Wilful defaulters and the Companies Act, 2013

Recently, United Bank of India declared Kingfisher Airlines Chairman Vijay Mallya, as well as some directors of the company, wilful defaulters. Let's take a look at the implications of this tag on an individual, in terms of the provisions of the Companies Act, 2013.

Experts on corporate law say the entire subject of wilful defaulters is within the domain of the Reserve Bank of India (RBI). From time to time, the central bank issues guidelines, updating the definition and process of identifying such defaulters. The latest is RBI's master circular on wilful defaulters dated July 1.

"The Companies Act, 2013, does not deal directly with the concept of wilful defaulters," says Lalit Kumar, partner, J Sagar Associates. Section 164 of the Act, which deals with the disqualifications for the appointment of directors, doesn't specifically provide for any disqualification on account of one being a wilful defaulter, says Kumar.

There is nothing specifically and directly provided in the Act that bars such directors from taking board positions or decisions or entering into financial dealings. However, an order from a court or a tribunal or any regulatory authority can debar any director from taking such positions, say lawyers.

Legal experts say a new provision in the Act, under section 74, spells out the punishment for directors and officers who fail to repay "deposits" raised by the company. This, however, doesn't apply to loans raised from banking and financial institutions, as these don't fall within the ambit of deposits.

According to the latest master circular, RBI's definition of wilful default covers a wide gamut of offences, including siphoning of funds, misrepresentation/falsification of records and entering fraudulent transactions. If one is found guilty on any of these accounts, there are various provisions in the Companies Act to hold the defaulter accountable. For instance, if guilty, all the provisions relating to fraud and punishment for fraud under sections 447 and 448 of the Act will apply.

Lawyers say provisions of oppression and mismanagement could also be triggered if there is mismanagement in the conduct of the affairs of the company.

What this means is if a court doesn't accept a director's contention against the wilful defaulter tag, the provisions of fraud and punishment provided in the Act might come into effect. According to section 447 of the Act, if found guilty of fraud, a director is punishable with imprisonment of six months to 10 years, as well as a fine of up to three times the amount involved in the fraud. Similarly, under section 447, those guilty of non-repayment of debt are punishable with imprisonment of six months to 10 years and a fine of up to three times the amount. That can only mean more trouble for the chairman and the directors of the grounded Kingfisher Airlines.