Companies Act Section 240

Companies Act, Section 240: Liability of Officers for Offences Committed Prior to Merger, Amalgamation, or Acquisition

Section 240 of the Companies Act, 2013 lays down an important principle of continuing liability for corporate officers who have committed offences under the Act prior to the merger, amalgamation, or acquisition of the company. This provision ensures that key managerial personnel or officers in default do not escape legal consequences for their misconduct simply because the company has ceased to exist in its original form due to a corporate restructuring.

The section reinforces the doctrine of individual accountability, preventing any misuse of corporate restructuring mechanisms such as mergers or acquisitions as a shield against prosecution or penal consequences.

Core Legal Provision Explained

1. Non-obstante Clause: Supremacy Over Other Laws

The section begins with the phrase “Notwithstanding anything in any other law for the time being in force…”, which is a non-obstante clause. This means that:

The provision of Section 240 will prevail over any conflicting provisions in other existing laws or statutes.
No other law whether general or special, existing or future can override or nullify the continuing liability specified in this section.
This clause ensures that officers cannot seek immunity or relief from liability under other legal provisions once a merger, amalgamation, or acquisition has occurred.

2. Applicability to Officers in Default

The provision specifically applies to “officers in default” of the transferor company, i.e., the company that is being merged or acquired.

As defined in Section 2(60) of the Companies Act, 2013, the term “officer in default” includes:

Managing director, whole-time director, manager;
Company secretary;
Any person under whose directions the Board is accustomed to act;
And other specified individuals who were responsible for compliance and management at the time of the offence.
Thus, liability does not extend to all employees but specifically to those who were in positions of authority and legally responsible for regulatory compliance or decision-making in the transferor company.

3. Continuation of Liability for Past Offences

The provision clearly states that:

The liability in respect of offences committed under this Act by the officers in default of the transferor company prior to its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.

This has the following implications:

If an offence (e.g., misstatement of financials, non-compliance with statutory filings, fraud, insider trading, or breach of fiduciary duties) was committed before the merger or acquisition took place, the responsible officers cannot avoid investigation or prosecution simply because the company’s corporate identity has changed.
Legal proceedings whether civil or criminal can be initiated or continued against such officers even after the corporate restructuring.
This liability is personal and continuous, irrespective of the fact that the transferor company may have been dissolved, merged, or subsumed into another entity.
Rationale Behind the Provision

The key objectives of Section 240 are to:

Ensure accountability of individuals who held positions of power within the transferor company.
Prevent misuse of amalgamation, mergers, or acquisitions as a way to cleanse corporate records or escape prosecution.
Maintain the integrity of the legal process by ensuring that offences are dealt with, regardless of changes in the corporate structure.
Reinforce the principle that corporate restructuring does not absolve personal liability under the Companies Act.