The Officer in Default: Directors and Their Duties

The Number That Follows You

Eight digits, issued once, held for life. A director identification number, the DIN, is the state's way of knowing that the man who signed a balance sheet in Chakan in 2019 is the same man who signs a loan guarantee in Nashik in 2026, whatever his letterhead says in between. Before the managing director's question about which officer can be answered, the law needs to be able to say who the officers are. The DIN is where that begins.

Section 152(3) of the Companies Act, 2013 forbids anyone from being appointed a director without a DIN. Section 153 sets out how one is applied for, and Section 155 prohibits an individual from holding more than one. The application is made in Form DIR-3 under Rule 9 of the Companies (Appointment and Qualification of Directors) Rules, 2014, or, for the first directors of a new company, inside the SPICe+ form itself. The number is tied to a PAN, an Aadhaar number for Indian residents, a passport for foreign nationals, a mobile number and an email address. It does not lapse when a directorship ends. A person who resigned from his only board in 2015 still has the DIN he was given, and it will still be his in 2045.

For several years after 2006, when DINs were first introduced under the 1956 Act, the Ministry of Corporate Affairs knew less about its directors than a cooperative bank knows about its depositors. Addresses went stale. Mobile numbers belonged to former clerks. Some numbers belonged to people who had died. In July 2018 the Ministry inserted Rule 12A, requiring every individual holding a DIN to file a KYC return each year. The form is DIR-3 KYC for a first filing or a change in particulars, and the shorter DIR-3 KYC-WEB where nothing has changed. The due date is 30 September. The rule applies to every DIN allotted on or before 31 March of that financial year, whether or not its holder sits on any board.

I filed my own on the first morning the form opened in 2018, mostly to see what my clients would see. The portal asked for a one-time password on my mobile and another on my email, and then timed out. The second attempt went through.

A director who misses 30 September does not commit an offence. What happens is administrative, and it is quick. The DIN is marked 'Deactivated due to non-filing of DIR-3 KYC', and it can be reactivated only by filing the form with a fee of ₹5,000. While it is deactivated, no form that requires the director's signature can be filed. This is what caught the private equity nominee at the Chakan firm, whose lapsed KYC sat quietly until the day the company most needed him on the record. The rule is mechanical, and that is its whole effect. No officer at the Registry reviews a deactivated DIN or forms a view on whether its holder meant well.

In late 2025 the Ministry indicated that it intends to move the KYC requirement to a three-yearly cycle. As at 1 January 2026 I advise clients to treat the annual date as binding until amended rules are actually notified. A proposal is not a rule, and a deactivated DIN costs more than an unnecessary filing.

The KYC tells the state who a director is and where to find him. It says nothing about what he owes. That comes from a different provision, one most directors in my experience have never read, although they are bound by it from the day they sign DIR-2. It runs to seven sub-sections, and the shortest of them is one sentence long: 'A director of a company shall not assign his office.'

Seven Sub-sections

Section 166 of the Companies Act, 2013 is the first place in Indian statute where a director's duties were written down at all. Before 2013 they existed, but they lived in judgments, most of them English, applied by Indian courts with the confidence of long habit. The 2013 Act codified them. It did so briefly, and the brevity is deceptive.

Sub-section (1) requires a director to act in accordance with the company's articles. This sounds like housekeeping, and mostly it is, until a board approves a borrowing beyond a limit the articles set, or appoints a director by a procedure the articles do not permit. The articles are a contract the director has agreed to. Most directors I meet have never seen a copy.

Sub-section (2) is the duty of good faith. A director must act 'in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.' The English model, Section 172 of the Companies Act, 2006, asks a director to promote the members' interests and, in doing so, to 'have regard to' employees and the community. The Indian drafting places all of them in one sentence, in one list. Commentators still argue about whether this creates enforceable duties to employees or merely permits a director to consider them. As at 1 January 2026 no Indian court has settled the question in a way I would rely on.

Sub-section (3) carries the most weight in practice. A director must exercise his duties 'with due and reasonable care, skill and diligence' and must exercise independent judgement. The two halves do different work. Care is about effort: reading the papers, attending the meetings, asking for the information that is missing. Independence is about whose view the director is expressing. A nominee director appointed by an investor is still bound by it, and the investor's instructions are no defence if the vote harms the company.

In 2021 a client of mine, a retired engineer who sat on the board of a Satara food-processing company as a favour to its founder, told me he signed the financial statements each year 'after seeing the total only'. He was not dishonest. He was precisely the director Section 166(3) was written about.

Sub-section (4) forbids a director from placing himself in a situation where his direct or indirect interest conflicts, or may conflict, with the company's. The words 'possibly may' do the damage. Actual harm is not required.

Sub-section (5) prohibits undue gain or advantage, whether to the director or to his relatives, partners or associates. A director found to have made such a gain must pay an amount equal to it to the company. It is the only clause in the section that names its own remedy in money.

Sub-section (6) bars assignment of office and declares any assignment void. Sub-section (7) prescribes the punishment for contravening the section: a fine of not less than ₹1 lakh, which may extend to ₹5 lakh.

Five lakh rupees, for a breach of good faith that might cost a company several crore. The fine is not where the real liability sits, and the Act knows it. When the engineer from Satara asked me what the worst outcome could be, I told him to read Section 2(60) before he asked again. He said, 'That is the definitions section, no?'

Who Gets Prosecuted

It is. And that is the point of it. Section 2(60) of the Companies Act, 2013 defines the 'officer who is in default', and dozens of penal provisions elsewhere in the Act borrow the phrase rather than naming anyone themselves. When a section says that 'the company and every officer of the company who is in default shall be liable to a penalty', the reader must turn back to the definitions to learn whose name will appear on the notice. Section 166(7) does not borrow it; its fine falls on the director who breached the duty. Most of the Act does.

The definition is a list of seven categories, and its order tells you something. First come whole-time directors. Second, key managerial personnel: the managing director or chief executive, the company secretary, the whole-time director and the chief financial officer, as Section 2(51) defines them. Only where a company has no key managerial personnel does the third category apply. Then the board may specify one or more directors who consent in writing to carry the liability, and if it specifies nobody, every director is an officer in default. Small private companies, which are not required to appoint a company secretary or a chief financial officer, fall into this third category more often than their directors realise. In my experience, almost none of them has passed the specifying resolution. Every director is exposed.

The fourth category reaches below the board. It covers any person who, under the immediate authority of the board or a key managerial person, is responsible for maintaining, filing or distributing accounts or records, and who authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent the default. The accounts executive who was told to file the AOC-4 and did not may fall within it. So may the manager who knew he had not. The fifth captures the shadow director, any person whose instructions the board is accustomed to follow, with an express exception for those advising 'in a professional capacity'. I have relied on that exception, privately, more than once. The seventh concerns share transfer agents and merchant bankers in matters of share issue and transfer.

The sixth is the one that matters most to an ordinary director. It makes every director an officer in default for a contravention of which he became aware 'by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same', or which occurred with his consent or connivance. Knowledge, under this clause, can be proved by paper. The director who received the board agenda, attended the meeting and said nothing has, as far as the record is concerned, known. Minutes then become evidence against the people who signed them, and silence in the minutes reads as assent.

This was the answer to the managing director at Chakan. The Section 454 notice named the company, the managing director and the company secretary, all key managerial personnel, and it named the chief financial officer, who had signed nothing late but had held the audit file through the summer. It did not name the independent directors. They had attended no meeting at which the missed AGM was discussed, because no such meeting had been held.

The managing director read the list twice and said, 'So the ones who did nothing are safe.'

Independent Directors after IL&FS

Not safe, exactly. Protected, in that instance, by a sub-section that was written for them and is narrower than most of them believe.

Section 149(12) of the Companies Act, 2013 provides that an independent director, and a non-executive director who is not a promoter or key managerial person, is liable only for acts of omission or commission by the company which occurred with his knowledge, attributable through board processes, and with his consent or connivance, or where he had not acted diligently. The first three conditions mirror the sixth category of Section 2(60). The fourth does not. 'Had not acted diligently' turns the shield back on its holder, because a director who never asked why the AGM was late may find that his ignorance is itself the failure. The Chakan independent directors escaped because no paper reached them. Had the auditor's delay been reported at a board meeting in August and minuted without comment, I would have given them a different answer.

The Act's requirements are precise. Section 149(4) requires every listed public company to have at least one-third of its board independent. Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 extends the obligation, at a minimum of two, to unlisted public companies with paid-up capital of ₹10 crore or more, turnover of ₹100 crore or more, or aggregate loans, debentures and deposits exceeding ₹50 crore. Section 149(6) sets the tests of independence: no pecuniary relationship of the disqualifying kind, no relative among the promoters, no recent employment with the company or its auditors. Section 149(10) and (11) limit tenure to two consecutive terms of five years. Since 1 December 2019, every independent director must be registered in the databank maintained by the Indian Institute of Corporate Affairs, and most must pass its online proficiency self-assessment. Schedule IV adds a code of conduct and requires the independent directors to meet at least once a year without the executives in the room.

That is the statutory floor. None of it ensures that anyone reads the papers.

IL&FS had independent directors, and distinguished ones. In September 2018 its group companies began defaulting on commercial paper and inter-corporate deposits, and the size of the group's debt became public: over ₹90,000 crore, spread across more than three hundred entities. On 1 October 2018 the National Company Law Tribunal at Mumbai allowed the government's petition under Sections 241 and 242 and superseded the board in its entirety, replacing it with nominees led by Uday Kotak. It was the first use of that power against a company of such size. The Serious Fraud Investigation Office's later reports, and the forensic audit that followed, described a board which had approved loans to group entities that could not repay, and a risk committee which, by the investigators' account, had seldom met. Whatever the ultimate findings against particular individuals, the structure had been complete on paper. Independence had been certified. Diligence had not been tested.

The government's response, oddly, softened enforcement against non-executives. MCA General Circular No. 1/2020, dated 2 March 2020, instructed registrars not to name independent and non-executive directors in proceedings unless the record showed knowledge through board processes. The circular protects the careful. It also tells the careless what the registrar will look for.

When I explain this to a prospective independent director, I advise him to ask for the last three sets of minutes before he accepts, and to read the dissents. Most boards record none. One retired banker in Kothrud, offered a seat by a Wakad real-estate company, read the minutes, found that every resolution for four years had been 'passed unanimously', and declined the seat with a two-line letter.

Related Party Transactions: Section 188 and the Conflicts the Law Expects You to Declare

The Wakad minutes would have told him something else had he read further, because unanimous boards and related-party contracts tend to keep company. Section 2(76) of the Companies Act, 2013 defines a related party broadly: a director or key managerial person, their relatives as Section 2(77) lists them, any firm in which a director is a partner, any private company in which a director is a member or director, and several more removed connections. Section 188(1) then names the transactions that need consent when such a person is on the other side. These include the sale or purchase of goods or property, leasing, the availing of services, the appointment of agents, underwriting, and a related party's appointment to any 'office or place of profit' in the company.

Consent comes in two layers. The board must approve by resolution at a meeting, and the interested director, having already disclosed his concern under Section 184(2), may not take part. Where the transaction crosses the thresholds in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, shareholders must approve by ordinary resolution. For most categories the threshold is ten per cent of turnover or net worth, and for an office or place of profit it is monthly remuneration above ₹2.5 lakh. A member who is a related party to that particular contract may not vote on it. One exemption carries most of the weight. A transaction entered into in the ordinary course of business and at arm's length needs none of this, and much argument in boardrooms is really an argument about those two phrases.

In 2021 a machining firm in Chinchwad asked me to review its lease for a godown on the Pune–Mumbai highway. The godown belonged to the managing director's wife. The rent was ₹1,10,000 a month, which the managing director described as 'market only, actually less than market'. That may have been true. Nobody had tested it, though, and no board resolution approved it. The Act does not presume dishonesty here. It requires that the claim be shown. I advised that we obtain two broker quotations for comparable space in Talawade, table them, and record the managing director's withdrawal from the discussion. The quotations came back at ₹1,05,000 and ₹1,25,000. The board approved. The minutes ran to half a page.

Without that half-page, Section 188(3) would have made the lease voidable at the option of the board or the shareholders if they did not ratify it within three months, and would have required the director who authorised it to indemnify the company for any loss. Since the 2020 amendment, Section 188(5) imposes a civil penalty of ₹25 lakh on the responsible director or employee of a listed company and ₹5 lakh in any other company. Approval must then be reported in the board's report in Form AOC-2, so the record outlives the meeting.

For the calendar, these duties recur on fixed dates. Every director files MBP-1 at the first board meeting of each financial year and again whenever his interests change. Every director gives DIR-8, confirming he is not disqualified, in the same season. Each independent director makes his Section 149(7) declaration at that first meeting. DIR-3 KYC falls due by 30 September. The company keeps the register of contracts with interested parties, MBP-4, up to date throughout the year.

The Chinchwad lease was recorded in the ledger under account code 4420. Since 1 April 2023 the accounting software has logged every edit made to that entry, with the user and the date.