Liabilities of Directors
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INTRODUCTION
In general understanding, a ‘Director’ is a person who manages all the decisions and affairs of the company. He acts upon the resolutions and makes decisions for the betterment of the company. He can also be understood as the trustee of the company its money and property. In legal definition, a director is a person who is elected or appointed to manage the company’s business and financial decisions. There must be at least two directors in a Private Limited Company and Three directors in a Public Limited Company. A company is an artificial person in the eyes of law which means that though the company is not having actual eyes, ears mouth to eat list and see yet it is considered to be liable for any act which is illegal in the eyes of law. The director is considered the mind and will of this artificial person ‘company’.
Table of Contents
- Meaning of director
- Who can be the director
- Liabilities of director
- Breach of fiduciary duty
- Acts ultra vires
- Negligence
- Mala fide acts
- Liability towards third person or party
- Minimum subscription
- Irregular allotment
- Fraudulent business
- Meaning of delegates non- protest delegate
- Contractual liability
- Vicarious liability
- Conclusion
WHO CAN BE DIRECTOR AND LIABILITIES OF DIRECTOR
Under Section 253 of the Companies Act, an individual can be a director and an association, firm, or body cannot be considered to be a director. A director of the company is allotted with a Directors Identification Number (DIN). These directors of the company are there to manage the affairs as an officer and not an employee. He may though act as an employee, agent, trustee in a separate capacity.
LIABILITIES OF DIRECTORS
Directors are though not liable for the actions of the company if they have done the act in good faith and accordance with the law, but, they can be held liable for their acts under the criminal laws and also under the principles of tort if the director has committed an act due to its negligence or he is the cause such act.
(a) Breach of Fiduciary duty– A director is liable to maintain the relationship between the company and himself. Where a director dishonestly acts against the interest of the company and breaches the fiduciary relationship with the company. A fiduciary relationship is a relationship of complete trust between the two parties.
(b) Acts Ultra vires– A director is empowered with a lot of power and nothing can be done beyond that. There are several agreements in the forms of Memorandum of association, Article of Association which records the agenda and duties of the member including the director and hence the same has to be followed. An act done by a director which is in contradiction with the memorandum of association or understanding will be ultra vires and void.
(c) Negligence– Directors are empowered with much power but there should be reasonable care, skill, and prudence which should be taken by the directors of the company. If due to negligence there is any loss or action against the company the directors will be held liable.
(d) Mala fide Acts– Any salaried act of the director which will give loss to the company and wrongful gain to the director is a dishonest and minified act. The director must disclose all the material facts to the company and he should do not act to gain secret profits.
(e) Liability towards third person or party- the directors are not directly liable to the third party unless and until there is direct misconduct on the part of the director.
(f) Minimum subscription:- it is the personal liability of the director if the allotment is not as per the sections mentioned.
(g) Irregular allotment- As per Section 69, there is a personal liability if the allotment is done before there is a minimum subscription or Under Section 70 without filing a copy of the statement in respect of prospectus the director, in this case, he shall be liable to compensate not only to the company but also to the allottees for any damages, loss or costs.
(h) Fraudulent Business: Under Section 542 of the Companies Act 1956 if the director is found guilty to practice trade during the course of its association with the company he will be liable for such acts. Further Section 542(1) states 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 persons or for any fraudulent purpose, then the director 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.
CASE LAW:- In J.K. Industries v. Chief Inspector of Factories 1996, the Hon’ble Supreme Court stated that the directors are under the liability to manage and control the affairs of the company. This responsibility is not a general one and hence has to be prudently and carefully done by the director and hence the same cannot be delegated causally to any sub-ordinate person.
The maxim delegates non- protest delegate i.e. authority once delegated cannot be delegated again is enough to justify that the shareholders have faith in the director and thus they have invested their assets. Though the law is not rigid and by a memorandum of association a certain degree of duty can be performed by a different person yet the director cannot dust off his shoulder from the duty he is bound to do.
(i) Contractual Liability:
In R.K. Dalmia & others v The Delhi Administration 1962, it was held by the Hon’ble Supreme part that the director is personally liable on company contract when the director has himself accepted personal liability either in an expressed or implied manner.
When the director has personally guaranteed the performance of the contract he is personally liable and is thus ‘Express liability’. Implied liability will be when a director signs the contract for the Company and failed to add the word “limited“. In Penrose v. Martyr 1858, a bill was addressed to a company and failed to mention the word “Limited” in describing it. The defendant signed the acceptance and the company secretary was held to be personally liable by the Court.
CASE LAW:- In Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited 1971, Taking advantage of the administrative responsibilities a company secretary fraudulently hired cars for his personal use and without the knowledge of the directors. The directors were not vigilant enough and thus taking benefit of this the company secretary entered into the contract in the name of the company as well. The company was held liable as company secretary fraudulently hired cars for his use without the knowledge of the managing director. The company secretary was constantly entering into contracts in the name of the company as he has administrative responsibilities to hire cars. Hence, the company was liable as the company was representing the secretary who was appointed by the company and had the authority to enter into the transactions.
CASE LAW:- It was held in Re Duomatic Ltd 1969, it was held that the director shall act for the company in a way in which a person deals his personal affairs, with all reasonable care and diligence and any act and omission which held the director liable.
(ii). VICARIOUS LIABILITY
The directors are usually held liable for the dishonor of a cheque who have either left the company, but in KK Ahuja v. V.K Arora 2009, it was held by the court that the liability of a director in case of dishonor of cheque issued by the company is limited to only the directors who were in charge of and were responsible for the conduct of the business. The director who was not in charge and responsible for the business of the company will not be liable for a criminal offense.
CONCLUSION
The directors are under an enormous responsibility to manage the affairs of the company it is like feeding paralyzed human who does not know what is right or wrong, the person taking care is wholly responsible for survival. Likewise, the directors are the sole caretaker of the company who along with other helpers grow the company over the period. Any wrong action could collapse the system and the company will ultimately die. Thus the accountability of the directors is important.
There is a principle which describes how a director should act and they suggest that the directors should act in good faith towards the company, he should not misuse the powers conferred upon him, they must not use their discretion in a manner affecting the company wrongfully, they must not put their interest before the company.