Summary:- A company has to appoint directors to ensure the proper functioning of the company and to use the money invested by shareholders in a way that provides good returns to them. Directors are considered the brain of the company. Shareholders are the owners of the company. But what happens if those same directors commit fraud within the company and fail to properly utilize the shareholders’ money? To address this, lawmakers created the definition of ‘officer in default.’ Under this definition, anyone who does something that harms the company’s reputation or causes penalties due to their actions will be considered an officer in default. An officer in default is a person associated with a company who is liable for any penalties or punishments if the company defaults under the Companies Act, 2013. Officers in default may face penalties, fines, legal consequences, or disqualification from holding office if they are found guilty of non-compliance.
The term “officer in default” is defined in Section 2(60) of the Companies Act, 2013. It includes:-
1. Whole-Time Directors (WTD).
2. Key Managerial Personnel (KMP).
3. If there is no KMP, then:
- Such directors specified by the Board, who have provided written consent to the Board.
- If no such specification is made, all the directors are included.
- Intimation regarding this must be submitted to the Registrar of Companies (ROC) in Form GNL-3.
4. Any person who, under the immediate authority of the Board, is responsible for the maintenance of books of accounts (as per Sections 128(6) and 129(7)) and knowingly fails to take active steps to prevent any default.
Intimation regarding this must also be submitted to the ROC in Form GNL-3.
5. Any person whose directions the Board of Directors is accustomed to act in accordance with.
6. Every director who is aware of a contravention of any provision of this Act in respect of such contravention.
7. In respect of the issue or transfer of shares of a company:
- Share Transfer Agent
- Registrar to an Issue
- Merchant Banker
If a company officer in default does not pay the penalty within 60 days of receiving the order, they may face:-
- A fine of at least ₹25,000 and up to ₹1,00,000
- Imprisonment for up to six months
- Both a fine and imprisonment
Section 454(8)(ii) of the Companies Act, 2013 states that if the officer fails to pay the penalty, the company will be prosecuted at their own cost without further notice. An appeal can be made to the Regional Director within 60 days of receiving the order. The Regional Director has the authority to confirm, modify, or set aside the order.
Q. The Managing Director (MD) of X Ltd committed a default on 1st January 2025. & The MD resigned from the company on 2nd January 2025.
(a) Is the MD considered an “Officer in Default”?
Yes, the MD will be considered an “Officer in Default” because the definition includes ex-officers as well.
(b) What if the MD passed away on 3rd January 2025?
In this case, the MD will no longer be considered an “Officer in Default” post their death.
(c) After the MD’s death, will their legal representatives be considered Officers in Default?
No, the legal representatives will not be considered Officers in Default
Q. X Ltd has appointed a Company Secretary (CS).The company has committed a default under any section of the Companies Act, 2013.
Will the CS be considered an Officer in Default ?
Yes, the CS will be considered an “Officer in Default” because, as per Section 2(52) of the Companies Act, 2013, a Company Secretary (CS) is classified as a Key Managerial Personnel (KMP).
Source :- companies act 2013
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