ORDINARY DIRECTOR – OFFICER-IN-DEFAULT?

[Mr. M. GOVINDARAJAN]

Section 5 of the Companies Act, 1956 (‘Act’ for short) defines the term ‘officer-in-default’. For the purpose of any provision in the Act which enables that an officer of the Company who is in default shall be liable to any punishment of penalty, whether by way of imprisonment, fine or otherwise, the expression ‘officer who is in default’ means all the following officers 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 is accustomed to act;

(f)    Any person charged by the Board with the responsibility of complying with the provision. 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. Where the Board exercises any power under clause (f) and (g)  it shall, within 30 days of the exercise of such powers, file the Registrar a return in the prescribed form.  taxmanagementindia.com

According to the above definition it is clear that where the company who is alleged to have committed the default does not have managing director (s) and/or whole time director(s), manager or any of director(s) who may be specified by the Board in this behalf and then only all the directors can be said to be the ‘officer-in-default’. 

In ‘Ravindra Narayanan V. Registrar of Companies’ – (1994) 14 CLA 323 (Raj) the High Court held that the Directors are officer in default only where company does not have managing director, whole time director or manager. Considering the said decision the Department of Company affairs issued a circular No. 6/1994, dated 24.06.1994 in which it is observed that where penal provisions provide for punishment of ‘officers-in-default’ prosecution be filed against the Managing Director (s), whole time director (s) and manager apart from Secretary, if any, and the company and only in those cases where there is no such managerial personnel, i.e., Managing Director/Whole time Director/Manager, prosecution be filed against all ordinary directors, apart from Secretary, if any, and the company.

The said concept has been followed by the Gujarat High Court in ‘Kalpesh Dagli V. State of Gujarat and another’– (2012) 111 CLA 116 (Guj).  In this case the Assistant Registrar of Companies has carried out an inspection under Section 290A of the Act. During the course of inspection it was found that the company has not maintained the register of members and index of members. The details of the shareholders along with the names of the shareholders, folio number, date of appointment, date of cessation etc., maintained in the computer files/floppies and such details can be read on the screen of the computer.

As per Section 150(1) of the Act every company shall keep one or more books in register of the members and enter therein the particulars mentioned. As per Section 150(2) of the Act if default is made in complying with Section 150(1), every ‘officer of the company who is in default shall be punishable with fine which may extend to Rs.500 for every day for which the default continues.

The Assistant Registrar of Companies filed a criminal complaint before the Additional Chief Judicial Magistrate, Ahmadabad against the company Reliable Finstock Services Limited, the petitioner and other directors. The petitioner is an ordinary director and he is the 6^th accused of this complaint.  Being aggrieved and dissatisfied with the impugned criminal proceedings, the petitioner has preferred the present special Criminal Application under Article 226 of the Constitution of India read with Section 482 of the Code of Criminal Procedure.

The petitioner put forth the following contentions before the High Court:

• The petitioner was the ordinary director of the company at the relevant time and there was already a Managing Director  and considering Section 5 of the Act he would not be an officer-in-default;
• In case where the company does not have any officer specified in clauses (a) to (c) of Section 5 of the Act then and then only any other director who may be specified by the Board and when no director is specified, all the directors can be held liable for the offence of the default;
• The Circular issued by the Department of Company Affairs affirmed the above;
• The criminal proceedings may be quashed and set aside which is an unnecessary harassment to the petitioner and the same would be abuse of the process of law and court.

The Department is not in a position to dispute that the company had appointed the Managing Director and the same was also communicated to the Department and not in a position to show contrary decision against the circular issued by the Department.

The High Court held that the Department initiated criminal proceedings against the company and its directors. The petitioner is the 6^th accused in this case. Respondent No.2 is the Managing Director of the Company and the appointment intimation was duly received by the Department. The company had also the whole time directors and the manager. The petitioner was arraigned as an accused only as an ordinary director. Since the company has a Managing Director, whole time director and Manager there cannot be any prosecution against the petitioner who was an ordinary director of the company as he cannot be said to be ‘officer-in-default’. The Court held on the above grounds the criminal proceedings against the petitioner could not be continued since it is the abuse of process of law. The High Court quashed the criminal proceedings against the petitioner and gave liberty to the Department to proceed against the other accused in accordance with law and on its own merits, without, in any way, being influenced by the present order.