There is a pondering question in all of our minds that whether a Company Secretary can be held liable for wrong entries in the books of accounts or falsification of accounts of the company in discharge of his statutory duties or not ?
By looking into various sections, judgments and Case Laws, I am of the opinion that,
A Company Secretary is not held liable for wrong entries in the books of accounts or falsification of accounts of the company in discharge of his duties, merely on the basis of signing the annual accounts of the Company if, he has not been authorized by the Management or the Board of Directors, specifically to look into the accounts or maintenance of the accounts or records, and also he has not been given the responsibility to prepare the accounts of the Company.
However, merely upon signing or authenticating the Accounts of the Company, as a Company Secretary, renders no liability on the Secretary of the Company for falsification of accounts of the company, as authentication does not mean that the facts and figures or truth or accuracy of the transactions in the accounts are all certified as true but it only implies, that the documents authenticated are genuine and not faked.
Authentication of the Annual Accounts by the Company Secretary
When a company employs a Secretary, he usually provides liaison between the Board and the executive management of the company. The secretary is also responsible for ensuring the performance by the clerical and other staff of their duties in relation to the accounts. These responsibilities of the secretary assume greater importance where the company does not have either a managing director or manager. In the absence of such managerial heads, the secretary is necessarily a responsible officer who is expected to authenticate the Balance sheet and Profit and Loss Account and testify to their correctness and also to the formal requirements as to accounts. Where the company does not have a managing director or manager, at least the secretary must join in the authentication of the annual accounts.
Authentication, however does not mean that the facts and figures or truth or accuracy of the transactions in the accounts are all certified as true. It only implies, that the documents authenticated are genuine and not faked. It only means certification of its genuineness or authorship. The secretary or an ordinary director who signs the balance sheet and the profit and loss account cannot be expected to guarantee the truth and accuracy of the transactions and figures in the accounts presented, as it is no part of the duty of the secretary or ordinary director to vouch the truth or correctness of the items in the accounts as that duty lies in those in management and / or responsible for maintaining the accounts.
As per Lexicon Law Dictionary, by P. Ramanatha Aiyar, we need to look into these terms for betbetter clarity,
meaning of “Authentication” is – To give legal validity to a document, to establish the genuineness of the document, an attestation made by a proper officer by which he certifies that the record is in due form of law, and that the person who certifies it is the officer appointed to do so.
meaning of “authorize” is – to give formal approval to, to sanction, approve, countenance, to empower, to give a right or an authority to act, to endow with authority or effective legal power, warrant, or right. To permit a thing to do be done in the future. It has a mandatory effect or meaning, implying a direction to act.
meaning of “signing” is – To “sign” a paper is to subscribe one’s own name to it. Whatever is intended as a signature is valid signing, no matter how imperfect or unfinished or illegible or even false the characters may be. The actual signing of a written instrument in legal sense may imply more than the clerical act of writing the name. The element of intent may enter into the Act, not the intent to merely place the name on the paper, but to affix it to the instrument in token of intention to be bound with the conditions, for a signing consisting of both the Act of writing a person’s name and the intention in doing this to execute, authenticate or to sign as an witness.
1. Section 54 of Companies Act, 1956 – Authentication of documents & Proceedings
The officers signing the Balance sheet and the Profit and Loss account, sign by virtue of their office and do not require any authorization. But in case of any other officer there must be actuauthority.
2. Signature of Agent whether Signature of company
Signature of the Company Secretary on behalf of the Company can only hold the Company liable in case of misrepresentations. So, if the Company Secretary is authorized to sign, then company is bound. But, this requires evidence on the scope of Company Secretary’s authority.
This judgement was delivered in the following case, wherein, a representation signed by a duly authorized agent or officer of a company acting within the scope of his authority and on behalf of the company in the course of its business may amount to a representation and signature of the company. U.B.A.F. Ltd. V. European American Banking Corporation, (1984) 2 All ER 226 : 1984 BCLC 112. (CA).
Responsibility for preparing accounts
The responsibility is placed on the directors unless they prove that the duty was entrusted by them to some other competent and reliable person who was in a position to discharge it.
While under section 210 of the Act, the responsibility as regards the annual accounts and balance sheet is laid on the directors. Even u/s 211, which deals with the form & content of Balance sheet & Profit & Loss account, it throws the responsibility on the managing director / manager, in companies having managing director / manager, and in companies not having managing director / manager, on the directors.
In connection to above mentioned statements, following relevant sections may be referred –
3. Section 210 (5) of Companies Act, 1956 – Director’s Responsibility
This section states that, if any person, being a director of Company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Rs.10,000 or with both, provided that in any proceedings against a person in respect of an offence, under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty.
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully. So, primarily, the Directors of the company are liable.
4. Section 210 (6 ) of Companies Act, 1956 – Annual accounts and balance sheet
If any person, not being a director of the company, having been charged by the Board of directors with the duty of seeing that the provisions of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both:
Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.
5. Section 215 of Companies Act, 1956 –
Authentication of Balance sheet and Profit and Loss Account
Every Balance sheet and every Profit and Loss account of the Company shall be signed on behalf of the Board of Directors, in case of Companies, other than Banking Companies by its Manager or Secretary, if any, and by not less than two directors of the Company one of whom shall be a managing director where there is one. However, in the case of a Company, not being a banking company, when only one of its director, is for the time being is in India, the Balance sheet and the Profit and Loss account shall be signed by such director, but in such case there shall be atattached to the Balance sheet and the Profit and Loss account, a statement by explaining the reasons for non compliance with the provisions. The Balance sheet and the Profit and Loss account shall be approved by the Board of Directors before they are signed on behalf of the Board in accordance with the provision of this section and before they are submitted to the auditors for their report thereon.
Headings or Titles prefixed to sections or group of sections can be referred to in construing an Act of the Legislature, and so, in this case also, Section 215 of the Companies Act, 1956,
which deals with authentication of accounts is to be treated only as a preamble to the other provisions following them.
Also, there has been a Government clarification on section 215 of the Companies Act, 1956. Circular No. 7/72, dated 12-5-1972.
The Department is of the view that as the authentication by the Secretary is “ on behalf of the board of directors” and not in his personal capacity, secretary can be held responsible regarding errors, etc., only as an “officer” of the company within the meaning of section 628 and not because of authentication by him under section 215 as such. Where, however, the secretary is charged with the responsibility of maintaining the accounts and also assisting the auditor at the time of auditing, he cannot conceivably escape the consequence of any wrong statement in the accounts.
In this connection, we need to also refer to Section 628 of the companies act, 1956 –
Section 628 – penalty for false statements –
If in any return, report, certificate, balance sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a false statement –
(a) which is false in any material particular, knowing it to be false;or
which omits any material fact knowing it to be material;
he shall be punishable with imprisonment for a term which may extend to two years, and shall be liable to fine.
“Officer in Default” (Section 5 of the Companies Act, 1956)
This section was amended by the companies (Amendment) Act, 1988, so as to revise the definition of “officer in default” so that officers and directors, who are in charge of management or who have been charged with the responsibility of complying with any of the provisions of the Act are held responsible for any contravention of the Act.
These statements can be supported by referring to following mentioned case laws :
S.C. Bhatia v. P.C. Wadhwa,(1998) :
Where the applicants to whom debentures could not be allotted were given refund with a delay and also without interest, it was held that only those persons could be prosecuted who fell within the meaning of the expression “officer in default”. A person who was simply a director was not liable to be prosecuted. So, the person to be “officer in default” should have been charged by the Board of Directors or the Management with a specific task or responsibility, for prosecution.
(b) Bhagwan Das Sharma v. Vijay Kumar Jain, (1998)
No prosecution was allowed under the Indian Penal code where the complainant was not aware as to who was the principal officer of the company. The Company could not be prosecuted by implicating the booking clerks unless they are shown to be in – charge of affairs. They cold be prosecuted as individuals without showing a position of responsibility in the Company but it would have to be shown that they were guilty of the alleged offences individually. So, in order to make one held liable, the person in prosecution should have been entrusted / in charge of the particular responsibility.
Accounts & Audit under the Companies Bill, 2008
Even under the recent Companies Bill, 2009, Clause 117 and Clause 120 of the Bill, throws light on the liability of the Board of Directors.
The CEO, CFO & the Company Secretary is taken to be the Key Managerial Personnel of the Company.
The authentication of accounts dealt with in section 215 of the Act is dealt with clause 120 of the Bill with the difference that the secretary of the Company is no longer required to authenticate the financial statements as contemplated u/s 215 of the Act but instead is to be authenticated solely by the Chairman of the Board, if so authorized, or if not so authorized, by at least 2 directors one of whom shall be a M.D. or by the director in the case of one man company. So, onus lies on the Board ultimately. In this view, we can say that, a Company Secretary is not held liable for authentication of accounts, if he is only signing the accounts, being in the position of, as a Secretary.
The financial statements are to be prepared on a going concern basis according to clause 120 and perhaps if it is not so, the Board have to specifically state that it has not been so, setting out the reasons therefore. So, the Board is always answerable.
However, if the financial statements have not been prepared in accordance with the provisions of the Bill, then the M.D. Whole Time Director in charge of Finance, the CFO or any other person charged by the Board with the duty of complying with the requirements of Clause 117 of the Bill, will be punishable.
The punishment for contravention of clause 117 shall extend to all the directors and they shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Provisions of the Indian Penal code
Even some of the Provisions of the Indian Penal code may be applied to against the company and its Directors which relate to falsification and fabrication of Company Accounts and books etc. Since such offences involve penal consequences involving jail terms, the company directors are required to face prosecution; obtain bail and wait the verdict after a long drawn protracted litigation.
Sec 464 of the IPC stipulates that a person is said to make a false document who dishonestly or fraudulently makes signs or executes a document with the intention of causing it to be believed that such document was signed or executed or at a time which he knows that it was not made, signed, sealed or executed.
Sec 465 of the IPC stipulates that whoever commits forgery shall be punished with imprisonment of either description for a term which may extend to 2 years or with fine, or with both.
Further. Sec 471 of the IPC also stipulates that whoever fraudulently or dishonestly uses as genuine any document which he knows or has reason to believe to be a forged document, shall be punished in the same manner as if he had forged such document.
Again sec 477A of the IPC stipulates that whoever, being a clerk, officer or servant, willfully and with intent to defraud, destroys, alters, mutilates or falsifies any book, paper, writing or valuable security, shall be punished with imprisonment of either description for a term which may extend to 7 years, or with fine, or with both.
Source: Companies Act, 1956, Different case laws, Judgements and Opinions.