2014 (11) TMI 1137 - HC - Companies Law

Offence punishable under Section 220 of the Companies Act - Held that - All the director who are not accustomed to the act or the directions or instructions are not there to the directors from the Board of directors, they cannot be called as officer in default . Therefore, there must be specific allegation in the complaint that a director who is made as an accused in the complaint is either a managing director or whole time director or manager or secretary or the director who is having accustomed to the act or directed by the Board of directors as compliance officer. In the absence of such specific allegations in the complaint, it cannot be said that the petitioner who is a director of the company is liable and can be prosecuted. Section 220(3) has to be established by means of facts in the complaint averments. In the absence of such averments in the complaint, in my opinion, such complaint is not maintainable. Learned counsel for the petitioner also brought to my notice that considering the various decisions of different courts bearing in mind, the Central Government framed certain guidelines. The Ministry of Corporate Affairs has issued a circular in No.3/57/2011/CL-11 dated 29.07.2011 addressing to all the Regional Directors, all the Registrars of Companies and all Official Liquidators, some guidelines with regard to the prosecution of directors of the companies. The said circular at paragraph-5 subclause(b) says that; It is further clarified that before taking penal action under the Companies Act, 1956 against the Directors, the following compliance should be verified by Registrar of Companies - Any persons amongst officers and employees other than Managing Director/Manager/Directors who has been charged by the Managing Director/Manager 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. If by reading the circular as per paragraphs 5 and 6, it goes without saying that only on the basis of person being the director of the company, he should not be fasten with the liability but there should be specific responsibility entrusted to him by the company that if he commits any default in making such compliance, then only the said person is liable under the said provision. In my opinion, the said provisions and circular equally applicable to Section 220 also. Even otherwise, Section 220(3) is very much clear that the director should be accustomed with the act that means to say that he should be the complying officer or he should be fastened with such responsibility to perform duty as such and he has to comply the directions of the Board of directors. Nothing has been stated in the complaint, whether this particular petitioner is accustomed with that act or whether he is directed by the Board of directors and the said director is specified as the complying officer. In the absence of such materials in the complaint itself, in my opinion, the complaint is not maintainable, so far as this petitioner is concerned. Hence, the same is liable to be quashed.

Summary

Issues:
Quashing of criminal case under Section 220 of the Companies Act against accused No.3.

Analysis:
The judgment involves the quashing of a criminal case against accused No.3 under Section 220 of the Companies Act. The Registrar of Companies filed a complaint alleging non-compliance by accused No.3, who was a director of a public company, with the requirement to file balance sheet and profit and loss accounts within the specified time frame. The petitioner argued that as a director, he was not the authorized compliance director and therefore should not be prosecuted under Section 220. The court examined the provisions of Section 220, emphasizing sub-section (3) which holds the company and every officer in default liable for punishment. The court referred to Section 162, which specifies fines for non-compliance with certain provisions, and highlighted that the term "officer" includes any person acting in accordance with the board's directions.

The court further analyzed Section 5 of the Companies Act, which defines an "officer in default" and includes managing directors, whole-time directors, managers, secretaries, and persons acting in accordance with board instructions. The judgment emphasized that for a director to be considered an "officer in default," specific allegations in the complaint must establish that the director falls under the categories mentioned in Section 5. Without such specific allegations, the complaint against the director may not be maintainable. The court also noted that guidelines issued by the Ministry of Corporate Affairs emphasized verifying the specific responsibilities entrusted to directors before prosecution.

The judgment highlighted that the circular guidelines specified that liability should not be solely based on being a director but on the specific responsibilities assigned by the company. It was emphasized that for a director to be liable under Section 220, they must be accustomed to acting in compliance with board instructions or be designated as the compliance officer. In the absence of such details in the complaint, the court found the complaint not maintainable against the petitioner. Consequently, the petition was allowed, and all proceedings related to the petitioner in the criminal case were quashed by the court.