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Whether director is liable for any act or offence committed by the company or his co-director or officer in charge of the company prior to the date of his appointment?

Chapter II of the companies Act, 1956 deals with the topic “Director”. Section 291 of the Companies Act, (in Chapter II) deals with the general powers of board, as per which the Board of Directors of a company is entitled to exercise all such powers, and do such thing or acts, as may be authorised. Section 291 reads as under:

291. GENERAL POWERS OF BOARD.

(1) Subject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do:

Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting :

Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provisions contained in that behalf in this or any other Act, or in the memorandum or articles of the company, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.

A company is thus a juristic person run by Board of Directors, which is entitled to exercise all such powers and do the things as may be authorised. Section 2(6) of the Companies Act, 1956 defines “Board of Directors” as

(6) "Board of directors" or "Board", in relation to a company, means the Board of directors of the company;

Thus the “Board of directors” of a company consists of directors of the company.


In case of a private company which is not subsidiary of the public company, the article may provide for the appointment of all or any of its directors in such manner as may be provided therein. Where the articles does not provide otherwise, the directors are appointed in the general meeting.


If we come to the question as to the liability of a director in relevancy to the query under hand Section 5 of the Companies Act, 1956 is important. For any default or offence under the companies Act, Section 5 (of the Act) defines the “the officer who is in default” and it includes the Managing director or whole time director. Section 5 reads as under:

5. Meaning of "officer who is in default"

For the purpose of any provision in this Act which enacts that an 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) where 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 power 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.

Section 5 or any other provision of the Companies Act, 1956 does not specifically deal as to the question whether a person who was not on board at the time of default, would be treated as officer in default or be liable to any act, or offence committed by the company or co-director or officer in default prior to his appointment. However there are cantena of judgments, which dealt with the issue and we can find answer to the query by discussing some of them.

In the case of “C.V. Prasad v. ROC & Anr” (1997) 88 Com Cases 420, the Hon'ble High court of Andhra Pradesh held that:

“Examining the present case in the light of section 5 of the said Act, it is clear that at the relevant point of time, i.e., up to March 31, 1992, the petitioner was not the managing director, as admitted in the complaint itself. No particulars are given in the complaint except the particulars stated in annexure "A" filed along with the complaint. From the reading of both the complaint and as well as annexure "A", it is clear that the entire case pertains to the lending of loans prior to March 31, 1992, and one entry dated June 30, 1993, found at item No. 8 of annexure "A" is only an item calculating the interest on the loan already advanced on April 22, 1992. From the entire reading of the complaint and its annexure "A" it is clear that the petitioner who has joined his duties as the managing director with effect from September 16, 1992, cannot be said to be an officer-in-default regarding the loan transactions that have taken place prior to his joining his duties on September 16, 1992. As per the allegations, in the complaint itself it is clear that the relevant period of the offence is up to March 31, 1992. Since the petitioner was not a managing director during that period he cannot be a defaulting officer. In this view of the matter, I am of the opinion that the complaint in C.C. No. 64 of 1994 does not disclose the offence alleged against the petitioner.”

In another case of “Registrar of Companies v. Bipin Behari Nayak”, (1995) 83 Com Cases 95 (Ori), the Hon'ble High Court held that:

“The meaning of the expression "officer in default" as was provided in Section 5 of the Act at the relevant time was any officer of the company who was knowingly guilty of the default, etc., or who knowingly or willfully authorised or permitted such default. Neither in the complaint was there any averment that the respondent was knowingly guilty of the default in non-compliance or he knowingly and willfully authorised or permitted such default nor was any evidence adduced by the prosecution on that score. On the contrary, the evidence of PW-1 suggests that the respondent was in no way connected with the company. In paragraph 5 of his cross-examination, PW-1 has admitted that the balance-sheet and profit and loss account of the company was signed by the managing director who was one P. K. Das. PW-1 further admitted that except exhibit 4 (Form No. 32) there is no other document to show that the respondent was a director of the company.

The Bombay High Court in one of the celebrated case of “Seas Goa Limited & Ors V. State of Maharastra” (2009) 151 Comp Cases 338 (Bom) discussed the issue held that:

“The Directors who have been arrayed as accused were not on the Board of Directors when the alleged misrepresentation was made in preferential offer document of 1993. They were neither the Director or SIL or SGL at that time and there fore, can not have been involved either in inducement or entrustment”


In the case of “Ajay Mitra v. State of M.P” 2003 Cri LJ 1249, The Hon'ble Supreme Court held that:

“Since the appellant were not in picture at all at the time when complainant alleged to have spent money in bottling plant, neither any guilty intention can be attributed to them nor, there be possibility of any intention on their part to deceive the complainant. No offence of cheating can, therefore be said to have been committed by appellants.

In another case “National Small Industries Corp. Ltd. v. Hemant Singh & Anr.” the Hon'ble Supreme Court observed that:

“Section 291 of the companies Act, provides that subject to the provision of this Act, the Board of Directors of a company shall be entitled to exercise all such powers and to do all such act and things, as the company is authorised to exercise and do. A company through a legal entity, can act only through the Board of Directors. The settled principle is that a Managing Director is prima facia in charge of and responsible for the company’s business and affairs and can be prosecuted for offences by the company. But in so far as other directors are concerned they can be prosecuted only if they were in charge of and responsible for the conduct of the business of the company.


In the case of “N.K. Wahi vs. Shekhar Singh & Others”, (2007) 9 SCC 481, the Hon'ble Supreme Court held that:

“To launch a prosecution, therefore, against the alleged Directors there must be a specific allegation in the complaint as to the part played by them in the transaction. There should be clear and unambiguous allegation as to how the Directors are in-charge and responsible for the conduct of the business of the company. The description should be clear. It is true that precise words from the provisions of the Act need not be reproduced and the court can always come to a conclusion in facts of each case. But still, in the absence of any averment or specific evidence the net result would be that complaint would not be entertainable.”

In the case of “K.K. Ahuja v. V.K. Vohra”, (2009) 10 SCC 48, Hon'ble Supreme Court has held that:

“It is evident that a person who can be made vicariously liable ... is a person who is responsible to the company for the conduct of the business of the company and in addition is also in charge of the business of the company. There may be many directors and secretaries who are not in charge of the business of the company at all ... a person may be a director and thus belongs to the group of persons making the policy followed by the company, but yet may not be in charge of the business of the company; that a person may be a Manager who is in charge of the business but may not be in overall charge of the business; and that a person may be an officer who may be in charge of only some part of the business.”


Conclusion:

By reading the above judgments it is clear that a director can not be held liable for any offence, default or any act of the company or co-director or officer in default, if he was not a director or in charge of the business or affairs of the company at the relevant time. Thus, for any offence or act committed by the company or his co-director or officer in charge prior to the date of his appointment a director can not be held liable.

 

 

 
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