Note on Officer in default under Companies Act, 2013

We have analysed the impact of new Companies Act, 2013 with respect to non-compliances and the penalties imposed for the same on the Directors and in this regard we found the following points:

(a) The working directors (viz. Managing Director, Whole-time Director, CEO, CFO, Company Secretary) are responsible for all the activities of the Company including the Compliances.

(b) In case the Company does not have any working Directors, then all  directors of Company are liable for all non-compliance under the Companies Act, 2013.  In other words, in the absence of any Working Directors, all directors of the Company are held liable for all non-compliances under the Companies Act, 2013, resulting in huge amount of monetary penalties for all directors.

Hence the concept of “Officer in Default” plays an important role for resolution of the above.

Section 2(60) of Companies Act, 2013 specifically defines the term Officer in Default which means an officer who shall be held responsible for any default in the Company.

Whole-Time Director, Key Managerial Personnel, Directors, Authorized Personnel, Share Transfer Agents, Registrars and Merchant Bankers are brought under the ambit of Officers in Default.

However, if there is no Whole-Time Director or Key Managerial Personnel(MD/CEO/CS(Whole-time)/CFO) then the board may pass a resolution and appoint one Director as the officer in default.

Importance of having an Officer in Default:

It is important to have an Officer in Default, due to the following reasons:

i. To ensure that officers act in the best interest of the Company and its stakeholders and

ii. To perform the duties in good faith and

iii. Making the key officials of the Company more responsible;

Keeping in view the above, it is suggested to appoint an Officer in Default to have a single point of responsibility, who shall be responsible for the non-compliance/ misconduct and will be obliged to bear the penalties/ punishment imposed by the regulatory authorities.

Appointment of Officer in Default:

An Officer in Default can be appointed by passing a Board Resolution provided the person has given his consent in this behalf to the Board. Further, appointment of the same has to be informed to Registrar of Companies by filing Form GNL-3 with MCA within 30 (Thirty) days of passing Board Resolution.

The provisions of the Companies Act, 2013 are produced below for more clarity-

For the purpose of any provision in Companies Act, 2013 which enact 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;

Author: Sakshi Gupta  is an Associate at M&K Associates and can be reached at [email protected]

Disclaimer: The views, information or opinions expressed herein are compiled by the Legal team of M&K Associates, Company Secretaries, Hyderabad. The above information is solely for disseminating knowledge and private circulation. We are hereby not liable for any loss, damage or inconvenience caused as a result of reliance on such information and we accept no legal liability or other responsibility by or on behalf of any errors, omissions, or statements on this content.