"Caught in the Crossfire: Are You at Risk of Being an Officer in Default?"

“Officer in Default”

In our last few posts we have been talking about penalties being levied on an “officers in default” 

But, Who exactly is an “Officer in Default”?

According to Section 2(60) of The Companies Act, 2013 an 'Officer in Default' means, 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 penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:-

(i) Whole-Time Director; 

(ii) Key Managerial Personnel; 

(iii) where there is no key managerial personnel, such director or Directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the Directors, if no director is so specified; 

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; 

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; 

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance; 

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

Case Study

Let's illustrate the concept of an officer in default with a case study. In our first post in the CSR series we captured a few case studies on the various penalties being imposed on various CSR companies.

In one case study we saw that on RHI Magnesita, the RoC slammed a penalty of Rs 2 lakhs on each one of them as they qualified to be “Officer in Default” hence resulting in a total penalty of Rs 8 lakhs on 4 officers in default. The officers in default in the given case were the Managing Director, Director, Company Secretary & the Chief Financial Officer.

Are You an Officer in Default?

Now, it's crucial to reflect on whether you or any executives in your organization qualify as officers in default. Review your roles and responsibilities to ensure compliance with CSR provisions and avoid being classified as an officer in default. Taking proactive steps is essential to protect both your organization and yourself from penalties.

Steps for Ensuring CSR Compliance

To ensure your company is CSR compliant and avoid penalties associated with being an officer in default, consider the following steps:

1. Understanding Legal Requirements: Familiarize yourself with the Companies Act, 2013, and its provisions related to CSR obligations.
2. Implementing Robust Policies: Develop and implement robust CSR policies and practices within your organization to meet legal requirements and contribute positively to society.
3. Regular Audits and Monitoring: Conduct regular audits and monitoring of CSR activities to ensure they align with statutory requirements and are effective in achieving social impact goals.
4. Training and Awareness: Provide training and awareness programs to employees regarding CSR responsibilities, ethical practices, and compliance requirements.

Conclusion

In conclusion, being an officer in default under the Companies Act, 2013, carries significant responsibilities and potential penalties. It is your responsibility as a corporate leader to ensure your company is CSR compliant and avoid the company & its officers in default getting penalized. By understanding legal requirements, implementing robust policies, conducting regular audits, engaging stakeholders, and fostering a culture of CSR awareness, you can contribute positively to society while safeguarding your organization's reputation and legal standing.

To seek guidance in developing an action plan and to become CSR compliant, feel free to reach out to us at priyanka@arthasamarth.com.