When directors can be treated as 'officer who is in default' under section 5 - Companies Law - CIRCULAR NO. 6/94

CIRCULAR NO. 6/94 [F. NO. 3/41/93-CL-V], DATED 24-6-1994 ISSUED BY THE DEPARTMENT OF COMPANY AFFAIRS Subject:- When directors can be treated as 'officer who is in default' under section 5 1. I am directed to enclose herewith a copy of judgment dated 11th January, 1994 of the Rajasthan High Court in the matter of Pratap Rajasthan Copper Foils Laminates Ltd., for information (see Annex). 2. The issue relating to correct interpretation of 'officer who is in default', as per provision of section 5 of the Companies Act, 1956, has been considered by the Department in the light of the abovesaid judgment of the Hon'ble Rajasthan High Court. The Department is of the view that this judgment has correctly interpreted the provisions of section 5 as amended in 1988. It may, therefore, please be ensured that where the penal provisions provide for punishment of 'officers in default', prosecution be filed against the managing director(s), whole-time directors) and manager, apart from the secretary, if any, and the company and only in those cases where there is no such managerial personnel (i.e., managing director/whole-time director/manager), prosecution be filed against all ordinary directors, apart from the secretary, if any, and the company. ANNEX Tibrewal, J. - In this petition under section 482 of Code of Criminal Procedure, 1973 ('the Code'), the petitioners challenge the Criminal Complaint No. 47/91 pending against them before the Special Court of Judicial Magistrate (Economic Offences), Rajasthan, Jaipur, for the offence under section 220 of the Companies Act, 1956 (for short, 'the Companies Act'). At the relevant time, all the four petitioners are said to be the directors of Pratap Rajasthan Copper Foils Laminates Ltd. incorporated under the Companies Act. Mr. P.C. Maheshwari was the managing director of the said company. The non-petitioner, i.e., Registrar of Companies, Rajasthan, Jaipur filed a complaint under section 220(3) of the Companies Act for committing default with the requirements of sub-sections (1) and (2) of section 220. Sub-sections (1) and (2) require three copies of balance-sheet, etc., to be filed with the Registrar, within stipulated time, mentioned therein. Subsection (3) provides punishment for the default and it reads as under : "(3) If default is made in complying with the requirements of sub-sections (1) and (2), the company, and every officer of the company who is in default, shall be liable to the like punishment as is provided by section 162 for a default in complying with the provisions of section 158, 160 or 161." A bare perusal of the aforesaid provision makes it clear that for non-compliance of the requirements of sub-sections (1) and (2) of section 220, the company and every officer of the company, who is in default, is liable to the punishment. Section 5 of the Companies Act defines officer who is in default and ft provides as under : 5. Meaning of "officer who is in default" - For the purpose of any provision in this Act which enacts that a officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression "officer who is in default" means all the following officers of the company, namely : (a) the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act ; (f) any person charged by the Board with the responsibility of complying with that provision : Provided that the person so charged has given his consent in this behalf to the Board; (g) in case any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors: Provided that where the Board exercises any powers under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form." The above definition of the 'officer who is in default' makes it clear that a director or directors of the company fall within the said definition if the company does not have any of the officers specified in clause (a) to clause (c), i.e., the managing director or the managing directors, the whole-time director or the whole-time directors and the manager. Admittedly, in the present case, Mr. P.C. Maheshwari was the managing director of the company at the relevant time. Therefore, the petitioners, who were directors, at the relevant time, did not fall within the expression 'officer in default' and they could not be held liable criminally for the default with the requirements of sub-sections (1) and (2) of section 220 of the Companies Act. In the above situation, when the averments made in the complaint, if taken on their face value, do not make out a case against the petitioners, it would be in the interest of justice to quash the complaint to prevent abuse of the process of the Court. See R.P. Kapur v. State of Punjab AIR 1960 SC 866 and Madhu Limaye's case AIR 1987 SC 47. The result of the above discussions is that this petition deserves to be allowed and it is, hereby, allowed. The criminal proceedings against the petitioners in Complaint No. 47/91 are quashed and the complaint against them is, hereby, dismissed. However, the case shall proceed against the remaining accused, namely, the company and Shri P.C. Maheshwari, the managing director of the company.