Directors & Their Liabilities
Meaning of a Director
‘Director’ includes any person occupying the position of a director by whatever name called.” So It is not the name which is important but the position he occupies and the functions and duties he discharges.
A corporation is an artificial being existing only in contemplation of law. It has neither a mind nor a body of its own which it requires to carry out its operations and so here Directors come into the picture and company’s business is entrusted to them as human agents.
Directors are often treated as mind and will of the company.
Also Sec. 252 of Act says that every public company shall have three Directors and every private company shall have two directors.
So Directors in a company play a very vital role. Further we are going to discuss about their position and their liabilities in detail.
Who may be appointed as a Director
Only an individual can be appointed as a director and no association or firm or body corporate can be appointed as a director of a company, as it’s given under Se. 253 of the Companies Act. However, No Company can appoint or reappoint any person as a director of the company unless he has been allotted a Directors Identification Number (DIN). Every individual, intending to be appointed as director of a company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in the prescribed DIN Form. Therefore, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained. Specific care should be taken that a person cannot have more than one DIN, therefore, a DIN once obtained shall serve the requirement for all the companies in which he is a director or intended to be a director.
Position of Directors
Directors are professional men hired by the company to direct its affairs. They are not the servants of a company rather they are the officers who manage everything in the company unlikely to the shareholders who are the owners of the company. A director may also work as an employee in different capacity.
They can also work sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose, be considered.”
Director as Agents
The general principles of agency, govern the relations of directors with the company and of persons dealing with the company through its directors. So whenever the director contracts on behalf of the company with the third parties, it’s the company who’ll be made liable on it and not the directors.
Directors as Trustees
Although directors are not properly speaking trustees, yet they have always been considered as trustees of companies assets over which they exercise control. They shall exercise their powers honestly in the interest of the company and the shareholders, and not for their own personal advantage. And if they misuse their power they could be rendered liable as trustees and in the case of his death, even his legal representatives could be made liable for it.
Directors as managing Partners
In this the company is considered as large partnership, wherein the directors are been allotted the responsibility of managing the affairs. Whereas the shareholders enjoy vast powers of management and act as the supreme policy and decision making body.
Liabilities of Directors
It is not easy to describe the liabilities of a director. The Director can’t delegate their authority which is specifically imposed on them, and which involve the exercise of their own judgment and discretion. However, General tort principles make the directors personally liable if they have either intentionally or negligently caused harm to third parties. Here it is to be also noted that the directors, who act in good faith and within the scope of their authority, will not be held liable for the tortuous acts of the association. It is only when directors act in bad faith or outside the scope of their authority, will they have a problem. For example, an employee may be fired without just cause, but the dismissal may be in the best interests of the association.
The liabilities of Directors can be considered under the following heads.
1. Liability to the Company-
The liability of directors to the company arises under few circumstances only for example the directors have acted ultra vires the company.
The liability of the Director to the company may arise from:
(a) Breach of fiduciary duty.
(b) Ultra Vires acts
(c) Negligence, and
(d) Mala fide Acts.
(a) Breach of Fiduciary duty- whenever a director works dishonestly to the interest of company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are ‘powers in trust’ as explained above and therefore, should be exercised in the benefit of company and not for their own benefit or for the benefit of other members.
(b) Ultra vires acts- everybody in the company are supposed to work within the prescribed limits or the provisions of Companies Act, Memorandum and Articles of association since these lay down the limits to the activities of the company and consequently to the power of board of Directors. If the Directors do anything which is beyond these prescribed limits it would be considered as ultra vires and so he shall be made personally liable for this.
(c) Negligence- as long as the Directors Act within their powers, and exercise their duty with reasonable care and skill as every prudent businessman is expected to take care of, they will not be made liable. But where they fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently in discharge of their duties and consequently shall be liable for any loss or damage resulting therefrom. Although, there are no objective standards of skill and care with the help of which we can decide whether a director has been negligent, instead, there are only general principles which may be applied depending on the facts of each case. The directors are not bound to bring any special qualification into their office. The mere omission to take every possible care will not amount to negligence.
(d) Mala fide Acts- directors are the trustees of the assets of the company including money, property and also exercise power over them. And If they exercise such power dishonestly or perform their duties in a malafide manner, they will be held liable for the breach of trust and would be asked to reimburse the company of whatever the loss company has suffered of such malafide act. It is the foremost duty of director to disclose all the facts to the company which is known to him and so he could be made accountable to the company for any secret profits he might have earned in the course of performing duties on behalf of the company. Directors can also be made liable for the acts of Misconduct or wilful misuse of powers.
2. Liability to third parties:
In addition to the statutory duties, directors also owe common law duties. As a result of this, they may often find themselves liable to third parties. If, for example, you assumed personal responsibility for a misstatement to a customer, you could find yourself sued by that customer alongside the company.
The directors are not personally liable to outsiders or third parties if they act within the scope of the powers vested in them. The directors are not personally liable to the third parties for any contract on behalf of the company.
The discussion on liabilities of Directors towards third parties may be grouped as under:
(a) Liability under the provisions of Companies Act, 1956:
(i) Prospectus: in case of any omission to state any particulars as per the requirement of the section 56 and Schedule II of the act or mis-statement of facts in prospectus renders a director personally liable for damages to the third party. Also if the party subscribes for any shares or debentures on faith of the prospectus then for any loss or damage he may sustain by reason of any untrue or misleading statement included therein , director shall be made liable to pay compensation, as it is given in the Section 62. He may, however, escape his liability, where he proves his innocence.
(ii) With regard to allotment: Directors may also incur personal liability for:
Ø Irregular allotment, i.e., allotment before minimum subscription is received (Section 69), or without filing a copy of the statement in lieu of prospectus (Section 70): Under section 71(3), if any director of a company knowing contravenes or willfully authorizes or permits the contravention of any of the provisions of section 69 or 70 with respect to all allotment, that is to say, if he allots the share even before minimum subscription is received or before filing a copy of the Statement in lieu of prospectus, he shall be liable to compensate not only to the company but also to the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby.
Ø For failure to repay application monies in case of minimum subscription having not been received within 120 days of the opening of the issue: Under section 69(5) read with SEBI guidelines, in case where minimum subscription is not received within 120 days of the opening of issue, then money is to be repaid to all the applicants who have subscribed for shares within 130 days from the date of the issue of the prospectus, which if not repaid, the directors of the company shall be made jointly and severally liable to repay that money with interest at the rate of 6 % per annum on the expiry of 130th day. However, a director shall not be liable if he proves that the default in repayment of money was not due to any misconduct or negligence on his part.
Ø Failure to repay application monies when application for listing of securities are not made or is refused: Under section 73(2) .Where the permission for listing of the shares of the company has not been applied or such permission having been applied for, has not been granted, the company shall forthwith repay without interest all monies received from the applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay, the company and every director of the company who is an officer in default shall from the expiry of the eighth day, be jointly and severely liable to repay that money with interest rate of not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.
(iii) Unlimited liability: Directors will also be held personally liable to the third parties where their liability is made unlimited in MOA in pursuance of section 322(i.e. where Memorandum’s scope is widened) or in pursuance of section 323(i.e., where alterations of Memorandum can be made by passing special resolution).
So By virtue of section 322, if there is a specific clause mentioned in MOA stating the liability of all or any of the directors unlimited, their liability would be unlimited as per the MOA. In that case, the directors, manager and the member who proposes a person for appointment as director or manager must add to the proposal for appointment as a statement that the liability of the person holding the office will be unlimited. Also Notice in writing to the effect that the liability of the person will be unlimited must be given to him by the following or one of the following persons, namely: the promoters, the directors, manager and officers of the company before he accepts the appointment.
Further, in case of limited liability of a Company, the company may, if authorized by the AOA, by passing resolution alter its Memorandum so as to render the liability of its directors or of any director or manager unlimited. But the alteration making the liability of director or directors or manager unlimited will be effective only when the concerned officer consents to his liability being made unlimited. In case when Director does not agree to it such alteration will not have any effect and so the he cannot be compelled to have unlimited liability.
(iv) Fraudulent trading: if the Directors have been found guilty of fraudulent trading during the course of business, they may also be made personally liable for the debts or liabilities of a company by an order of the court under section 542. Section 542(1), in this regard, provides that if in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the court, on the application of the Official Liquidator, or the liquidator or any creditor or contributory of the company may if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on business in the manner aforesaid shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
Further, section 542(3) provides that every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.
Liability for breach of warranty:
Directors are supposed to function within the scope of their authority as given in AOA of the company and the Companies Act. Thus, where they exceed the scope of their authority i.e. do any ultravires act, ultra vires to the company or ultra vires to the articles; they may be proceeded against personally for any loss sustained by any third party.
3. Liability for breach of statutory duties:
The Companies Act, 1956 imposes numerous statutory duties on the directors under various sections of the Act. Where any Default in compliance of these duties attracts penal consequences. The various statutory penalties which directors may incur by reason of non-compliance with the requirements of Companies Act are referred to in their appropriate places.
4. Liability for acts of co-directors:
Director is bound by the maxim delegates non- protest delegare i.e. authority once delegated cannot be delegated again. Shareholders have appointed him because of their faith in his skill, competence and integrity and they may not have the same faith in another person. It was held in the case of J.K. Industries v. Chief Inspector of Factories that the directors being in control of the company’s affairs cannot get rid of their managerial responsibility by nominating a person as the occupier of the factory. The rule is, however, not that rigid. The Act or Articles of Association of the Company may make a delegation of functions to the extent to which it is authorized. Also, there are certain duties, which may, having regard to the exigencies of business, properly be left to some other officials. A proper degree of delegation and division of responsibility is permissible but not a total abrogation of responsibility. A director might be in breach of duty if he left to others the matters to which the Board as a whole had to take responsibility. Directors are responsible for the management of the company and cannot divest themselves of their responsibility by delegating the whole management to agent and abstaining from all enquiries. If the latter proves unfaithful, the liability is that of the directors as if they themselves had been unfaithful. So generally, a director has to perform his functions personally. He is the agent of the company except for matters to be dealt with by the company in general meeting and not of the other members of the Board. Accordingly, nothing done by the Board can impose liability on a director who did not participate in the Board’s action or did not know about it. To incur liability he must either be a party to the wrongful act or later consent to it.
Thus, the absence of a director from meeting of the Board does not make him liable for the fraudulent act of a co-director on the ground that he ought to have discovered the fraud.
Directors of the Company are bound to use fair and reasonable diligence in discharging their duties and to act honestly, and act with such care as is reasonably expected from them, having regard to his knowledge and experience. In R.K. Dalmia and others v. The Delhi Administration, it was held that “A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company”.
Express liability of the director usually arises only when a director has personally guaranteed the performance of a contract. On the other hand Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. This rule is based upon the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability by default. As it was held in the case of Penrose v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court.
Pre- Incorporation Liability- A Company cannot enter into a contract before it is incorporated because, before incorporation, it has no legal existence. Therefore, a Company after incorporation cannot ratify a contract previously made. If it wants the contract then it will have to make a fresh contract. So the directors can also be not made liable for such pre incorporation contracts unless they have given a prior consent to it. In Kelner v. Baxter the Court of Common Pleas held that where a person purports to sign a contract as agent, but has no principle in existence at the time, he is personally responsible. That is to say if a person signs a contract as an agent when principle is not in existence at that time, he would be made personally liable for such contract.
Liability of Directors for Torts of the company: -
If a company commits any wrongful act, injury or damage to somebody, the first Question which comes to our mind is who’ll be liable for such act, the company or the Director of the company. Whether the director of a company can be made personally liable in damages for a tortious act committed by the company? A company is a separate legal person liable for its own torts. Directors as such are not liable for the torts or civil wrongs of their company. To make a person liable for a tort, e.g. for negligence, trespass, nuisance or defamation it must be shown that he was himself the wrongdoer or that he was the principal of the wrongdoer that it was under his instructions and guidance the act is been committed in relation to the act complained of.
That is to say that a director may be held personally liable for damage caused by the tortious act of the company, if he had himself given instructions for the act to be done by an employee of the company or any other.
In Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited, a company secretary fraudulently hired cars for his own use without the knowledge of the managing director. A company secretary routinely enters into contracts in the company's name and has administrative responsibilities that would give apparent authority to hire cars. Hence, the company was liable.
Civil Liability to the Company:
Director’s liability to the Company may arise in either of the circumstances:
· the directors are guilty of negligence,
· the directors committed breach of trust,
· there has been misfeasance and
· the director has acted ultra vires and the funds of the company have been applied for such an act.
A director is required to act honestly and diligently by applying his mind and discharging his duties as a man of prudence of his ability and knowledge would do. It has been explained more precisely in the duties of directors as to what is standard or due care and diligence expected from him as explained by Justice Romer in Re City Aquintable Fire Insurance Company.
Any willful misconduct or culpable negligence falls within the category of misfeasance. It was held in Re Duomatic Ltd,
“A director has to act in the way in which a man of affairs dealing with his own affairs with reasonable care, and circumspection could reasonably be expected to act.....”
Therefore, Directors would decidedly be liable for omitting to do what the was supposed to do in the given circumstances.
A Director is liable to make good with interest all amount paid from time to time out of the funds of the company for the purchase of shares of the company. He is not entitled to spend money for a purpose which is not covered by the Memorandum of Association although such payment is sanctioned by the Board of Directors and by the majority of shareholders. A shareholder can maintain an action against the director to compel them to restore to the company its funds employed in transactions that the directors have no authority to enter into. The funds of the company cannot be used by the Directors to pay their litigation costs, although these would not have been incurred if they had not been directors. A Director will, however, not be liable for any such unlawful act if he had no knowledge of such payments.
5. Criminal Liability-
Criminal Liability is basically defined as the liability of a person authorized by the company, and the liability is such that the provisions of the Indian Penal Code can be actually applied for the illegal act he committed.
Criminal Liability: Crime against the state for which an officer of the state can bring legal action. Society is harmed by an individual breaking the laws of the state. Usually there is no statute of limitations for criminal liability. Property and casualty insurance is not designed to provide coverage for the criminal acts of an insured individual.
Directors of a company may also incur criminal liability other than the civil liability under the Companies Act or Common law. He may be held criminally liable for any of the act committed by company where he has aided, abetted or procured the commission of such act. There may also be investigations done on them and may also be prosecuted or fined by criminal or regulatory authorities over acts or omissions. Authorities such as the Companies Investigation Branch (CIB) of the Department for Business, Enterprise & Regulatory Reform, have wide powers of investigation that they are not afraid to use. Typically, investigations commence with an unannounced visit by the investigator to a company’s premises — the so called “dawn raid”.
Just as individuals owe a duty not to harm or injure others in society without justification, so do companies owe a duty not to poison our water and food, not to pollute our rivers, beaches and air, not to allow their workplaces to endanger the lives and safety of their employees and the public, and not to sell commodities, or provide transport, that will kill or injure people.
In addition to the above liabilities, the directors are also bound for their acts relating to the company, to the state, for; the Government is concerned with the affairs of the company in the interest of the public. So, the Companies Act, 1956 imposes criminal liability either in the form of fine or imprisonment or both on the directors for contravention of certain statutory duties. The penal sections dealing with offence imposing punishment are mainly sections 44, 63, 68, 70, 84,105, 202, 203, 207, 209, 210, 211, 217, 221, 240, 248, 250, 295, 371, 407, 420, 68 A, 606,614 A, 615 and 628.
Apart from civil liability under the Act or under the common law, directors of a company may also incur criminal liability under common law, as well as under the Companies Act, and other statutes. Some of the provisions of the Companies Act which make directors criminally liable (fine or/and imprisonment) are:
i) Section 44(4) – Filing of prospectus or statement in lieu of prospectus (to be filed by a private company on ceasing to be private company) containing untrue statement.
The penalty for this is two years imprisonment or/ and fine up to Rupees fifty thousand.
ii) Section 58A(5) –failure to repay deposits within the prescribed time limit as specified under the provisions of Section 58A.
The Central Government has taken the power by Section 58A to regulate, in consultation with the Reserve Bank, the acceptance of deposits by Companies. Such rules may prescribe for the limits up to which, the manner in which and the terms and conditions on which deposits may be invited or accepted. Deposits should be in accordance with deposit rules and by an advertisement accompanied by a statement showing the financial position of the company in such form as may be prescribed by the rules. If any deposit is accepted or renewed in contravention of such rules, the company, the company shall repay it within thirty days or within further thirty days if allowed by the Central government on sufficient cause.
The Penalty for this may be five years imprisonment and fine.
iii) Section 58A(6) – Accepting deposits or inviting deposits in excess of the prescribed limits.
Deposits in excess of the limits prescribed by the rules is also punishable and also involve fine on the company to an amount equal to the deposit; for mere invitation the fine may go up to ten lakh rupees, but not less than Rs.50,000. Officers are punishable with fine and imprisonment up to five years.
iv) Section 63 – Issuing a prospectus containing untrue statement.
That is to say For any untrue statement in the prospectus, every person who authorized the issue of the prospectus shall be punishable with Imprisonment for a term which may extend to two years, or with fine which may extend up to Rs.50,000/ or both
Although Person involved can take a defense by showing that
· The statement was immaterial or
· He had reasonable ground to believe and
· Up to the time of the issue of the prospectus believed that the statement was true.
v) Section 68- Knowingly making a false, deceptive or misleading statement and thereby inducing persons to invest money.
It is a punishable offence to fraudulently induce the third party to invest money in Companies. This section can be invoked when investment is brought about by knowingly making any statement which is false or misleading or concealing of material facts. Liability would also be incurred even one is attempting to do so.
It attracts the imprisonment upto five years or and fine up to Rupees One lakh.
vi) Section 73 - Failure to repay excess application money.
Where the permission of a stock exchange has been granted and therefore, the allotment completed is valid, the prospectus being over-subscribed, the over - subscribed portion of money received must be sent back to the applicants forthwith. This over-subscribed money should be sent back to the applicants within the margin of eight days.
Any default in repayment of application money and interest is punishable with fine up to Rupees Fifty Thousand but if repayment is not made within six months from the expiry of the eighth day, also with imprisonment for a term up to one year.
vii) Section 84(3) – Fraudulently renewing a share certificate or issuing a duplicate share certificate.
A shareholder is expected to keep his share certificate in safe custody, for he is not entitled to a duplicate unless he shows that the original has been lost or destroyed, or, torn is surrendered to the company. A Civil suit lies for determining ownership of shares for an order of issue of Duplicate Share certificates.
The punishment for this may be imprisonment up to six months or and fine up to Rupees one lakh.
viii) Section 105 – Concealing the name of a creditor or misrepresenting the nature or amount of the debt or claim of any creditor.
It provides for punishment with imprisonment extending to one year or with fine or both, if any officer of the company knowingly conceals the name of any creditor or misrepresents the nature or amount of claim or debt or abets such concealment or misrepresentation.
ix) Section 202(1) – undercharged insolvent acting as Director
If a person who is an undischarged insolvent is disqualified from being appointed to any managerial office. If any such person discharges the functions of a Director or takes part in the management of any company, he is punishable with fine up to Rupees fifty thousand and imprisonment up to two years.
x) Section 207 – Default in Distributing Dividends.
In order to ensure prompt payment of Dividend to shareholders. Section 207 imposes a penalty if a dividend has been declared and is not paid within thirty days from the date of the declaration. The penalty is incurred by every director, provided if he was a party to the default.
The punishment for this is simple imprisonment up to seven days and fine.
xi) Section 209A – Failure to assist Registrar or any officer so authorized by Central Government in inspection of books of account, etc.
It provides that the books of account and other books and papers of every company shall be open to inspection during the business hours by the registrar or by any such officer as may be authorized by the Central Government. It is not mandatory to give prior notice to the company before inspection is made.
The punishment may be imprisonment up to one year and fine to be not less than Rupees fifty thousand.
xii) Section 210(5) – Failure to lay balance sheet, profit & loss account, etc, at the annual General meeting.
At every Annual General Meeting, it’s the duty of Board of Directors to lay before the meeting the documents like balance sheet, profit and loss account etc. failing of which they are entitled to imprisonment up to six months or/and fine up to Rupees ten thousand.
xiii) Section 211(8) – Failure to comply with Section 211 regarding form of balance sheet and matters to be stated therein and the content and disclosures to be made in the profit and loss account.
The format of Balance sheet is set out in Para I of Schedule VI. The balance sheet has to be as near thereto as circumstances admit. It may also be in any format as may be approved by the Central government. The profit and loss account has to be in accordance with the Part II of Schedule.
The penalty for this is imprisonment up to six months or/ and fine up to Rupees Ten thousand.
xiv) Section 217(5) – Failure to attach to balance sheet a report of the board of Directors.
It says that a report made by the Board of Directors is to be attached mandatorily with the Balance sheet. In failure to which, the punishment is imprisonment up to six months or/ and fine up to Rupees Twenty thousand.
xv) Section 221(4) – Failure to supply information to auditors.
Under this it’s the duty of Director to disclose to the company the particulars of any matter pertaining to them which is required to be reflected in accounts.
The penalty for this is imprisonment up to six months or/and fine up to Rupees fifty thousand.
xvi) Section 233B(11) – Default in complying with the requirements of the section.
The penalty for this may be imprisonment for a term that may extend to three years or with fine which may go up to Rs. 50,000 or with both.
xvii) Section 248(4) – For failure to supply information or for supplying false information to the Central Government or the Company Law Board.
The punishment for this is imprisonment up to six months or/ and fine upto Rupees fifty thousand.
This section was omitted by the Amendment Act of 2000.
xviii) Section 250(9) – Failure to honour restrictions upon shares and debentures imposed by the Company Law Board.
There are certain restrictions imposed by the Company Law Board upon shares and debentures which is to be honoured and in failure to it, will attract imprisonment up to six months or/and fine up to Rupees fifty thousand.
xix) Section 293A(5) – Contribution to political parties or for political purpose in contravention of Section 293A.
There are certain conditions laid down in S.293A which govern the contribution of companies for political purposes, some of them are, Companies other than the government and companies which have been in existence for less than three years are allowed to contribute money to any political party or to any person for political purposes. So the contribution made by the company if, is in non compliance with such conditions would attract penalties which may be imprisonment up to three years and fine.
xx) Section 295(4) – Grant of loan to Directors without obtaining the previous approval of the Central Government.
Granting loans to the directors is now strictly regulated by the Act. It cannot be given unless the consent of Central government is been taken off. And if it is given without taking the approval of Government, then it will have to go for simple imprisonment up to six months or fine up to Rupees fifty thousand.
xxi) Section 299(4) – Failure to disclose interest.
If the director makes a contract with the company without disclosing his interest in the contract, he will have to bear the fine which may extend to Rupees 50,000.
xxii) Section 308(3) – Failure to disclose Shareholdings.
Under this every Director of the Company is required to give notice of the company of such matters relating to him as may be necessary for the purpose of enabling the company to make entries in the register of Director’s shareholdings.
Failure to comply with the provisions will attract imprisonment which may extend to two years or with fine up to Rupees fifty thousand or with both.
xxiii) Section 407(2) – Acting as director or manger after removal by the Company Law Board.
A director or whose agreement or office has been terminated by the order of Company law Board shall not act for five years thereafter without the leave of the CLB. Any director who acts in contravention of this provision would be entitled to imprisonment up to one year, or with fine upto Rupees fifty thousand, or with both.
xxiv) Section 488(3) – False declaration of Company’s solvency.
There is a penalty for making the declarations without having the reasonable grounds for the opinion that the company will be able to pay its debts within the specified period. The penalty may be imprisonment up to six months or/and fine up to Rupees fifty thousand.
xxv) Section 209(5) – Non-compliance with the requirement of maintenance of proper books of account.
All the persons responsible for maintenance of books of account which they did not comply with as per the requirements of Section 209 will be made liable for imprisonment which may extend to six months and/or fine up to Rs.50,000.
Again, this is not an exhaustive listing.
Recently Supreme Court has added a point to the Criminal liability in one of its recent Judgment of February, 2010.
The case is pertaining to the liability of directors, who have been hounded under the Negotiable Instruments Act for dishonour of a cheque issued by the company.
it was held by the court that "Only those persons who were in-charge of and responsible for the conduct of the business of the company at the time of commission of an offence will be liable for criminal action,"
This means that if a director of a company who was not in-charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable for a criminal offence under the provisions.
Accountability is the most important aspect in any business, because until and unless the person is been made accountable to his/her act he may do the act in pursuance of his own interest. So there should be some mechanism for evaluating the performance of the directors. The extent of liability of a director would depend on the nature of his directorship.
As it was held aptly by the Supreme Court in the case mentioned above wherein the director can be made liable for the act only if he was he was in charge of the act and if he knew about it and this is also supported by principles of equity wherein no person can be made liable until and unless he’s a party to the commission of offence or he’s aware of.
In applying the general equitable principles to company directors, four separate rules have emerged. They are (1) that directors must act in good faith in what they believe to be the in the best interest of the company (2) they must not exercise powers conferred upon them for purposes different from those for which they are conferred. (3) that they must not fetter their discretion as to how they shall act and (4) that without the informed consent of the company, they must not place themselves in a position in which their personal interests or duty to other persons are liable to conflict with the duties to the company.
After analyzing all the things discussed above, i would just like to say that yes, although Directors have multifarious liabilities but if they exercise these by following the above mentioned rules and with due care as expected of them they won’t be made liable and neither they should be made liable for the act they have not done and merely on the basis of their position.
# Section 2(13) of Companies Act, 1956
# H L Bolton & Co v T J Graham & Sons  1 QB 159.
# Lee v Lee’s Air Farming Ltd  3 All ER 420 PC: 1961 AC 12.
# Saharay H.K. (2008).Company Law, Delhi: Universal Law Publishing Company.
# Majumdar A.K.,and Kapoor G.K. ‘Company Law and Practice’ , Edn. 13th, pg. 552.
# Sawchuk Russell, ‘Director's Responsibilities and Liabilities’, Dec 19, 2004, 15:00
# http://www.iitk.ac.in/siic/liabilities.html, taken on 20 july,2010
# Sunday Times, ‘What is my liability as a Company Director’, December 11, 2007.
# Memorandum Of Association- these documents are basically the charter of the company which govern the relations of company with the third parties. If company does anything contravening to these will be utravires.
# Articles of Association- articles of the company are the internal rules of the company, which defines how the company is supposed to work within i.e. internal management.
# Majumdar A.K.,and Kapoor G.K. ‘Company Law and Practice’ , Edn. 13th, pg. 610
# AIR 1962 SC 1821.
# Salomon v Salomon & Co Ltd  AC 22.
#  2 QB 711
# Ltd  Ch 407.
#  2 Ch 365.
# Saharay H.K. (2008).Company Law, Delhi: Universal Law Publishing Company.
# Private Companies cannot advertise for deposits. When a private company accepts deposits from its members or directors, it has to take a declaration from them that they are not making deposit out of borrowed money. Vijay Kumar Gupta v Eagle Paint & Pigment Industries(P) Ltd, (1997) 26 Corpt LA 236 CLB.
# Singh Avtar, Company Law, Edn 15th, pg.572
# Supreme Court narrows down Director’s liability in Cheque Bouncing cases, TNN, Feb 16, 2010, 02.58am IST
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