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Officer Who Is in Default - Pravir Malhotra
Officer Who Is in Default - Pravir Malhotra
COMPANY LAW I
RESEARCH PAPER
CHAPTER 1
INTRODUCTION
OVERVIEW
Human beings have a physical existence and also possess mental faculty. It can thus
be inferred that they possess the capacity to take decisions and actions. On the contrary
however, considering the fact that a corporations does not qualify as a natural person, it is
devoid of the capacity to do the same and thus, is not capable of taking actions or making
judgment on itself and hence requires a channel through which it can do the same.
the company hence serve as this channel for it to take actions and making judgments on
behalf of it. “A corporation is an artificial being, invisible, intangible and existing only in
contemplation of law.” It is essential to note that a corporation cannot have intention and
since it requires its directors or agents as a channel to act on its behalf, liability for intention
entity other than its directors and agents but since there exists a necessity for a company to
rely on directors and agents to carry out tasks, their role becomes primordial.
The Companies Act, 2013 has had a great impact on the world of corporate governance with
respect to non-compliances and penalties imposed on Directors. It may be noted that Working
Directors, such as the CEO, Company Secretary, Managing Director, CFO, Whole-Time
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Officer Who Is In Default – and the Companies Act, 2013
Director etc. are responsible for all the activities of a company, including compliances.1
Interestingly enough, if the company does not have any Working Directors, then all the
directors of the company are made liable for non-compliance under the Companies Act,
2013. This directly results in high amounts of monetary penalties for all directors.
It is essential to note that as result of The Companies Act, 2013, monetary penalties and
imprisonment have increased. Moreover, civil and criminal liability of the same not just falls
on the directors but also include “Officers In Default.” Furthermore, it is also elemental to
note that corporate governance requirements even for start-ups and unlisted companies have
been heightened even though there is no investment of public money whatsoever. In order to
make the statutes under The Companies Act, 2013 stricter, for ensuring compliance and
making key officials of companies more accountable, interpretation of the term ‘officer in
default’ has been revised making it inclusive of certain authorised persons of the company.2
It is crucial to note that The Companies Act, 1956, in its interpretation of the term ‘officer in
default’ in pertinence to appending a person with liability for offences, in case default is
made in compliance with a section, holds the company and all its officers in default guilty
under that section followed by specifying the sentencing guidelines for the same as per the
case. 3
The provision for an “officer who is in default” is included in the Companies Act, 2013 due
to a multiplicity of reasons. Simply put, it helps in ensuring that the officers of a company act
1
Mnkassociates, “Note on Officer in Default under Companies Act, 2013,” Tax Guru,
https://taxguru.in/company-law/note-officer-default-companies-act-2013.html
2
Startup Choice, “Officer in Default 2(60) Under Companies Act 2013,” Startup Choice,
http://startupchoice.com/blog/officer-default-companies-act-2013
3
CAClubIndia, “Officer in default - an overview,” CAClubIndia, https://www.caclubindia.com/forum/officer-
in-default-an-overview-186460.asp
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in the best interest of the company and the stakeholders, it helps in ensuring that they perform
their duties in good faith, and it makes the key officials of the company more accountable.4
The phrase “officer who is in default” is defined under Section 2(60) of Companies Act, 2013
as per:
S. 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
(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
(iv) any person who, under the immediate authority of the Board or any key
(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
(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
4
Supra note 1.
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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
Therefore, it is elemental to note that all the aforementioned seven categories of officers of
the company fall under the ambit of an officer who is in default, regardless of their
involvement in the default or not and could be proven merely by acknowledging that a
Bankers, debenture trustees, auditors, and professional advisors are not covered under the
ambit of “officer who is in default”. This is because a person in accordance with whose
directions or instructions the Board of Directors of a company acts or is accustomed to act are
only providing advice in a professional capacity and may not necessarily have a direct
bearing on the decisions of the Board of Directors.7 It is essential to note that directors in the
board by efficacy of their professional competence and technical skill are in no way different
Analysing section 5 of the statute divulges that (i) As mentioned before, liability as officer in
default is appended to all officers mentioned under clauses (a) to (g) collectively. (ii) A
return.9 (iii) Liquidator is an officer of the company.10 (iv) In a scenario wherein a company
has any of the officers mentioned under clauses (a) to (c), the other directors will not be held
as officers in default. (v) In the scenario opposite to the last point, wherein a company does
5
The Companies Act, 2013, Ministry of Corporate Affairs.
6
Supra note 3.
7
Ibid.
8
Madan Gopal Dey v State, [1969] 39 Comp Cas 119 (Cal).
9
Marthanda Varma (H.H.) v Registrar of Companies, [1988] 64 Comp Cas 125 (Kar).
10
Official Liquidators, Baroda Batteries Ltd. v Registrar of Companies, [1978] 48 Comp Cas 120; Prahallad Bai
Lath v Registrar of Companies, [1979] 49 Comp Cas 317 (Ori).
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not have any officers mentioned under clauses (a) to (c), any director specified by the board
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
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
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.11
An “officer who is in default” can be appointed by passing a Board Resolution after the said
person gives his consent in this regard to the Board. A Board Resolution for charging any
person with the responsibility of complying with any provision of Companies Act, 2013 has
11
Supra note 3.
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certain essential elements that this paper seeks to explore considering the practical nature of
the provision under consideration. Such a resolution explicitly states the designation of the
officer of the company who is being charged and obtains consent with respect to the
Form GNL-3 may be filed with the Registrar of Companies to bring such a resolution into
effect.12
12
Law Gyaan, “Officer and Officer in Default under the Companies Act 2013,” Law Gyaan,
http://lawgyaan.in/officer-officer-default-company/
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