Nominee Director - Officer Who Is In Default?

Can a "Nominee Director" nominated to take care of the interests of a public financial institution be treated as an "officer who is in default?

Section 5 of the Companies Act, 1956 provides the meaning of ‘officer who is in default’. It reads as follows:

“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 of the Companies Act is quite unambiguous on this. Normally, a nominee director will not be an officer who is in default unless the board was remiss in nominating a person for this purpose or remiss in specifying one among themselves for that role in the absence of a whole-time director or a managing director or a manager. Section 5 of the Companies Act, 1956 defines the ‘officer who is in default’ as only those directors and officers of the company who are in charge of the management of the company and not the nominee directors.

However, a nominee director could be proceeded against and they cannot claim wholesale exoneration from the proceeding merely by virtue of being nominee directors unless there is an express provision to that effect under the statute for contravention of which the company and the directors can be proceeded against. Further it is for the prosecution to establish that the nominee director was party to the offence. This principle may be widely disregarded in practice and nominee directors may take themselves to be simply as watchdogs for those who put them on the Board. They are wrong, and before accepting office they should remember that the law expects them to devote their loyalty to the company as a whole. They must be careful. They must not represent only those appointing them. They must look to the interest of ‘the company’s employees in general’, and they, like any other director, must also balance these, where necessary, with those of the membership comprising the company. See LORD DENNING in Meyer v. Scottish C.W.S Ltd., (1959) AC 324 at pp. 366, 367 (HL) cited with approval in Selangar United Rubber Estates Ltd. v. Cradock (No. 3), (1968) 1 WLR 1555 : (1969) 39 Comp Cases 485

Further, in the case of Geetanjali Mills Ltd. v. Thiruvengadathan (1989) 1 Comp. L. J, the liability of the nominee directors in the Income Tax Act, 1961 was discussed and it was held that the Nominee Directors of the creditors, institutions, government, joint venture partners etc., generally, do not enjoy any special immunity. Financial Institutions’ nominee directors, however, get immunity under the State Financial Corporation Act. But it has to be established that the accused person has acted in good faith.

Furthermore, Section 5 (g) of the Companies Act, 1956 may be read very carefully. It reads as follows:

“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”.”

Sub-section (13) of Section 2 of the Companies Act, 1956 defines a “director” as ‘director includes any person occupying the position of director, by whatever name called’.

In view of the above and the law evolving on the subject vide various other decisions, it appears that nominee directors are in the same position and they owe same duties to the companies as any other director.