Several provisions of the Companies Act, 2013 (the 2013 Act) require proceedings to be initiated against ‘officers in default’ liable for various non-compliances under the 2013 Act.
Background
Several provisions of the Companies Act, 2013 (the 2013 Act) require proceedings to be initiated against ‘officers in default’ liable for various non-compliances under the 2013 Act.
Section 2(60) of the 2013 Act defines ‘officers in default’ to include the following:
Directors of the company include Independent Directors (IDs) and Non-Executive Directors (NEDs).
New development
The Ministry of Corporate Affairs (MCA) through its circular dated 2 March 2020 (the circular) provides a clarification on both the prosecution filed as well as internal adjudication proceedings initiated by the Registrar of Companies (Registrar) against IDs, non-promoter and non-Key Managerial Personnel (KMP) NEDs. As per the circular:
This issue of first notes provides clarification on the above provisions.
MCA Circular
Officers to be held in default
The circular reiterated Section 149(12)[2] of the 2013 Act and clarified that IDs and NEDs (non-promoter and non-KMP) should not be implicated in any criminal or civil proceedings under the 2013 Act, unless they were a part of a default/non-compliance committed by the company. A default/non-compliance would include such acts of omission or commission by a company which had occurred with the knowledge of the IDs or NEDs attributable through Board processes with their consent or connivance or where they did not act diligently.
Standard operating procedures to be followed by the registrar while initiating proceedings against IDs and NEDs
For all ongoing cases or cases where proceedings are to be initiated, the registrar should follow the below standard operating procedures:
Cases which are already under prosecution, but which do not meet the criteria mentioned in the circular, then those cases should be submitted to MCA for necessary examination and further direction thereon.
Our comments
Section 149(12) of the 2013 Act provides that the liability of IDs or NEDs who is not a KMP, is restricted to actions of omission or commission committed by a company which had taken place with the knowledge of ID or NED and with his or her consent, connivance, or where he/she had not acted diligently.
The recent circular of MCA does not provide a blanket protection to IDs or NEDs (non-promoter and non-KMP) from prosecution under civil/criminal proceedings under the 2013 Act. It requires registrars to follow a principle-based approach and understand the nature of default before indicting IDs and NEDs (non-promoter and non-KMP). It lays down a standard operating procedure that should be followed by the registrar while dealing with any proceedings against them.
The presence of IDs and NEDs are an important cog in the wheel of corporate governance. The 2013 Act puts a lot of emphasis on the seat of the IDs. However, it was perceived that IDs and NEDs (non-promoter and non-KMP) were being put on an equal footing to the executive directors notwithstanding the fact that there is information asymmetry between executive directors and their non-executive counterparts. The circular seems to address this matter by casting a greater responsibility/obligation on the registrar to examine relevant information such as board agenda, minutes of the board meetings to ascertain participation of the directors, records of appointment and resignation of directors and copies of the annual returns or financial statements before proceeding against the IDs and NEDs (non-promoter and non-KMP).
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[1] Typically, non-promoter and non-KMP NEDs (apart from IDs) would exist in the following cases:
2 Section 149(12) is a non-obstante clause, which states that an independent director and a non-executive director (not being promoter or key managerial personnel), would be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
3 Notice of resignation of director to the registrar
4 Particulars of appointment of directors, KMP and the changes among them
To access the text of the MCA circular, please click here.
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