Officer in Default – When is he Liable for Penalty? - MMJC

Introduction.

Section 2 clause 60 of Companies Act, 2013 [‘the Act’] defines the term ‘Officer in Default [‘OID’]’[1]. Certain sections of the Act hold an OID responsible for non-compliances viz. sub-section (7) of section 135 of the Act[2], sub-section (11) of section 90[3] of the Act etc., Recently it is seen that adjudicating authorities have been penalizing OID for certain non-compliances. In this article we shall have a look at the adjudication orders passed by Registrar of Companies [‘ROC’] where penalties were levied on OID to understand as to who were considered as officers in default and why?

Landmark ROC orders.

Adjudication orders passed by different ROCs help us to understand the views taken by different ROC while determining the person who is OID. Following are some of such orders.

• Smith N Smith Chemicals Limited: In this order dated 5^th September 2023, passed by ROC Delhi, the company had failed to spend the CSR amount and also had failed to report the same in the board’s report. The company argued that, the executive director was the only person responsible for CSR compliance and therefore only he should be penalized and other non-executive directors should not be penalized as they were not involved in day-to-day activity and were unaware of said non-compliance. ROC Delhi held that, “it is a trite principle of law that in case the law casts an obligation upon any person/body, the liability in case of default in complying with such obligation would also squarely lie with such person/body.”

The ROC Delhi further held that, “it is clear that section 135 of the Act and rules made thereunder casts an onus on the Board to comply with the provisions. The Board here refers to all the directors of the company, whether executive or otherwise.” With respect to use of definition of OID as per section 2(60), the ROC stated that, “section 2 begins with the words, “unless the context requires otherwise”. Thus, the principle of ascertaining the officer-in default on the basis of section 2(60) would only hold good if the concerned provision does not identify the officer-in-default. Once such officer is identifiable under the relevant provision, the general definition of section 2(60) would no longer hold the sway.’”

• M/s. Madras Fertilizers limited

In this order dated 29^th November 2022 passed by Regional Director Southern Region, the order passed by ROC Chennai was challenged. The company during the conduct of annual general meeting, had distributed SBI cards as free gifts which was non-compliance of SS-2 which prohibits distribution of free gifts at general meetings. ROC Chennai had penalized managing director and whole-time director along with the company for this non-compliance. However, the Regional Director while setting aside ROC Chennai’s order, said that, as per section 205 of the Act ensuring compliance of secretarial standards is the duty of the company secretary and since the company had a full-time company secretary, it was his responsibility to ensure the same. Hence the Regional Director ordered that the penalty imposed against managing director and whole-time director of the company is set aside and ordered the ROC Chennai to take action against CS of the company.

• Go Digit Life Insurance Limited

In this order dated 21^st June 2024 passed by ROC Pune, the company had delayed in filing of form BEN-2 under sub-section (4) section 90 of the Act. The company submitted before the ROC Pune that the board of the company through a resolution had appointed the company secretary as OID for the purpose of sub-section (4) section 90 of the Act and therefore, only the company secretary is liable for penalty. ROC accepted the company’s contention that, since it was responsibility of the CS to ensure compliance of sub-section (4) of section 90, she is the OID and liable for penalty under sub-section (11) of section 90 of the Act[4].

Learnings from analysis.

It is a general understanding that, whenever the section says penalty be imposed on OID, all the persons included in definition as per section 2(60) are to be penalized. However, analysis of above orders show that this is not the case.

Whether all individuals enumerated under sub-section (60) of section 2 of the Act should be penalized or not shall depend on the which section of the Act is violated.

While determining the actual OID, one should try to understand, that on whom does the section cast responsibility to comply and that person only shall be considered as OID for non-compliance of that section. For example, section 134 of the Act[5] says that, board of directors should attach a report to financial statements. That means, if the board’s report is not attached, then full board of directors shall be considered as OID as it was responsibility of board as a whole.

It is also sometimes seen that companies themselves designate a person as an OID for compliance with particular section. This was also seen recently in the ROC adjudication order in the matter of Go Digit Life Insurance limited. In this case the company itself has determined the person responsible for compliance with section 90 of the Act by passing a board resolution in this regard and intimating the same to ROC. When company itself has determined the responsible person, there is no need to identify OID separately.

So, if no is determined by company specifically for the purpose of compliance with a particular section of the Act, then reference can be made to definition of OID under section 2(60).

Conclusion.

Even though the Act provides definition of OID, it is not appropriate to apply this definition for imposing penalty under all sections. Only that person who is responsible for that particular non-compliance should be identified and should be penalized, for the reason that, all other persons were no responsible for that compliance and hence were not guilty of its non-compliance. It is advisable for the companies to designate a specific person who shall be responsible for ensuring all compliances and who shall be treated as OID in case of any non-compliance. Generally managing director or executive director or company secretary may be such person.

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[1] “(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;”.

[2] (7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.]

[3] [(11) If a company, required to maintain register under sub-section (2) and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein, the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to a maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

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