You are on page 1of 8

1/22/2015

Directors&TheirLiabilities

LawArticlesIndia'sMostAuthenticeFreelegalSourceOnline

Home

TopRated

SubmitArticle

AdvancedSearch

FAQ

ContactUs

LawyersinIndia

LawForum

RSSFeeds

RegisteryourCopyrightOnline
Weoffercopyrightregistrationrightfromyourdesktopclickherefordetails.

RentDelhiOfficeSpace
regus.co.in/Delhi_Office_Space

3mthFreeLimitedOffer.Short/LongTermLeases.GetaQuoteToday!
SearchOn:

LatestArticles|Articles2013|Articles2012|Articles2011|Articles2010|Articles2009|Articles2008|Articles2007|Articles2006|Articles200005
EmailloginPassword
MutualConsentDivorceinDelhi

Weprovidefast,costeffectiveandHasslefreesolution.
Search

ContactusatPhno:9650499965(DivorceLawFirmDelhi)
Login

LawsinIndia

Main Categories

EnterKEYWORDheretofindarticles...

Welcome!

Search AdvancedSearch

BankingandFinance
laws

Directors&TheirLiabilities(Saveas.pdf)

CaseLaws
CivilLaws
CompanyLaw
ConstitutionalLaw
Consumerlaws
Contractslaws
Criminallaw
Dubailaws
EnvironmentalLaw
familylaw
HumanRightslaws
Immigrationlaws
Insurance/Accident
Claim

Published:March08,2011|Author:surabhibairathi
Category:CompanyLaw|TotalViews:21026|Rating:

InternationalLaw
JuvenileLaws
Lawlawyers&legal
Profession
Legaloutsourcing
Medialaws
Medicolegal
Miscellaneous
Realestatelaws
TaxLaws
TortsLaw
WomanIssues
WorkplaceEquality&
NonDiscrimination
YetAnotherCategory

More Options
Mostreadarticles
Mostratedarticles

Subscription
Subscribenowandreceivefree
articlesandupdatesinstantly.
Name
Email

Subscribe

Copyright
Registration
ToCopyrightYourBooks,
Videos,Songs,Scriptsetc
Callusat:9891244487/oremail
at:admin@legalserviceindia.com
TopLawColleges

LawUpdates:
#IncomeTax
#Familylaw
#CompanyLaw
#ConstitutionalLaw
#Partnershipfirms
#ImmigrationLaw
#CyberLaw
#LokAdalat,legalAid&PIL

Print|

Directors&TheirLiabilities

Emailtofriend

surabhibairathi
SurabhiBairathi

MeaningofaDirector
Viewarticles | Contactauthor
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 companys business is
entrustedtothemashumanagents.
Directorsareoftentreatedasmindandwillofthecompany.
Also Sec. 252 of Act says that every public company shall have three
Directorsandeveryprivatecompanyshallhavetwodirectors.

IntellectualProperty

Remove

Pleaseloginorregister
account.

Company
Registration

SoDirectorsinacompanyplayaveryvitalrole.Furtherwearegoingto
discussabouttheirpositionandtheirliabilitiesindetail.

WhomaybeappointedasaDirector
Onlyanindividualcanbeappointedasadirectorandnoassociationor
vakilsearch.com/privatelimitedco
firmorbodycorporatecanbeappointedasadirectorofacompany,as
itsgivenunderSe.253oftheCompaniesAct.However,NoCompany
RegisteraCompanyOnline.
canappointorreappointanypersonasadirectorofthecompanyunless
he has been allotted a Directors Identification Number (DIN). Every
Affordable&Quality
individual, intending to be appointed as director of a company shall
makeanapplicationforallotmentofDirectorIdentificationNumber(DIN)
Assured
to the Central Government in the prescribed DIN Form. Therefore, all
thedirectorsoftheproposedcompanymustensurethattheyarehaving
DINandiftheyarenothavingDIN,itshouldbefirstobtained.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
companiesinwhichheisadirectororintendedtobeadirector.
PositionofDirectors
Directors are professional men hired by the company to direct its affairs. They are not the servants of a company
rathertheyaretheofficerswhomanageeverythinginthecompanyunlikelytotheshareholderswhoaretheownersof
thecompany.Adirectormayalsoworkasanemployeeindifferentcapacity.
Theycanalsoworksometimesasagents,sometimesastrusteesandsometimesasmanagingpartners.Buteachof
theseexpressionsisusednotasexhaustiveoftheirpowersandresponsibilities,butasindicatingusefulpointsofview
fromwhichtheymayforthemomentandfortheparticularpurpose,beconsidered.

RandomPick

TheCompanies
of1956setsdown
fortheestablishme
bothpublicandpri
companies.Them
commonlyused
corporateformisth
limitedcompany,
unlimitedcompanie
beingrelativelyuncommon.Acomp
formedbyregisteringtheMemorand
andArticlesofAssociationwiththe
RegistrarofCompaniesofthestate
whichthemainofficeistobelocate
fullstory|sendtofriend

Statistics
TotalArticles
TotalAuthors
TotalViews
Totalcategories

LawForum

Thatwasamazingforumwithgo
FreelegalAdvicelawyersFor
discussion.Reallyreadyourdis
thatwasamazinglawconcept.
Jan21,201512:09:27PM

canwestartaPILforconductin
apartmentelections?
HelloEveryone,Incompanylaw
tocloseacompany,thecourtne
interveneandappointaliquidato
Similarlyarethereanyp...
Jan21,201511:14:33AM

Valueofstamppaper
Onepersonislendinganamou
3.00lakhtoanotherperson.Wh
thewhatshallbethevalueofsta
Inwhosenamest...
Jan21,201510:22:31AM

DirectorasAgents
Thegeneralprinciplesofagency,governtherelationsofdirectorswiththecompanyandofpersonsdealingwiththe
companythroughitsdirectors.Sowheneverthedirectorcontractsonbehalfofthecompanywiththethirdparties,its
thecompanywhollbemadeliableonitandnotthedirectors.
DirectorsasTrustees
Althoughdirectorsarenotproperlyspeakingtrustees,yettheyhavealwaysbeenconsideredastrusteesofcompanies
assetsoverwhichtheyexercisecontrol.Theyshallexercisetheirpowershonestlyintheinterestofthecompanyand
theshareholders, and not for their own personal advantage. And if they misuse their power they could be rendered
liableastrusteesandinthecaseofhisdeath,evenhislegalrepresentativescouldbemadeliableforit.
DirectorsasmanagingPartners
In this the company is considered as large partnership, wherein the directors are been allotted the responsibility of
managingtheaffairs.Whereastheshareholdersenjoyvastpowersofmanagementandactasthesupremepolicyand
decisionmakingbody.
LiabilitiesofDirectors
It is not easy to describe the liabilities of a director. The Director cant 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.Hereitistobealsonotedthatthedirectors,whoactingoodfaithandwithinthescopeoftheirauthority,will
notbeheldliableforthetortuousactsoftheassociation.Itisonlywhendirectorsactinbadfaithoroutsidethescope
of their authority, will they have a problem. For example, an employee may be fired without just cause, but the
dismissalmaybeinthebestinterestsoftheassociation.
TheliabilitiesofDirectorscanbeconsideredunderthefollowingheads.

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

1/8

1/22/2015
#Forms
#Trademarks
#Womanissues
#MedicoLegal
#Consumerlaws
#Criminallaws
#SupremeCourtJudgments

Directors&TheirLiabilities
1.LiabilitytotheCompany
Theliabilityofdirectorstothecompanyarisesunderfewcircumstancesonlyforexamplethedirectorshaveactedultra
viresthecompany.
TheliabilityoftheDirectortothecompanymayarisefrom:
(a)Breachoffiduciaryduty.
(b)UltraViresacts
(c)Negligence,and
(d)MalafideActs.
(a)BreachofFiduciarydutywheneveradirectorworksdishonestlytotheinterestofcompany,hewillbeheldliable
forbreachoffiduciaryduty.Most of the powers of Directors are powers in trust as explained above and therefore,
shouldbeexercisedinthebenefitofcompanyandnotfortheirownbenefitorforthebenefitofothermembers.
(b)Ultraviresactseverybodyinthecompanyaresupposedtoworkwithintheprescribedlimitsortheprovisionsof
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
prescribedlimitsitwouldbeconsideredasultraviresandsoheshallbemadepersonallyliableforthis.
(c)NegligenceaslongastheDirectorsActwithintheirpowers,andexercisetheirdutywithreasonablecareandskill
aseveryprudentbusinessmanisexpectedtotakecareof,theywillnotbemadeliable.Butwheretheyfailtoexercise
reasonablecare,skillanddiligence,theyshallbedeemedtohaveactednegligentlyindischargeoftheirdutiesand
consequentlyshallbeliableforanylossordamageresultingtherefrom.Although,therearenoobjectivestandardsof
skill and care with the help of which we can decide whether a director has been negligent, instead, there are only
generalprincipleswhichmaybeapplieddependingonthefactsofeachcase.Thedirectorsarenotboundtobringany
specialqualificationintotheiroffice.Themereomissiontotakeeverypossiblecarewillnotamounttonegligence.
(d)MalafideActsdirectorsarethetrusteesoftheassetsofthecompanyincludingmoney,propertyandalsoexercise
poweroverthem.AndIftheyexercisesuchpowerdishonestlyorperformtheirdutiesinamalafidemanner,theywill
beheldliableforthebreachoftrustandwouldbeaskedtoreimbursethecompanyofwhateverthelosscompanyhas
sufferedofsuchmalafideact.Itistheforemostdutyofdirectortodiscloseallthefactstothecompanywhichisknown
tohimandsohecouldbemadeaccountabletothecompanyforanysecretprofitshemighthaveearnedinthecourse
ofperformingdutiesonbehalfofthecompany.DirectorscanalsobemadeliablefortheactsofMisconductorwilful
misuseofpowers.
2.Liabilitytothirdparties:
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,youcouldfindyourselfsuedbythatcustomeralongsidethecompany.
Thedirectorsarenotpersonallyliabletooutsidersorthirdpartiesiftheyactwithinthescopeofthepowersvestedin
them.Thedirectorsarenotpersonallyliabletothethirdpartiesforanycontractonbehalfofthecompany.
ThediscussiononliabilitiesofDirectorstowardsthirdpartiesmaybegroupedasunder:
(a)LiabilityundertheprovisionsofCompaniesAct,1956:
(i)Prospectus:incaseofanyomissiontostateanyparticularsaspertherequirementofthesection56andSchedule
IIoftheactormisstatementoffactsinprospectusrendersadirectorpersonallyliablefordamagestothethirdparty.
Alsoifthepartysubscribesforanysharesordebenturesonfaithof the prospectus then for any loss or damage he
maysustainbyreasonofanyuntrue or misleading statement included therein , director shall be made liable to pay
compensation,asitisgivenintheSection62.Hemay,however,escapehisliability,whereheproveshisinnocence.
(ii)Withregardtoallotment:Directorsmayalsoincurpersonalliabilityfor:
Irregularallotment,i.e.,allotmentbeforeminimumsubscriptionisreceived(Section69),orwithoutfilingacopyof
the statement in lieu of prospectus (Section 70): Under section 71(3), if any director of a company knowing
contravenesorwillfullyauthorizesorpermitsthecontraventionofanyoftheprovisionsofsection69or70withrespect
toallallotment,thatistosay,ifheallotstheshareevenbeforeminimumsubscriptionisreceivedorbeforefilingacopy
oftheStatementinlieuofprospectus,heshallbeliabletocompensatenotonlytothecompanybutalsototheallottee
respectivelyforanyloss,damagesorcostswhichthecompanyortheallotteemayhavesustainedorincurredthereby.

Forfailuretorepayapplicationmoniesincaseofminimumsubscriptionhavingnotbeenreceivedwithin120daysof
theopeningoftheissue:Undersection69(5)readwithSEBIguidelines,incasewhereminimumsubscriptionisnot
receivedwithin120daysoftheopeningofissue,thenmoneyistoberepaidtoalltheapplicantswhohavesubscribed
for shares within 130 days from the date of the issue of the prospectus, which if not repaid, the directors of the
companyshallbemadejointlyandseverallyliabletorepaythatmoneywithinterestattherateof6%perannumon
theexpiryof130thday.However,adirectorshallnotbeliableifheprovesthatthedefaultinrepaymentofmoneywas
notduetoanymisconductornegligenceonhispart.
Failure to repay application monies when application for listing of securities are not made or is refused: Under
section73(2).Wherethepermissionforlistingofthesharesofthecompanyhasnotbeenappliedorsuchpermission
havingbeenappliedfor,hasnotbeengranted,thecompanyshallforthwithrepaywithoutinterestallmoniesreceived
fromtheapplicantsinpursuance of the prospectus, and, if any such money is not repaid within eight days after the
companybecomesliabletorepay,thecompanyandeverydirectorofthecompanywhoisanofficerindefaultshall
fromtheexpiryoftheeighthday,bejointlyandseverelyliabletorepaythatmoneywithinterestrateofnotlessthan
fourpercentandnotmorethanfifteenpercent,asmaybeprescribed, having regard to the length of the period of
delayinmakingtherepaymentofsuchmoney.
(iii) Unlimited liability: Directors will also be held personally liable to the third parties where their liability is made
unlimitedinMOAinpursuanceofsection322(i.e.whereMemorandumsscopeiswidened)orinpursuanceofsection
323(i.e.,wherealterationsofMemorandumcanbemadebypassingspecialresolution).
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
memberwhoproposesapersonforappointmentasdirectorormanagermustaddtotheproposalforappointmentasa
statementthattheliabilityofthepersonholdingtheofficewillbeunlimited.AlsoNoticeinwritingtotheeffectthatthe
liabilityofthepersonwillbeunlimitedmustbegiventohimbythefollowingoroneofthefollowingpersons,namely:
thepromoters,thedirectors,managerandofficersofthecompanybeforeheacceptstheappointment.
Further,incaseoflimitedliabilityofaCompany,thecompanymay,ifauthorizedbytheAOA,bypassingresolution
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
officerconsentstohisliabilitybeingmadeunlimited.IncasewhenDirectordoesnotagreetoitsuchalterationwillnot
haveanyeffectandsothehecannotbecompelledtohaveunlimitedliability.
(iv)Fraudulenttrading:iftheDirectorshavebeenfoundguiltyoffraudulenttradingduringthecourseofbusiness,they

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

2/8

1/22/2015

Directors&TheirLiabilities
mayalsobemadepersonallyliableforthedebtsorliabilitiesofacompanybyanorderofthecourtundersection542.
Section 542(1), in this regard, provides that if in the course of the winding up of a company, it appears that any
businessofthecompanyhasbeencarriedon,withintenttodefraudcreditorsofthecompanyoranyotherperson,or
for any fraudulent purpose, the court, on the application ofthe Official Liquidator, or the liquidator orany creditor or
contributoryofthecompanymayifitthinksitpropersotodo,declarethatanypersonswhowereknowinglypartiesto
thecarryingonbusinessinthemanneraforesaidshallbepersonallyresponsiblewithoutanylimitationofliability,for
alloranyofthedebtsorotherliabilitiesofthecompanyasthecourtmaydirect.
Further,section542(3)providesthateverypersonwhowasknowinglyapartytothecarryingonofthebusinessinthe
manneraforesaid,shallbepunishablewithimprisonmentforatermwhichmayextendtotwoyears,orwithfinewhich
mayextendtofiftythousandrupees,orwithboth.
Liabilityforbreachofwarranty:
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
companyorultravirestothearticlestheymaybeproceededagainstpersonallyforanyloss sustained by any third
party.
3.Liabilityforbreachofstatutoryduties:
The Companies Act, 1956 imposes numerous statutory duties on the directors under various sections of the Act.
WhereanyDefaultincomplianceofthesedutiesattractspenalconsequences.Thevariousstatutorypenaltieswhich
directors may incur by reason of noncompliance with the requirements of Companies Act are referred to in their
appropriateplaces.
4.Liabilityforactsofcodirectors:
Director is bound by the maxim delegates non protest delegare i.e. authority once delegated cannot be delegated
again.Shareholdershaveappointedhimbecauseoftheirfaithinhisskill,competenceandintegrityandtheymaynot
havethesamefaithinanotherperson.ItwasheldinthecaseofJ.K.Industriesv.ChiefInspectorofFactoriesthatthe
directors being in control of the companys 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,
whichmay, havingregardto theexigencies ofbusiness,properly be left to some other officials. A proper degree of
delegationanddivisionofresponsibilityispermissiblebutnotatotalabrogationofresponsibility.Adirectormightbein
breachofdutyifhelefttoothersthematterstowhichtheBoardasawholehadtotakeresponsibility.Directorsare
responsibleforthemanagementofthecompanyandcannotdivestthemselvesoftheirresponsibilitybydelegatingthe
wholemanagementtoagentandabstainingfromallenquiries.Ifthelatterprovesunfaithful,theliabilityisthatofthe
directorsasiftheythemselveshadbeenunfaithful.Sogenerally,adirectorhastoperformhisfunctionspersonally.He
istheagentofthecompanyexceptformatterstobedealtwithbythecompanyingeneralmeetingandnotoftheother
members of the Board. Accordingly, nothing done by the Board can impose liability on a director who did not
participateintheBoardsactionordidnotknowaboutit.Toincurliabilityhemusteitherbeapartytothewrongfulact
orlaterconsenttoit.
Thus, the absence of a director from meeting of the Board does not make him liable for the fraudulent act of a co
directoronthegroundthatheoughttohavediscoveredthefraud.
ContractualLiability:
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.InR.K.Dalmiaandothersv.TheDelhiAdministration,itwasheldthatAdirectorwillbepersonallyliable
onacompanycontractwhenhehasacceptedpersonalliabilityeitherexpresslyorimpliedly.Directorsaretheagents
orthetrusteesofaCompany.
Express liability of the director usually arises only when a director has personally guaranteed the performance of a
contract.OntheotherhandImpliedliabilitywillarisewhenadirectorsignsacontractfortheCompanyormentioning
thenamebutfailingtoaddthevitalword"limited"oritsabbreviation.Thisruleisbasedupontheordinaryprincipleof
agencythatwhere an agent enters into a contract without disclosing that he is acting as agentheacceptspersonal
liabilitybydefault.AsitwasheldinthecaseofPenrosev.Martyrabillwasaddressedtoacompanyandomittedthe
word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be
personallyliablebytheCourt.
Pre Incorporation Liability A Company cannot enter into a contract before it is incorporated because, before
incorporation,ithasnolegalexistence.Therefore,aCompanyafterincorporationcannotratifyacontractpreviously
made.Ifitwantsthecontractthenitwillhavetomakeafreshcontract.Sothedirectorscanalsobenotmadeliablefor
suchpreincorporationcontractsunlesstheyhavegivenapriorconsenttoit.InKelnerv.BaxtertheCourtofCommon
Pleasheldthatwhereapersonpurportstosignacontractasagent,buthasnoprincipleinexistenceatthetime,heis
personallyresponsible.Thatistosayifapersonsignsacontractasanagentwhenprincipleisnotinexistenceatthat
time,hewouldbemadepersonallyliableforsuchcontract.
LiabilityofDirectorsforTortsofthecompany:
Ifacompanycommitsanywrongfulact,injuryordamagetosomebody,thefirstQuestionwhichcomestoourmindis
whollbeliableforsuchact,thecompanyortheDirectorofthecompany.Whetherthedirectorofacompanycanbe
made personally liable in damages for a tortious act committed by the company? A company is a separate legal
personliableforitsowntorts.Directorsassucharenotliableforthetortsorcivilwrongsoftheircompany.Tomakea
personliableforatort,e.g.fornegligence,trespass,nuisanceordefamationitmustbeshownthathewashimselfthe
wrongdoerorthathewastheprincipalofthewrongdoerthatitwasunderhisinstructionsandguidancetheactisbeen
committedinrelationtotheactcomplainedof.
Thatistosaythatadirectormaybeheldpersonallyliablefordamagecausedbythetortiousactofthecompany,ifhe
hadhimselfgiveninstructionsfortheacttobedonebyanemployeeofthecompanyoranyother.
InPanoramaDevelopments(Guildford)LimitedvFidelisFurnishingFabricsLimited,acompanysecretaryfraudulently
hiredcarsforhisownusewithouttheknowledgeofthemanagingdirector.Acompanysecretaryroutinelyentersinto
contractsinthecompany'snameandhasadministrativeresponsibilitiesthatwouldgiveapparentauthoritytohirecars.
Hence,thecompanywasliable.
CivilLiabilitytotheCompany:
DirectorsliabilitytotheCompanymayariseineitherofthecircumstances:
thedirectorsareguiltyofnegligence,
thedirectorscommittedbreachoftrust,
therehasbeenmisfeasanceand
thedirectorhasactedultraviresandthefundsofthecompanyhavebeenappliedforsuchanact.
A director is required to act honestly and diligently by applying his mind and discharging his duties as a man of
prudenceofhisabilityandknowledgewoulddo.Ithasbeenexplainedmorepreciselyinthedutiesofdirectorsasto
whatisstandardorduecareanddiligenceexpectedfromhimasexplainedbyJusticeRomerinReCityAquintable
FireInsuranceCompany.
Anywillfulmisconductorculpablenegligencefallswithinthecategoryofmisfeasance.ItwasheldinReDuomaticLtd,

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

3/8

1/22/2015

Directors&TheirLiabilities
A director has to act in the way in which a man of affairs dealing with his own affairs with reasonable care, and
circumspectioncouldreasonablybeexpectedtoact.....
Therefore, Directors would decidedly be liable for omitting to do what the was supposed to do in the given
circumstances.
ADirectorisliabletomakegoodwithinterestallamountpaidfromtimetotimeoutofthefundsofthecompanyforthe
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.Ashareholdercanmaintainanactionagainstthedirectortocompelthemtorestoretothecompanyits
fundsemployedintransactionsthatthedirectorshavenoauthoritytoenterinto.Thefundsofthecompanycannotbe
usedbytheDirectorstopaytheirlitigationcosts,althoughthesewouldnothavebeenincurrediftheyhadnotbeen
directors.ADirectorwill,however,notbeliableforanysuchunlawfulactifhehadnoknowledgeofsuchpayments.
5.CriminalLiability
CriminalLiabilityisbasicallydefinedastheliabilityofapersonauthorizedbythecompany,andtheliabilityissuchthat
theprovisionsoftheIndianPenalCodecanbeactuallyappliedfortheillegalacthecommitted.
CriminalLiability:Crimeagainstthestateforwhichanofficerofthestatecanbringlegalaction.Societyisharmedby
anindividualbreakingthelawsofthestate.Usuallythereisnostatuteoflimitationsforcriminalliability.Propertyand
casualtyinsuranceisnotdesignedtoprovidecoverageforthecriminalactsofaninsuredindividual.
Directors of a company may also incur criminal liability other than the civil liability under the Companies Act or
Commonlaw.Hemaybeheldcriminallyliableforanyoftheactcommittedbycompanywherehehasaided,abetted
orprocuredthecommissionofsuchact.Theremayalsobeinvestigationsdoneonthemandmayalsobeprosecuted
orfinedbycriminalorregulatoryauthoritiesoveractsoromissions.AuthoritiessuchastheCompaniesInvestigation
Branch(CIB)oftheDepartmentforBusiness,Enterprise&RegulatoryReform,havewidepowersofinvestigationthat
they are not afraid to use. Typically, investigations commence with an unannounced visit by the investigator to a
companyspremisesthesocalleddawnraid.
Justasindividualsoweadutynottoharmorinjureothersinsocietywithoutjustification,sodocompaniesoweaduty
nottopoisonourwaterandfood,nottopolluteourrivers,beachesandair,nottoallowtheirworkplacestoendanger
thelivesandsafetyoftheiremployeesandthepublic,andnottosellcommodities,orprovidetransport,thatwillkillor
injurepeople.
Inadditiontotheaboveliabilities,thedirectorsarealsoboundfortheiractsrelatingtothecompany,tothestate,for
theGovernmentisconcernedwiththeaffairsofthecompanyintheinterestofthepublic.So,theCompaniesAct,1956
imposescriminalliabilityeitherintheformoffineorimprisonmentorbothonthedirectorsforcontraventionofcertain
statutory duties. The penal sections dealing with offence imposing punishment are mainly sections 44, 63, 68, 70,
84,105,202,203,207,209,210,211,217,221,240,248,250,295,371,407,420,68A,606,614A,615and628.
ApartfromcivilliabilityundertheActorunderthecommonlaw,directorsofacompanymayalsoincurcriminalliability
undercommonlaw,aswellasundertheCompaniesAct,andotherstatutes.SomeoftheprovisionsoftheCompanies
Actwhichmakedirectorscriminallyliable(fineor/andimprisonment)are:
i)Section44(4)Filingofprospectusorstatementinlieuofprospectus(tobefiledbyaprivatecompanyonceasingto
beprivatecompany)containinguntruestatement.
Thepenaltyforthisistwoyearsimprisonmentor/andfineuptoRupeesfiftythousand.
ii)Section58A(5)failuretorepaydepositswithintheprescribedtimelimitasspecifiedundertheprovisionsofSection
58A.
TheCentralGovernmenthastakenthepowerbySection58Atoregulate,inconsultationwiththeReserveBank,the
acceptanceofdepositsbyCompanies.Suchrulesmayprescribeforthelimitsuptowhich,themannerinwhichand
thetermsandconditionsonwhichdepositsmaybeinvitedoraccepted.Depositsshouldbeinaccordancewithdeposit
rulesandbyanadvertisementaccompaniedbyastatementshowingthefinancialpositionofthecompanyinsuchform
asmaybeprescribedbytherules.Ifanydepositisacceptedorrenewedincontraventionofsuchrules,thecompany,
the company shall repay it within thirty days or within further thirty days if allowed by the Central government on
sufficientcause.
ThePenaltyforthismaybefiveyearsimprisonmentandfine.
iii)Section58A(6)Acceptingdepositsorinvitingdepositsinexcessoftheprescribedlimits.
Depositsinexcessofthelimitsprescribedbytherulesisalsopunishableandalsoinvolvefineonthecompanytoan
amountequaltothedepositformereinvitationthefinemaygouptotenlakhrupees,butnotlessthanRs.50,000.
Officersarepunishablewithfineandimprisonmentuptofiveyears.
iv)Section63Issuingaprospectuscontaininguntruestatement.
ThatistosayForanyuntruestatementintheprospectus,everypersonwhoauthorized theissue of the prospectus
shallbepunishablewithImprisonmentforatermwhichmayextendtotwoyears,orwithfinewhichmayextendupto
Rs.50,000/orboth
AlthoughPersoninvolvedcantakeadefensebyshowingthat
Thestatementwasimmaterialor
Hehadreasonablegroundtobelieveand
Uptothetimeoftheissueoftheprospectusbelievedthatthestatementwastrue.
v)Section68Knowinglymakingafalse,deceptiveormisleadingstatementandtherebyinducingpersonstoinvest
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
concealingofmaterialfacts.Liabilitywouldalsobeincurredevenoneisattemptingtodoso.
ItattractstheimprisonmentuptofiveyearsorandfineuptoRupeesOnelakh.
vi)Section73Failuretorepayexcessapplicationmoney.
Where the permission of a stock exchange has been granted and therefore, the allotment completed is valid, the
prospectus being oversubscribed, the over subscribed portion of money received must be sent back to the
applicantsforthwith.Thisoversubscribedmoneyshouldbesentbacktotheapplicantswithinthemarginofeightdays.
AnydefaultinrepaymentofapplicationmoneyandinterestispunishablewithfineuptoRupeesFiftyThousandbutif
repaymentisnotmadewithinsixmonthsfromtheexpiryoftheeighthday,alsowithimprisonmentforatermuptoone
year.
vii)Section84(3)Fraudulentlyrenewingasharecertificateorissuingaduplicatesharecertificate.

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

4/8

1/22/2015

Directors&TheirLiabilities
Ashareholderisexpectedtokeephissharecertificateinsafecustody,forheisnotentitledtoaduplicateunlesshe
shows that the original has been lost or destroyed, or, torn is surrendered to the company. A Civil suit lies for
determiningownershipofsharesforanorderofissueofDuplicateSharecertificates.
ThepunishmentforthismaybeimprisonmentuptosixmonthsorandfineuptoRupeesonelakh.
viii)Section105Concealingthenameofacreditorormisrepresentingthenatureoramountofthedebtorclaimof
anycreditor.
Itprovidesforpunishmentwithimprisonmentextendingtooneyearorwithfineorboth,ifanyofficerofthecompany
knowingly conceals the name of any creditor or misrepresents the nature or amount of claim or debt or abets such
concealmentormisrepresentation.
ix)Section202(1)underchargedinsolventactingasDirector
Ifapersonwhoisanundischargedinsolventisdisqualifiedfrombeingappointedtoanymanagerialoffice.Ifanysuch
persondischargesthefunctionsofaDirectorortakespartinthemanagementofanycompany,heispunishablewith
fineuptoRupeesfiftythousandandimprisonmentuptotwoyears.
x)Section207DefaultinDistributingDividends.
InordertoensurepromptpaymentofDividendtoshareholders.Section207imposesapenaltyifadividendhasbeen
declaredandisnotpaidwithinthirtydaysfromthedateofthedeclaration.Thepenaltyisincurredbyeverydirector,
providedifhewasapartytothedefault.
Thepunishmentforthisissimpleimprisonmentuptosevendaysandfine.
xi) Section 209A Failure to assist Registrar or any officer so authorized by Central Government in inspection of
booksofaccount,etc.
Itprovidesthatthebooksofaccountandotherbooksandpapersofeverycompanyshallbeopentoinspectionduring
thebusinesshoursbytheregistrarorbyanysuchofficerasmaybeauthorizedbytheCentralGovernment.Itisnot
mandatorytogivepriornoticetothecompanybeforeinspectionismade.
ThepunishmentmaybeimprisonmentuptooneyearandfinetobenotlessthanRupeesfiftythousand.
xii)Section210(5)Failuretolaybalancesheet,profit&lossaccount,etc,attheannualGeneralmeeting.
At every Annual General Meeting, its the duty of Board of Directors to lay before the meeting the documents like
balancesheet,profitandlossaccountetc.failingofwhichtheyareentitledtoimprisonmentuptosixmonthsor/and
fineuptoRupeestenthousand.
xiii) Section 211(8) Failure to comply with Section 211 regarding form of balance sheet and matters to be stated
thereinandthecontentanddisclosurestobemadeintheprofitandlossaccount.
The format of Balance sheet is set out in Para I of Schedule VI. The balance sheet has to be as near thereto as
circumstancesadmit.ItmayalsobeinanyformatasmaybeapprovedbytheCentralgovernment.Theprofitandloss
accounthastobeinaccordancewiththePartIIofSchedule.
Thepenaltyforthisisimprisonmentuptosixmonthsor/andfineuptoRupeesTenthousand.
xiv)Section217(5)FailuretoattachtobalancesheetareportoftheboardofDirectors.
ItsaysthatareportmadebytheBoardofDirectorsistobeattachedmandatorilywiththeBalancesheet.Infailureto
which,thepunishmentisimprisonmentuptosixmonthsor/andfineuptoRupeesTwentythousand.
xv)Section221(4)Failuretosupplyinformationtoauditors.
UnderthisitsthedutyofDirectortodisclosetothecompanytheparticularsofanymatterpertainingtothemwhichis
requiredtobereflectedinaccounts.
Thepenaltyforthisisimprisonmentuptosixmonthsor/andfineuptoRupeesfiftythousand.
xvi)Section233B(11)Defaultincomplyingwiththerequirementsofthesection.
ThepenaltyforthismaybeimprisonmentforatermthatmayextendtothreeyearsorwithfinewhichmaygouptoRs.
50,000orwithboth.
xvii)Section248(4)ForfailuretosupplyinformationorforsupplyingfalseinformationtotheCentralGovernmentor
theCompanyLawBoard.
Thepunishmentforthisisimprisonmentuptosixmonthsor/andfineuptoRupeesfiftythousand.
ThissectionwasomittedbytheAmendmentActof2000.
xviii)Section250(9)FailuretohonourrestrictionsuponsharesanddebenturesimposedbytheCompanyLawBoard.
There are certain restrictions imposed by the Company Law Board upon shares and debentures which is to be
honouredandinfailuretoit,willattractimprisonmentuptosixmonthsor/andfineuptoRupeesfiftythousand.
xix)Section293A(5)ContributiontopoliticalpartiesorforpoliticalpurposeincontraventionofSection293A.
There are certain conditions laid down in S.293A which govern the contribution of companies for political purposes,
someofthemare,Companiesotherthanthegovernmentandcompanieswhichhavebeeninexistenceforlessthan
three years are allowed to contribute money to any political party or to any person for political purposes. So the
contributionmadebythecompanyif,isinnoncompliancewithsuchconditionswouldattractpenaltieswhichmaybe
imprisonmentuptothreeyearsandfine.
xx)Section295(4)GrantofloantoDirectorswithoutobtainingthepreviousapprovaloftheCentralGovernment.
Granting loans to the directors is now strictly regulated by the Act. It cannot be given unless the consent of Central
governmentisbeentakenoff.AndifitisgivenwithouttakingtheapprovalofGovernment,thenitwillhavetogofor
simpleimprisonmentuptosixmonthsorfineuptoRupeesfiftythousand.
xxi)Section299(4)Failuretodiscloseinterest.
Ifthedirectormakesacontractwiththecompanywithoutdisclosinghisinterestinthecontract,hewillhavetobearthe
finewhichmayextendtoRupees50,000.
xxii)Section308(3)FailuretodiscloseShareholdings.

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

5/8

1/22/2015

Directors&TheirLiabilities
UnderthiseveryDirectoroftheCompanyisrequiredtogivenoticeofthecompanyofsuchmattersrelatingtohimas
maybenecessaryforthepurposeofenablingthecompanytomakeentriesintheregisterofDirectorsshareholdings.
FailuretocomplywiththeprovisionswillattractimprisonmentwhichmayextendtotwoyearsorwithfineuptoRupees
fiftythousandorwithboth.
xxiii)Section407(2)ActingasdirectorormangerafterremovalbytheCompanyLawBoard.
AdirectororwhoseagreementorofficehasbeenterminatedbytheorderofCompanylawBoardshallnotactforfive
yearsthereafterwithouttheleaveoftheCLB.Anydirectorwhoactsincontraventionofthisprovisionwouldbeentitled
toimprisonmentuptooneyear,orwithfineuptoRupeesfiftythousand,orwithboth.
xxiv)Section488(3)FalsedeclarationofCompanyssolvency.
Thereisapenaltyformakingthedeclarationswithouthavingthereasonablegroundsfortheopinionthatthecompany
willbeabletopayitsdebtswithinthespecifiedperiod.Thepenaltymaybeimprisonmentuptosixmonthsor/andfine
uptoRupeesfiftythousand.
xxv)Section209(5)Noncompliancewiththerequirementofmaintenanceofproperbooksofaccount.
All the persons responsible for maintenance of books of account which they did not comply with as per the
requirementsofSection209willbemadeliableforimprisonment which may extend to six months and/or fine up to
Rs.50,000.
Again,thisisnotanexhaustivelisting.
RecentlySupremeCourthasaddedapointtotheCriminalliabilityinoneofitsrecentJudgmentofFebruary,2010.
Thecaseispertainingtotheliabilityofdirectors,whohavebeenhoundedunderthe Negotiable InstrumentsActfor
dishonourofachequeissuedbythecompany.
it was held by the court that "Only those persons who were incharge of and responsible for the conduct of the
businessofthecompanyatthetimeofcommissionofanoffencewillbeliableforcriminalaction,"
Thismeansthatifadirectorofacompanywhowasnotinchargeofandwasnotresponsiblefortheconductofthe
businessofthecompanyattherelevanttime,willnotbeliableforacriminaloffenceundertheprovisions.
CONCLUSION.
Accountability is the most important aspect in any business, because until and unless the person is been made
accountabletohis/heracthemaydotheactinpursuanceofhisowninterest.Sothereshouldbesomemechanismfor
evaluating the performance of the directors. The extent of liability of a director would depend on the nature of his
directorship.
AsitwasheldaptlybytheSupremeCourtinthecasementionedabovewhereinthedirectorcanbemadeliableforthe
actonlyifhewashewasinchargeoftheactandifheknewaboutitandthisisalsosupportedbyprinciplesofequity
whereinnopersoncanbemadeliableuntilandunlesshesapartytothecommissionofoffenceorhesawareof.
Inapplyingthegeneralequitableprinciplestocompanydirectors,fourseparateruleshaveemerged.Theyare(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
exercisepowersconferreduponthemforpurposesdifferentfromthoseforwhichtheyareconferred.(3)thattheymust
notfettertheirdiscretionastohowtheyshallactand(4)thatwithouttheinformedconsentofthecompany,theymust
notplacethemselvesinapositioninwhichtheirpersonalinterestsordutytootherpersonsareliabletoconflictwith
thedutiestothecompany.
CRITICALANALYSIS
Afteranalyzingallthethingsdiscussedabove,iwouldjustliketosaythatyes, although Directors have multifarious
liabilitiesbutiftheyexercisethesebyfollowingtheabovementionedrulesandwithduecareasexpectedofthemthey
wontbemadeliableandneithertheyshouldbemadeliablefortheacttheyhavenotdoneandmerelyonthebasisof
theirposition.
******************
#Section2(13)ofCompaniesAct,1956
#HLBolton&CovTJGraham&Sons[1957]1QB159.
#LeevLeesAirFarmingLtd[1960]3AllER420PC:1961AC12.
#SaharayH.K.(2008).CompanyLaw,Delhi:UniversalLawPublishingCompany.
#MajumdarA.K.,andKapoorG.K.CompanyLawandPractice,Edn.13th,pg.552.
#SawchukRussell,Director'sResponsibilitiesandLiabilities,Dec19,2004,15:00
#http://www.iitk.ac.in/siic/liabilities.html,takenon20july,2010
#SundayTimes,WhatismyliabilityasaCompanyDirector,December11,2007.
#MemorandumOfAssociationthesedocumentsarebasicallythecharterofthecompanywhichgoverntherelations
ofcompanywiththethirdparties.Ifcompanydoesanythingcontraveningtothesewillbeutravires.
# Articles of Association articles of the company are the internal rules of the company, which defines how the
companyissupposedtoworkwithini.e.internalmanagement.
#MajumdarA.K.,andKapoorG.K.CompanyLawandPractice,Edn.13th,pg.610
#www.legalserviceindia.com
#AIR1962SC1821.
#SalomonvSalomon&CoLtd[1897]AC22.
#http://www.financialexpress.com/news/directorspersonalliabilityfortort/35053/
#[1971]2QB711
#Ltd[1925]Ch407.
#[1969]2Ch365.
#www.legalserviceindia.com
#http://business.timesonline.co.uk/tol/business/law/article3025472.ece
#http://www.scribd.com/doc/15253291/dutiesandliabilitiesofdirectorinindia
#SaharayH.K.(2008).CompanyLaw,Delhi:UniversalLawPublishingCompany.
# Private Companies cannot advertise for deposits. When a private company accepts deposits from its members or
directors,ithastotakeadeclarationfromthemthattheyarenotmakingdepositoutofborrowedmoney.VijayKumar
GuptavEaglePaint&PigmentIndustries(P)Ltd,(1997)26CorptLA236CLB.
#SinghAvtar,CompanyLaw,Edn15th,pg.572
#SupremeCourtnarrowsdownDirectorsliabilityinChequeBouncingcases,TNN,Feb16,2010,02.58amIST
Theauthorcanbereachedat:surabhibairathi@legalserviceindia.com

Ratethisarticle!Poor

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

5
Excellent RateNow!

6/8

1/22/2015

Directors&TheirLiabilities

AyyamperumalPachamuthu:amretiredcommissionerofcustoms,centralexciseandservicetaxandhaveanimmenseexperiencein
LawyersinIndia
handlingcasesinthe...
Sep24,20143:11:55AM
RakeshK.Sharma
RakeshK.Sharma:Litigationservicesrelatedtocivilandcriminalappellatepracticeareoffered.Andotherprodigiousservicesare
relatedtothe...
Jul31,20141:03:32PM
LawyerAssociates
LawyerAssociates:Weprovideallkindoflegalservicesincivil,criminal,CosumerProtection,arbitration,registration,Propertymatters,
Corpo...
Jul31,201412:37:53PM
V.V.Associates,ChennaiAdvocates
V.V.Associates:WeareaChennaibasedlawfirmhavingdomainexpertiseinvariousfieldsviz.banking,bankruptcy,civil,consumer,
contract,cop...
May6,20149:59:50AM
AdvocateXavierFelix,Chennai

MostviewedarticlesinCompanyLawcategory
Globalization&itsimpactonIndianEconomy:DevelopmentsandChallenges
WindingUpofaCompany
ADRMechanisminIndia
RemunerationofDirectors
ArticlesofAssociation&AlterationofArticles
DemergerunderCompanyLaw
RetrenchmentunderIndustrialDisputeAct,1947
Dissolutionofpartnershipfirm
Mergingacompany
Directors&TheirLiabilities
CorporatePersonality
WhichemployeesdonotfallundertheambitofIndustrialDisputeAct,1947
MinorityRightsonOppressionandMismanagementUnderCompaniesAct,1956AndCompaniesBill,2011
TheEmployeesDepositlinkedInsuranceFundScheme
Director
CorporateSocialResponsibility

MostrecentarticlesinCompanyLawcategory
Businessstructuresavailableforastartup
Buyinganewcompanypointstobeconsidered
OnePersonCompany
AppointmentofWomanDirector
HasCompaniesAct,2013reallyenhancedpositionofwomenincorporateworld?
CSRundertheCompaniesAct2013
EquidistanceandEquitablePrincipleunderthelawoftheSea
CorporateSocialResponsibility
DuelListingofCompanies
VTBCapitalPLCV.NutritekInternationalCorp&Ors
HowMediationCanBenefitTheBusinessCommunity
CanmerefinecompensatethewrongsdoneunderthenameofCorporations
MergersandAcquisitions
ITSectorsCorporateSocialResponsibilitytowardsPublicInfrastructreinIndia
ManufacturersLiability,CaseDevelopmentsinUK,USAandIndia
MinorityRightsonOppressionandMismanagementUnderCompaniesAct,1956AndCompaniesBill,2011

Article Comments
PostedbyGSRaoonOctober02,2011
Theauthor'sattempttocoverthetopicelaboratelyisappreciable.Howeverlengthofthearticlemakesareaderimpatientandcentral
themegetslost.

Post Your Comments


Name

Note:Youremailaddressisonlyvisibletoadmin,othermembers/
userscannotseeit.

Email

YoucanusefollowingFXCodes

Yourcomments

BOLD:[b]
Italic:[i]
[b]LegalServicesIndia[/b]isa[i]nicewebsite[/i].
[url=http://www.legalservicesindia.com/article/]clickheretovisit.[/url]

LegalServicesIndiaisanicewebsite.
Clickheretovisit

Typethetext
Privacy&Terms

Postnow

Note:Currently,usercommentsaremoderatedandwillbepostedonlyafterapproval.

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

7/8

1/22/2015

Lawyers in India

Directors&TheirLiabilities

ClickonalinkbelowforlegalServices

lawyersinDelhiNewDelhi
lawyersinChandigarh
lawyersinSurat
lawyersinNashik

lawyersinJanjgir
lawyersinIndore
lawyersinAllahabad
lawyersinAgra

lawyersinKolkata
lawyersinHyderabad
lawyersinRajkot
lawyersinNagpur

lawyersinMumbai
lawyersinBangalore
lawyersinPune
lawyersinPondicherry
lawyersinJaipur

lawyersinChennai
lawyersinAhmedabad
lawyersinJodhpur
lawyersinCochin
lawyersinLucknow

ForMutualconsent
DivorceinDelhi
ClickHere
Phno:9650499965

TOP
Home|AboutUs|Privacy|Termsofuse|FAQ|Divorcebymutualconsent|Lawyers|Submitarticle|SCJudgments|ContactUs

India'sMostTrustedOnlinelawlibrary
LegalServicesIndiaisCopyrightedundertheRegistrarofCopyrightAct(GovtofIndia)20002014
ISBNNo:9788192851013

http://www.legalservicesindia.com/article/article/directors&theirliabilities5771.html

8/8

You might also like