Effect of retirement or resignation from directorship
The Companies Act 1956 imposes a number of obligations and duties on the officers of a company (ie, those in charge of the management). If any officer contravenes the act, that officer is said to be an 'officer in default'. Section 5 of the act specifically defines the term 'officer in default' and lists the officers who can be brought under the purview of the term, as follows:
"a) the managing director(s);
b) the full time director(s);
c) the manager;
d) the secretary;
e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;
f) any person charged by the Board with the responsibility of complying with that provision:
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 thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form."
Officers who fail to comply with the act may be punishable with a fine, imprisonment or both, depending on which provision of the act has been contravened.
The Ministry of Corporate Affairs has on numerous occasions examined the circumstances under which prosecution can be launched against the officers of a company for violating the act - that is, who should be treated as an officer in default. It has come to the knowledge of the ministry that the registrar of companies has brought cases against all directors of a company for violations, without differentiating between the officer in default and other officers.
The ministry has also noted that penal actions have been initiated against certain directors who were not charged with the relevant responsibility. Through Circular 1/2011 (dated July 29 2011), the ministry clarified that no director shall be held liable for any violation by the company or by any other officer of the company, if the violation occurred without his or her knowledge and without his or her consent or connivance, or where he or she has acted diligently.
In the circular, the ministry further clarified that before taking penal action under the act against the directors, the following compliances should be verified by the registrar of companies:
- Where a director has resigned and the company has not filed a Form 32 (as required under Section 302(2) of the act), but the director concerned has informed or endorsed a copy of his or her resignation to the registrar of companies, the registrar should check with the company whether the director has actually resigned.
- Where the status of a director (ie, whether he or she is a nominee director) is not reflected in the annual return or other company documents filed with the registrar of companies, the documents should be cross-checked with the annual report filed by the company. Through Circular 42/7/73-CLII (dated September 20 1973), the ministry (then the Department of Company Affairs) clarified that a person appointed as a nominee director is responsible for the proper discharge of his or her obligations and fiduciary responsibilities under the statute in the same manner as an ordinary director, regardless of the interests that he or she represents or protects.
- The timing of the offence is material in identifying the director's responsibility - Form 1AB should also be checked, in case anyone has been charged by the board under Section 5(f) of the act with the responsibility of complying with a particular provision or in case any director has been specified by the board under Section 5(g) of the act.
- Special directors appointed by the board of industrial and financial reconstruction under Section 16(6)(b) of the Sick Industrial Companies (Special Provisions) Act 1985 will incur no obligation or liability for actions carried out (or failed to be carried out) in good faith and in discharge of duties. Hence, they shall be excluded from the list of officers in default.
The circular further provides that in case of default under Sections 209(5), 209(6), 211 and 212 of the Companies Act, the following persons shall be deemed 'officers in default' for the purpose of prosecution:
- where there is a managing director or manager, the managing director or manager (as the case may be) and, in addition, the company secretary appointed under Section 383A of the act or the person who has been charged with the work of maintaining and preparing annual accounts in compliance with such provisions;
- where there is no managing director or manager, every director and the company secretary appointed under Section 383A of the act; and
- any persons among the officers and employees other than the managing director, manager or board of directors who has been charged by the managing director, manager or board of directors with the specific responsibility of complying with the provisions, in addition to the managing director, manager or board of directors (as the case may be).
Directors, including non-executive directors, officers and employees not connected with responsibility for the provisions should not be arrayed as delinquent directors. While considering non-executive directors for inclusion in the list of officers in default for a particular violation of the act, it should be checked:
- whether the violation took place with his or her knowledge attributable through board process or with his or her consent or connivance; and
- whether he or she acted diligently.
Under Section 621 of the act, where prosecution must be filed against any government company, its directors or officers or members of Parliament and members of legislature, the registrar of companies should seek prior authorisation of the central government.
The ministry further clarified that the registrar of companies must be thorough when deciding whether a person to be implicated is an 'officer in default' by examining the company's annual return, Form 32 and DIN-3 database, as held by the registrar in order to avoid wrongful prosecution. If the registrar is in any doubt as to whether the director or officer can be held liable after applying the above parameters, it should refer its decision to the regional director, who will guide the registrar in the matter.
Through Circular 6/94 F 3/41/93-CL-V (dated June 24 1994), the ministry (then the Department of Company Affairs) clarified that where the penal provisions provide for punishments of 'officers in default':
"prosecution [should] be filed against the managing director(s), full-time director(s) and manager, apart from the secretary, if any, and the company and only in those cases where there is no such managerial personnel, [should] prosecution be filed against all ordinary directors apart from the secretary, if any, and the company."
In SMS Pharmaceuticals Ltd v Neeta Bhalla,(1) the Supreme Court applied the principle that a managing director is by definition in charge of the company's affairs and can be made liable ipso facto. The court held that:
"Merely being a director of a company is not sufficient to make the person liable under Section 141 of the Negotiable Instruments act, 1881. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of Section 141 of the Negotiable Instruments act, 1881 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases…
By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under Section 141 of the Negotiable Instruments act, 1881. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under sub-section (2) of Section 141 of the Negotiable Instruments act, 1881."
However, no director is immune from prosecution, and a director can be included in the accusation if his or her role can be attributed to him or her by default.
Effect of retirement or resignation from directorship
In MAA Annamalai v State of Karnataka,(2) a complaint for cheating was filed. The director in question, who was charged along with others, had vacated his office before the offence took place. There was no material to show that he was in charge of the company's affairs at the time that the offence occurred. In addition, there was no allegation against him in the first information report. Counsel for the complainant argued before the court that the complainant had been wrongly included in the list of accused persons. The Supreme Court quashed his prosecution.
Anyone that wishes to take up a managerial position in an Indian company should carefully study the provisions of the act and should avoid taking up a position without weighing up the pros and cons. Furthermore, directors who have wrongly been served a notice by the registrar of companies can challenge the notice on the aforementioned grounds.
Directors who resign from a directorship by simply tendering a resignation letter to the company and without ensuring that the company files a Form 32 informing the registrar of companies of the director's resignation should send a copy of their resignation letter directly to the registrar by registered post to avoid being wrongly prosecuted.
For further information on this topic please contact Rohit Jaiswal or Gunjan Gupta at Singhania & Partners LLP by telephone (+91 11 4153 1000), fax (+91 11 4153 1001) or email ([email protected] or [email protected]).