who are in default.
The directors who are in the Board by virtue of their technical skill and professional competence are no different from other directors. [Madan Gopal Dey v State (1969) 39 Comp Cas 119 (Cal)]
Liability of all the directors' under section 5(g)
Section 5 of the Companies Act 1956, provides an exhaustive list of officers who are in default. In one of the landmark case of Ravinder Narayan v Registrar of Companies (1994) 81 Comp Cas 925, the Rajasthan High Court construed the interpretation of section 5 of the Companies Act that the definition of the 'officer in default' makes it clear that a director(s) of the company fall within the said definition if the company does not have any of the officers specified in clause (a) to (c) i.e. Managing Director(s), the whole time director(s) and manager and held that the accusation made against the directors of the company is liable to be quashed since at the time of offence Mr. X was the managing director therefore directors would not fall within the definition of officer in default.
All the Directors of the company will be officers in default within the meaning of section 5 only when there is no Managing Director, Whole Time Director, Manager, Secretary, a person, charged by the Board with the responsibility of complying with the provisions of the Act and the director/directors specified by the Board under clause (g) of section 5. [Vijay Kumar Gupta v Registrar of Companies (2004) 118 Comp Cas 604 (HP): (2003) CLC 777 (HP)]
What defence the director has?
On initiation of prosecution against him, the director needs to defend his case. Some indicative defenses, gathered from various judgments of courts, are list below:
(a) Director has to prove that he does not fall under the ambit of "Officer-in-default" under section 5 of the Companies Act.
(b) He was not in charge or control of the day-to-day affairs of the company, and hence, not responsible. It was held by Supreme Court that to be in charge would mean that the person should be in overall control of the day-to-day business of the company.
(c) Offence in question was committed without his consent/knowledge/connivance and he was not negligent in ensuring that laws are complied.
(d) Allegation is vague and not specific.
(e) The company has not been prosecuted along with the director. In the case of U.P. Pollution Control Board v Modi Distillary AIR 1988 SC 1128 the Supreme Court had held that there can be no vicarious liability of the director or officer for the acts of the company unless the company is also prosecuted along with the accused.
(f) The offence was committed after his tenure and he cannot be held responsible for anything happening after his resignation/retirement. [Chokkalingam Chettiar v Official Liquidator (1943) 13 Comp Cas 263 (Mad)] In the case of Anita Chadha v Registrar of Companies (1999) 96 Comp Cas 265 (Del): (1998) 31 CLA 60 (Del): (1998) 8 SCL 304 (Del), it was held by Delhi High Court that, for a continuing offence committed during his tenure, a director may not be held liable after his resignation/retirement, if he can prove that he had no access to the records of the company and also no connection.
(g) Under section 633(1) of the Companies Act, the director can seek relief from the court by proving that he has exercised all due diligence to prevent the commission of the offence, acted honestly, reasonably and having regard to all circumstances ought to be fairly excused.
(h) Granting relief u/s. 633 nothing to interpret with Sec. 370, if directors have acted in good faith. [Askok Bhatia v R.O.C., Delhi and Haryana]
(i) When it is held that the petitioner is not an officer in default as per section 5 the question whether such alleged default was willful or not does not arise. [Siva Prasad (C.V.) v Registrar of Companies (1997) 88 Comp Cas 420 (AP): (1997) 2 Comp LJ 205 (AP)]
(j) When a director of a company submits his resignation from directorship of a company by giving one month's notice and Articles of Association of that company provide that a director may retire from his office upon giving one month's notice in writing to the company of his intention to do so, then such resignation will take effect upon the expiration of such notice or its earlier acceptance by the company and the company is bound to intimate such resignation of director to Registrar of Companies by sending e-Form 32, and the said director is absolved from his liabilities for future transactions, even if e-Form 32 has not been sent to the Registrar. In the meantime if such company goes in liquidation, official liquidator is under duty to send e-Form 32, with the leave of the winding up court. [Thangavel (V.) v Associated Business Credits Ltd. (2006) 65 (I) CC (Comp. Sec.) 409 (Rep.) (CLB-HC)]
Important Points Based on Judgments by Various Courts
Directors where held as officer in default
The combined effect of clause (30) of section 2 and section 5 is that all the directors of the company cannot at all be construed as 'officers in default', unless each of the directors is an 'officer in default' within the meaning of section 5. Service of notice is a crucial factor for determining the question as to whether an accused could be construed as an 'officer in default'. [Sivandhi Adityan v Additional Registrar of Companies (1995) 83 Comp Cas 616 (Mad)] In case of an offence under Minimum Wages Act, each director is liable. [Hari Charan Singh Dugal v State of Bihar (1989) 66 Comp Cas 449 (Pat)]
Prosecution may be launched against all the directors by RoC
Where Registrar has issued notice to all directors in respect of default committed by a company under sections 161 and 220, but gets no response from any of them, prosecution may be launched against all of them as 'officers' in default. [Asstt. Registrar of Companies v Southern Machinery Works Ltd. (1986) 59 Comp Cas 670 (Mad)]
Punishment may be on such directors who are guilty of offence
Only those officers who are knowingly and intentionally guilty of the offence can be punished. [Consolidated Pneumatic Tool Co. (I) Ltd. v Addl. Registrar of Companies (1989) 65 Comp Cas 259 (Bom)].
It was held by the Supreme Court in the case of K.K. Ahuja v V.K. Vora (2009) 152 Comp Cas 520 (SC) that the liability arises from being in charge of and responsible for the conduct of business of the company at the relevant time when the offence was committed and not because on the basis of merely holding designation or office in a company.
If the Company is having managing director or whole-time directors, other directors are not as officer in default
Where the company had accepted excess deposits in contravention of section 58A, the director, who was neither a managing or whole- time director, not even a shareholder nor was he involved in day-to-day affairs of the company could not be said to be 'an officer in default'. [Nanjundiah (H.) v Govindan, Registrar of Companies (1986) 59 Comp Cas 356 (Bom)]
The Madras High Court in Madhavan Nambiar v Registrar of Companies (2002) 108 Comp Cas 1 (Mad) held that in the matter of proceedings for negligence, default, breach of duty, misfeasance or breach of trust or violation of the statutory provisions of the Act and the Rules, there is no difference or distinction between the whole time or part time director or nominated or co-opted director and the liability for such acts, commission or omission is equal. So also the treatment for such violations as stipulated in the Companies Act, 1956.
Allegation must be made on a particular director for a default
Where the managing director of a company was prosecuted for an offence under the Payment of Bonus Act, but there was no allegation in the complaint filed by the Labour Officer that the managing director was responsible for the conduct of the company's business, it was held that without an allegation that the person was in charge of and was responsible for the conduct of the company's business, the complaint could not be maintained. [Sivalingam Chettiar (V.B.) v Labour Officer (1986) 59 Comp Cas 701 (AP)].
When in complaint, accused were not shown as 'officer in default' they could not be held responsible merely because they were directors. [Rameshchandra Manilal Kotla v State of Gujarat (1998) 30 CLA 313 (Guj)]
Director is not responsible for an offence committed before his appointment
For offences committed prior to appointment of petitioner as managing director, he cannot be held as officer in default u/s 5. [Siva Prasad (C.V.) v Registrar of Companies (1997) 88 Comp Cas 420 (AP)]
Officer in default under section 73(2A) must be understood with reference to section 2(31)
A 'director of a company who is an officer in default' appearing in section 73(2A) must be understood with reference to the definition of 'an officer who is in default' contained in section 2(31) read with section 5. This definition includes the managing director or a whole-time director of a company. So understood, the liability imposed under section 73(2A) on a director of the company falls only upon a director who is 'an officer in default', as defined under section 2(31) read with section 5, and not upon any other director. The nominees of the Government or financial institutions on the Board of directors of the company, but not directly in charge of its administration as full time directors are exempted from personal liability. [Raymond Synthetics Ltd. v Union of India (1992) 73 Comp Cas 762 (SC)]
Whether officer in default can be prosecuted as 'officer in default' where the Company has a managing director?
Section 5 make it clear that criminal liability of ordinary directors would arise only in respect of a company which has no managing director or whole-time director or manager and where particular directors are not specified by the company to be liable. [Vijayalakshmi (G.) v SEBI (2000) 100 Comp Cas 726 (AP): (2000) 25 SCJ 183 (AP)]
Ordinary directors are not liable, unless no managing director or whole-time director or manager has been appointed
Ordinary directors, i.e. directors simpliciter are not liable, unless no managing director or whole-time director or manager has been appointed by the company. [see G. Vijayalakshmi v SEBI (2000) 100 Comp Cas 726 (AP); Ravindra Narayan v Registrar of Companies (1994) 81 Comp Cas 925 (Raj)]
Managing Director is prima facie deemed to be officer in default
In case of Managing Director, courts have usually held that he is, prima facie, deemed to be in charge and responsible for the conduct of business and management of the company and therefore liable for defaults. [Garda Chemical Pvt Ltd v Parthasarthy (R.), Asst. Collector Central Excise (1984) 2 ECC 384 (Bom)]