What are the most significant liabilities for a company’s director?

Director will have personal liability in all the situations where he acts against the company’s interest. If his actions are malicious and wrong and it is proven that his actions are fraudulent, he will be liable. The high risk of internal fraud raises concerns about the liability of directors on the board of companies.

Further, independent directors being external directors should possess more experience and knowledge to gather all ongoing functionalities of the company. Also, additional duties for independent directors are codified in Schedule IV of the Companies Act. The liability on directors is imposed to the extent of reversing the transaction or making a reasonable contribution to the assets of the company under IBC process to ensure the safeguarding of the creditor’s interest. However, a director is not liable if reasonable due diligence is undertaken and there was no fraudulent intention. If false statements are meted out by a Director with respect to his company, he may be held personally liable for the same unless it can be proven that the said statements were made in true faith, or withdraws consent with respect to the same via a public declaration of its falsehood.

Life Insurance Corporation of India v. Escorts Ltd. & Ors, 1986

The Board of Directors has to exercise strategic oversight over business operations while directly measuring and rewarding management’s performance. Simultaneously the Board has to ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures. The issue at hand before the Hon’ble Supreme Court was when a director or a person in charge of the affairs of the company can be prosecuted for an offence committed by the company.

This will help the directors and KMPs to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company. The kind of liabilities could arise from claims made against the directors either by the company or the shareholders for breach of directors’ duties. Directors are not personally liable, because a company is a legal person. However, https://1investing.in/ the concept of the lifting of the corporate veil shifts the liability. This usually is seen when the directors try to set off their illegal acts under the company name. Once the insolvency resolution process under the Insolvency and Bankruptcy Code, starts, the powers of the board of directors are suspended, and an external professional is appointed to run the affairs of the company.

Section 167 of the Companies Act, 2013, provides for situations under which the office of a Director is liable to be vacated. Further, this section clarifies that the office of the Director shall be vacated even if he has filed an appeal against the order of the court. For a period of seven years or more, then under these circumstances, he will not be eligible to be appointed as a Director in any company, i.e., leads to permanent disqualification.

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They can be held personally liable only in exceptional circumstances when they contract in a personal capacity, or when the principal is not disclosed, when it is a pre-incorporation contract, or when the contract is ultra-vires the company and is not ratified subsequently. Government agencies – directors and officers may be personally liable for breaches of hundreds of statutes. When any private company is wound up and the tax assessed in respect of any previous year, cannot be recovered, then every person who was a director of such private company at any time during the relevant previous year shall be jointly and severally be liable for the payment of such tax . 1.1 Under common law rules and equitable principles, director’s duties are largely derived from the law of agency and trusts. Under the law of agency, duties of skill, care and diligence are imposed on directors. On the other hand, law of trusts imposes fiduciary duties on directors.

• Under Section 152, every person proposed to be appointed as a Director by the company in general meeting or otherwise, shall furnish a declaration that he is not disqualified to become a Director under this Act.
• The Committee considered the concept of exclusion of interested shareholders from participation in the General Meeting in events of conflict of interest.
• 11.3 For determining materiality of pecuniary relationship, transactions with an entity in which the director or his relatives hold more than 2% shareholding, should also be considered.
• However, a director is not liable if reasonable due diligence is undertaken and there was no fraudulent intention.
• It is evident that vicarious liability of a director, even though not absolute or plenary, is prevalent in a multitude of Indian laws such as Prevention of Money Laundering Act, Prohibition of Benami Property Transactions Act, Foreign Exchange Management Act, Negotiable Instruments Act etc.

If such requirements are met, the “correctness” of a business decision cannot be contested. This is based on the experience that all business decisions are based on a certain level of uncertainty and risk. The rule does not apply to decisions which are illegal, grossly negligent, or made under a conflict of interest. Compliance with the labour laws is sine qua non and must be ensured by the director of a company. If there is seen to be a breach of the same under the supervision or instructions given by a director, he or she may be held criminally liable for the same. If Section 179 of the Income Tax Act 1961 may be examined, in the instance that dues from a private company cannot be recovered or the tax assessed is not found to be recoverable, in such a scenario, when any private company is wound up and the tax assessed cannot be recovered, then the director, or directors are jointly liable for the same.

Liabilities of directors in Indian companies: An understanding

Additionally, upon knowledge of any wrong, follow up action / dissent of such independent directors from the commission of the wrong should be recorded in the minutes of the board meeting. There is a need for comprehensive revision of provisions of the Companies Act 1956 relating to payment of managerial remuneration. 13.1 Companies need to adopt remuneration policies that attract and maintain talented and motivated directors and employees so as to encourage enhanced performance of the company. Decision on how to remunerate directors should be left to the Company. However this should be transparent and based on principles that ensure fairness, reasonableness and accountability.

3.5 This provision can be convenient in situations where the company fails to sue the respective director for damages. Directors will be liable to pay for qualification of shares if the failure to do so within the given time and the company goes into liquidation. Act in the best interests of the company, its employees, the shareholders, and the community and for the protection of the environment.

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Criminal liability can be imposed on a director if there is a breach of any labour law under his supervision. If the company is responsible for any such breach under the directors who have overall control over operations and management, they can be held liable. Directors who are not in overall charge of the company but are only in control of certain aspects; or are aware of the policy of the company, but are not in charge of it, would not be held liable. A company is a separate legal entity from its shareholders, directors and management. However, being an artificial person, a company is run by its directors appointed by shareholders and they are responsible for the day to day business operations.

According to that section, vicarious liability is imposed on directors for dishonouring cheques drawn by a company. The liability is extended to the directors who are responsible for day to day affairs of the company and any director who is a signatory of the cheque is also held liable. However, a director will not be held liable for dishonour of cheque by the company if an offence occurred without his knowledge and he/she exercised due diligence in order to avoid the offence. A company is an independent entity and, as a general rule, the Director of the company is not liable for any offence or, breach or liability of the company.

However, courts have repeatedly held that the other way is not true, an employee cannot be held liable for the offenses committed by the company but still, the jurisprudence on this subject is under development. Hence, it is important for directors to hedge the risk arising therefrom. As there is no bar under the existing provisions of the Companies Act, directors must insist on the indemnification clause in the shareholder’s agreement and also in the appointment letter issued by the Company. The foregoing mechanism will help the directors to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company. An offence committed by a company relating to dishonouring of cheques is regulated by section 141 of the Negotiable Instrument Act, 1881.

Further, it says that anything mentioned in the companies act, that the company is a separate legal entity are automatically gets diluted when it comes to recovery of GST. The Companies Act, 2013 contain a set of liabilities for the directors and key managerial persons. The Companies Act also criminalizes various kinds of activities in the course of the economic life of the company, chief among them being fraudulent activities committed by the company through its employees. Section 166 of the Companies Act, 2013, mentions about the fiduciary duties of the directors which inter-alia includes that the director shall exercise his duties with due and reasonable care, skill and diligence and should not attempt to achieve or attempt to achieve any undue advantage either to himself or to any of his relative. If the director takes the undue advantage, then, it shall be held liable to pay an amount equal to that gain to the company and he shall be liable to pay fine which may extend to Rs. 5,00,000/-.

The Committee feels it desirable to dwell on such managerial personnel who have a significant role to play in the conduct of affairs of the company and determine the quality of its Governance. The Committee is of the view that such key Managerial Personnel may be recognized by the law, along with their liability in appropriate aspects of company operation. 5.1 Law should provide for minimum number of directors necessary for various classes of companies. However new kinds of companies will evolve to keep pace with emerging business requirements. Limit to maximum number of directors should be decided by the company by/in the Articles of Association. 5.4 Every Company should have at least one director resident in India to ensure availability in case any issue arises with regard to the accountability of the Board.

Monitoring the day-to-day compliances of the company is not the responsibility of the ID/ NED. Hence an ID/ NED cannot be held liable for acts, which are beyond their control, like failure on the part of the company to maintain and update statutory registers, minutes of meetings, filing of returns, etc. Additionally, it was also clarified that the Registrars are required to follow a standard operating procedure, as prescribed by MCA, while initiating proceedings against ‘officer who is in default’. The Income Tax Act, 1961 imposes vicarious liability upon the directors in respect of the tax arrears of the companies. The liability is linked to the income of the previous year which has been assessed to tax. This section applies to a person who is or has been a director in such a company for recovering tax dues.

The Companies Act 2013 has defined “fraud” under Section 447 that includes any act or abuse of position committed with intent to deceive, to gain undue advantage from, or to injure the interests of a person, company, shareholders, or creditors, whether or not there is wrongful gain or loss. The director who is guilty of fraud may be punished by imprisonment for up to 10 years, and when do directors become personally liable in india where fraud involves the public interest, the minimum sentence prescribed is three years. It is evident that vicarious liability of a director, even though not absolute or plenary, is prevalent in a multitude of Indian laws such as Prevention of Money Laundering Act, Prohibition of Benami Property Transactions Act, Foreign Exchange Management Act, Negotiable Instruments Act etc.