Master Circular No. 1/2011
No.3/57/2011/CL- II
Government of India
Ministry of Corporate Affairs
5th Floor, Shastri Bhavan,
Dr. Rajendra Prasad Road,
New Delhi-110001,
Dated the 29th July, 2011
To,
All Regional Directors,
All Registrars of Companies,
All Official Liquidators.
Sub: Master Circular on Prosecution of Directors – Regarding
Sir,
The question of treating a person as an officer in default by ROCs when
prosecutions are launched against a company and its directors for violations
under Companies Act, 1956 has come up for examination time and again. The
Department has issued various circulars in this regard so far. It may be
recollected that the Department vide circular No.42/7/73-CL.II dated 20.9.1973
had clarified that a person appointed as a nominee director, whatever interest he
represents or protects is responsible for the proper discharge of his obligations
and fiduciary responsibilities under the statute in the similar manner as an
ordinary directors. However, in the same circular, it was further clarified that
nominees of institutions set up under Acts having non-obstante clauses can
enjoy immunity from prosecutions.
2. In Departmental circular No.6/98 dated 12.11.1998, it was clarified that
where penal provisions provide for “punishment of officers in default”,
prosecutions should be filed primarily against managing director(s)/ whole time
director(s)/manager(s) and the company secretary, if any. It was also clarified
that only in those cases where the above mentioned managerial personnel are
not available in any company; prosecutions should be against ordinary directors.
In the same circular, it was also clarified that there are provisions in the Act
which though do not use the expression “officers who are in default” for fastening
liabilities in case of their contraventions, yet the persons against whom the
proceedings can be initiated is specified. In such cases, the persons expressly
specified in the relevant provisions of the Act should alone be prosecuted.
3. It has come to the notice of the Department that in spite of various rulings
available on the question of “officers in default” who can be held liable for
violations of a particular provision under the Companies Act, the ROCs are
arraying all the directors of the company for the violations without differentiating
between officer in default and or others.
4. It is noticed that penal actions are also initiated against certain Directors
who are not charge with the responsibility, particularly in following cases: --
(a) For listed companies Securities and Exchange Board of India (SEBI) requires
nomination of certain Directors designated as Independent Directors.
(b) For public sector undertakings, respective Government nominates Directors
on behalf of the respective Government.
(c) Various Public Sector Financial Institutions, Financial Institutions and Banks
having participation in equity of a Company also nominate Directors to the Board
of such companies.
(d) Directors nominated by the Government u/s 408 of the Companies Act, 1956.
In super session of all earlier circulars, it is clarified that Registrar of Companies
should take extra care in examining the cases where above Directors are also
identified as Officer in default. No such Director as indicated above shall be held
liable for any act of omission or commission by the company or by any officer of
the company which constitute a breach or violation of any provision of the
Companies Act, 1956, and which occurred without his knowledge attributable
through Board process and without his consent or connivance or where he has
acted diligently in the Board process. The Board process includes meeting of any
committee of the Board and any information which the Director was authorized to
receive as Director of the Board as per the decision of the Board. All the
Regional Directors are advised to direct Inspecting Officers also to examine the
Board’s minutes of the company to arrive at a conclusion if Independent director
is also responsible for any violation of the provisions of Companies Act, 1956.
5. It is further clarified that before taking penal action under the Companies Act,
1956 against the Directors the following compliances should be verified by
Registrar of Companies: -
(a) A director resigns and the company does not file Form 32 as required in
terms of Section 302(2) of the Act. In case, the director concerned has
informed/endorsed a copy of his resignation to the Registrar of Companies, the
Registrar should enquire into such cases and try to find out whether such director
has actually resigned or not.
(b) In case the status of a director, i.e. whether he is a nominee director or not, is
not reflected in the Annual Return or other documents of the company, available
with Registrar, the same should be cross checked with the Annual Report filed by
the company;
(c) The timing of the commission of offence is also material to identify the
director’s responsibility; and Form 1AB should also be checked in case any
person has been charged by the Board under Section 5(f) with the responsibility
of complying with some particular provision or in case any director has been
specified by the Board under Section 5(g) of the Act.
(d) Special Directors appointed by BIFR under section 16 (6)(b) of SICA 1985,
shall not incur any obligation or liability for anything done or omitted to be done in
good faith and in discharge of duties. Hence they shall be excluded in the list of
officers in default
6. For default u/s 209(5), 209(6), 211 and 212 of the Act, the following persons
shall be the ‘officers in default for the purpose of prosecution under these
provisions:-
(a) Where there is a Managing Director or Manager, the Managing Director or the
Manager as the case may be and in addition, the Company Secretary appointed
u/s 383A or the person who has been charged with work of maintenance and
preparation of Annual Accounts in compliance with aforesaid provisions.
(b) Where there is no Managing Director or Manager, every director and the
Company Secretary appointed u/s 383A of the Act.
(c) Any persons amongst officers and employees other than Managing
Director/Manager/Directors who has been charged by the Managing
Director/Manger or Board of Directors with specific responsibility of complying
with aforesaid provisions, in addition to Managing Director/Manager/Board of
Directors as the case may be.
(d) Directors including Non-Executive Directors, officers and employees not
connected with responsibility with the above provisions should not be arrayed as
delinquent directors.
(e) While considering the non-executive directors for including in the list of
officers in default for a particular violation of the Companies Act, it should be
examined whether the violation has taken place with his knowledge attributable
through board process, with his consent or connivance and whether he acted
diligently or not.
(f) Where prosecution is required to be filed against any Government
company, its directors/officers and Member of Parliament and Member of
Legislator under the Companies Act, 1956, Registrar of Companies should seek
prior authorization of Central Government in terms of Section 621 of the Act
7. There should be proper application of mind on the part of Registrar of
Companies in deciding whether a person to be implicated is an ‘officer in default’
by examining the Annual Return, Form 32(s) and DIN-3 database available in the
Registry. The guidelines issued herein above should be applied and wrongful
prosecution should be avoided. Wherever the Registrar of Companies has doubt
as to whether director/officer can be held liable after applying the above
parameters, they should refer to Regional Director, who shall guide Registrar of
Companies in the matter.
8. All the Regional Directors are required to ensure that such cases are
reviewed, based on these parameters and a report must be sent by each
Regional Director with specific recommendation in case the proceedings are
proposed to be discontinued.
This master circular consolidates circular No.2/2003 dated 7.7.2003,
No.08/2011 dated 25.3.2011, No.1/88/2010-CL.II dated 18.4.2011 and 47/2011
dated 14.7.2011 respectively.
Yours faithfully
Sd/-
(R K Bakshi)
Deputy Director
Tel. No. 23073230
Copy to:
1. PS to CAM
2. PS to MOS
3. PS to Secy. MCA
4. PS to AS, MCA
5. PS to Joint Secy. (A) & Joint Secy. (R)
6. PS to DII (DR)
7. PS to DII (Policy)
8. PS to Economic Advisor
9. Spare Copies
No.3/57/2011/CL- II
Government of India
Ministry of Corporate Affairs
5th Floor, Shastri Bhavan,
Dr. Rajendra Prasad Road,
New Delhi-110001,
Dated the 29th July, 2011
To,
All Regional Directors,
All Registrars of Companies,
All Official Liquidators.
Sub: Master Circular on Prosecution of Directors – Regarding
Sir,
The question of treating a person as an officer in default by ROCs when
prosecutions are launched against a company and its directors for violations
under Companies Act, 1956 has come up for examination time and again. The
Department has issued various circulars in this regard so far. It may be
recollected that the Department vide circular No.42/7/73-CL.II dated 20.9.1973
had clarified that a person appointed as a nominee director, whatever interest he
represents or protects is responsible for the proper discharge of his obligations
and fiduciary responsibilities under the statute in the similar manner as an
ordinary directors. However, in the same circular, it was further clarified that
nominees of institutions set up under Acts having non-obstante clauses can
enjoy immunity from prosecutions.
2. In Departmental circular No.6/98 dated 12.11.1998, it was clarified that
where penal provisions provide for “punishment of officers in default”,
prosecutions should be filed primarily against managing director(s)/ whole time
director(s)/manager(s) and the company secretary, if any. It was also clarified
that only in those cases where the above mentioned managerial personnel are
not available in any company; prosecutions should be against ordinary directors.
In the same circular, it was also clarified that there are provisions in the Act
which though do not use the expression “officers who are in default” for fastening
liabilities in case of their contraventions, yet the persons against whom the
proceedings can be initiated is specified. In such cases, the persons expressly
specified in the relevant provisions of the Act should alone be prosecuted.
3. It has come to the notice of the Department that in spite of various rulings
available on the question of “officers in default” who can be held liable for
violations of a particular provision under the Companies Act, the ROCs are
arraying all the directors of the company for the violations without differentiating
between officer in default and or others.
4. It is noticed that penal actions are also initiated against certain Directors
who are not charge with the responsibility, particularly in following cases: --
(a) For listed companies Securities and Exchange Board of India (SEBI) requires
nomination of certain Directors designated as Independent Directors.
(b) For public sector undertakings, respective Government nominates Directors
on behalf of the respective Government.
(c) Various Public Sector Financial Institutions, Financial Institutions and Banks
having participation in equity of a Company also nominate Directors to the Board
of such companies.
(d) Directors nominated by the Government u/s 408 of the Companies Act, 1956.
In super session of all earlier circulars, it is clarified that Registrar of Companies
should take extra care in examining the cases where above Directors are also
identified as Officer in default. No such Director as indicated above shall be held
liable for any act of omission or commission by the company or by any officer of
the company which constitute a breach or violation of any provision of the
Companies Act, 1956, and which occurred without his knowledge attributable
through Board process and without his consent or connivance or where he has
acted diligently in the Board process. The Board process includes meeting of any
committee of the Board and any information which the Director was authorized to
receive as Director of the Board as per the decision of the Board. All the
Regional Directors are advised to direct Inspecting Officers also to examine the
Board’s minutes of the company to arrive at a conclusion if Independent director
is also responsible for any violation of the provisions of Companies Act, 1956.
5. It is further clarified that before taking penal action under the Companies Act,
1956 against the Directors the following compliances should be verified by
Registrar of Companies: -
(a) A director resigns and the company does not file Form 32 as required in
terms of Section 302(2) of the Act. In case, the director concerned has
informed/endorsed a copy of his resignation to the Registrar of Companies, the
Registrar should enquire into such cases and try to find out whether such director
has actually resigned or not.
(b) In case the status of a director, i.e. whether he is a nominee director or not, is
not reflected in the Annual Return or other documents of the company, available
with Registrar, the same should be cross checked with the Annual Report filed by
the company;
(c) The timing of the commission of offence is also material to identify the
director’s responsibility; and Form 1AB should also be checked in case any
person has been charged by the Board under Section 5(f) with the responsibility
of complying with some particular provision or in case any director has been
specified by the Board under Section 5(g) of the Act.
(d) Special Directors appointed by BIFR under section 16 (6)(b) of SICA 1985,
shall not incur any obligation or liability for anything done or omitted to be done in
good faith and in discharge of duties. Hence they shall be excluded in the list of
officers in default
6. For default u/s 209(5), 209(6), 211 and 212 of the Act, the following persons
shall be the ‘officers in default for the purpose of prosecution under these
provisions:-
(a) Where there is a Managing Director or Manager, the Managing Director or the
Manager as the case may be and in addition, the Company Secretary appointed
u/s 383A or the person who has been charged with work of maintenance and
preparation of Annual Accounts in compliance with aforesaid provisions.
(b) Where there is no Managing Director or Manager, every director and the
Company Secretary appointed u/s 383A of the Act.
(c) Any persons amongst officers and employees other than Managing
Director/Manager/Directors who has been charged by the Managing
Director/Manger or Board of Directors with specific responsibility of complying
with aforesaid provisions, in addition to Managing Director/Manager/Board of
Directors as the case may be.
(d) Directors including Non-Executive Directors, officers and employees not
connected with responsibility with the above provisions should not be arrayed as
delinquent directors.
(e) While considering the non-executive directors for including in the list of
officers in default for a particular violation of the Companies Act, it should be
examined whether the violation has taken place with his knowledge attributable
through board process, with his consent or connivance and whether he acted
diligently or not.
(f) Where prosecution is required to be filed against any Government
company, its directors/officers and Member of Parliament and Member of
Legislator under the Companies Act, 1956, Registrar of Companies should seek
prior authorization of Central Government in terms of Section 621 of the Act
7. There should be proper application of mind on the part of Registrar of
Companies in deciding whether a person to be implicated is an ‘officer in default’
by examining the Annual Return, Form 32(s) and DIN-3 database available in the
Registry. The guidelines issued herein above should be applied and wrongful
prosecution should be avoided. Wherever the Registrar of Companies has doubt
as to whether director/officer can be held liable after applying the above
parameters, they should refer to Regional Director, who shall guide Registrar of
Companies in the matter.
8. All the Regional Directors are required to ensure that such cases are
reviewed, based on these parameters and a report must be sent by each
Regional Director with specific recommendation in case the proceedings are
proposed to be discontinued.
This master circular consolidates circular No.2/2003 dated 7.7.2003,
No.08/2011 dated 25.3.2011, No.1/88/2010-CL.II dated 18.4.2011 and 47/2011
dated 14.7.2011 respectively.
Yours faithfully
Sd/-
(R K Bakshi)
Deputy Director
Tel. No. 23073230
Copy to:
1. PS to CAM
2. PS to MOS
3. PS to Secy. MCA
4. PS to AS, MCA
5. PS to Joint Secy. (A) & Joint Secy. (R)
6. PS to DII (DR)
7. PS to DII (Policy)
8. PS to Economic Advisor
9. Spare Copies
No comments:
Post a Comment