Updated on: March 7th, 2020 5:06 PM

SOP for Proceedings against Directors & Non-Promoters

The Ministry of Corporate Affairs has released a detailed clarification on 2nd March 2020 on Standard Operating Procedure (SOP) for prosecutions filed or internal adjudication proceedings against Independent Directors, Non-Promoters and Non-Executive Directors. For any violations committed under the Companies Act 2013 by a Company, first of all, the responsible person or persons in the Company called “the officer who is in default” will be identified. The officer who is in default will have to pay the penalty or be punished by way of imprisonment, fine or otherwise. As per Section 2(60) of the Companies Act 2013 "officer who is in default" for a company that has committed defaults, will be any of the following officers of a company:

1. Whole-Time Director (WTD)
2. Key Managerial Personnel (KMP)
3. If there is no KMP, the director or directors specified by the Board who have consented to be responsible in writing OR all the directors if no director has been specified.
4. Any person who is immediately reporting to the Board or any KMP, and who is in charge of responsibilities such as maintenance, filing, and distribution of accounts or records; who has authorised, actively participated in, knowingly permitted, or intentionally failed to take action to prevent the default.
5. Any person (not in a professional capacity) whose advice or suggestion is usually followed by the Board of Directors of the company.
6. Every Director who is aware of the violation of the Companies Act either by receiving any proceedings of the Board, or participated without objection or when the violation has taken place with his consent or involvement.
7. In case of issue or transfer of any shares of a company, agents who transferred the shares, registrars and merchant bankers involved.

Based on the above definition, in normal cases, the WTD and KMP who are in charge of most of the daily activities should be held responsible for the defaults by a company. Where a KMP is not present, the directors who have signed the digital e-form GNL-3 filed with Registrar, thus consenting to incur the liability, will be held liable or responsible. If such a consent (e-form GNL-3) is submitted by any other person who is directly reporting to the Board or KMP, then that person will also be liable. But there is an exception that if penal provisions hold a certain director or company officer or any other specific person responsible for the default, then action should only be taken against that specific individual, for example under section 184 of the Companies Act, (disclosure of interest by directors).

Liability of Independent Director and Non-Executive Director

As per Section 149(12) of Companies Act, an Independent Director or Non-Executive Director who is not a promoter or a key managerial personal will be held liable for default only if the default occurred with his knowledge through Board processes and which happened with his consent or involvement or where diligence was not shown by the Independent Director or Non-Executive Director. The Independent Director or Non-Executive Director (not a promoter or a key managerial personal) cannot be held liable and involved in any criminal proceedings unless the above-stated conditions are met. It is further clarified that the Non-Executive Directors can also be:

• Government nominated Directors for public sector undertakings
• Bank/Financial Institutions/Public Sector Financial Institution nominated Directors
• Statutory or Regulatory requirement related appointments of Directors

The Independent Directors or Non-Executive Directors are not responsible for the following:

• Filing of Information or records with the registry
• Maintaining Minutes of the meeting
• Maintaining statutory registers
• Complying with the orders of statutory authorities

Unless specific requirement has been provided in the Companies Act or orders of authorities. Normally, even in such specific cases, the liability will arise only where there are no Whole-Time Director or Key Managerial Personnel. It is advised not to take civil or criminal proceedings against Independent Director or Non-Executive Director unless sufficient proof is available, for cases where the default is because of decisions of the Board or Committees.

Ascertaining Director or KMP

The government should ascertain if the specific director or KMP was working for the company on the date of the default. This can be done by examining all records with the Registrar such as e-forms DIR-11 or DIR-12, Annual Returns Copies or Financial Statements. In case there are any doubts or lack of clarity regarding who should be held liable, the registrar can seek guidance from the Ministry of Corporate Affairs (Director General of Corporate Affairs) and the action should be taken only after it is sanctioned by the Ministry in such cases. This Standard Operating Procedure needs to be strictly followed by all registrars and in case of any other doubts, they need to further contact the Ministry of Corporate Affairs who will examine the case and provide further direction. The notification from the Ministry of Corporate Affairs can be accessed below: