DESIGNATING OFFICERS IN DEFAULT – A MODERN DAY TOOL

Mamta Binani, B,COM, FCS
Practising Company Secretary & Immediate Past Chairperson-EIRC of ICSI



Monday, 25 July 2011

DESIGNATING OFFICERS IN DEFAULT – A MODERN DAY TOOL

Section 5 of the Companies Act, 1956 is a must read for not only the Directors of the Company but also the Officers of the Company. This is a pertinent tool in the hands of the Company to additionally embark on any officer, specific responsibilities of compliance of specific sections of the Companies Act, 1956. This will certainly not absolve the managing director(s) or the whole time director(s), manager(s) or the secretaries from their duties and obligations.

The definition of Officer in section 2(30) of the Companies Act is wide and enumerative and reads as: ‘officer’ includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors are accustomed to act.


Just for laugh...A. Ramaiya in Guide to the Companies Act (page 17, 7th Edition) humorously mentioned, that the definition of officer could include even the wife of a director if he is accustomed to act in accordance with her instructions or directions....


Just to mention-section 48(2) says that deed(s) signed by a person empowered by the Company in writing under its common seal, either generally or in respect of specified matters, shall bind the Company. In view of this power of attorney, the person who is signing under such an authority would come within the definition of ‘Officer’ under the Act.

The word person shall include even non-individuals which means it includes company, association or body of individuals whether incorporated or not . One example could be a subsidiary company which is accustomed to act on the instructions of a holding company.

Let us delve deeper into section 5. One aspect is very clearly understood by all. The people who work and perform are bound to make mistakes. To err is human. The liberties of not committing mistakes are only with non-performers. The Government also thankfully realises this vital aspect and hence, if an analysis is done of the stricter penalties like that of imprisonment talked of in various sections, e.g section 210(5), 212(9), 217(6) etc., it is seen that a mention has been made of wilful commission (in my understanding let it also include wilful omission). A mere commitment of default, non-compliance etc. by an officer of a Company shall not subject him to penal provisions. It should be proved that the default, if committed by the officer himself, is committed knowingly and where such default etc. is committed by a person authorised by the officer, the authorisation or permission is made both knowingly and wilfully by the officer.

There is Form no.1AA prescribed to be filed by the Companies detailing out the names of the Directors (other than the MD, WTD, Manager, Secretary) and/or the names & details of the other persons charged with being the Officers in default. This form has to specifically mention the sections for the compliance of which they have been charged. The form enables the Company to file even the revocation of such entrustments. The date of consent/ revocation given by the concerned director/ officer is also what is required which makes it important that a written consent is taken and a written revocation is given as also envisaged in section 5(f). The interesting part is that this form will also have to be digitally signed by the person being charged with being the officer in default.

If one reads Rule 4BB of the Companies (Central Government’s) General Rules & Forms, 1956, there is a mention of Form 1AB (form for giving consent to act as an officer in default) and a mention of Form 1AC for Companies to intimate the revocation of such entrustment. Both the forms seem to have been discontinued. Revocation option has been given in Form 1AA itself.

The Ministry of Corporate Affairs vide a General circular no.08/2011 dated 25.03.2011 bought loads of prudence into this vulnerable section and the Registrar of Companies have been advised to follow the guidelines given in the circular and have been requested to apply diligence to avoid wrongful prosecutions.
Relief: The Company may indemnify such person who has been proved to be innocent, after termination of proceedings by a competent court in which judgement has been given in his favour or the person has been granted relief under section 633 of the Act.

References

The following can be referred:
1. Section 2(13) for the definition of Director
2. Section 7 - if the board is acting on the advice given by a person in a professional capacity, the said advisor/ consultant cannot be construed as an officer in default
3. Case law of Young and Harton’s Contract (1886) to understand the meaning of default – default has been explained as meaning nothing more, nothing less that not doing what is reasonable under the circumstances
4. Case law of Gibson Vs. Barton, 1875 – if a person is required by law to do something and he does not show that he ever made the attempt to do it, he makes evidence against himself that he has knowingly and wilfully made default in doing his duty
5. Section 629A in cases where a particular section does not mention any specific penalty.
6. Section 201 – any provision in articles or agreement or otherwise shall be void as to exempting or indemnifying any officer or auditor of the Company in respect of any liability arising from any negligence, default, misfeasance