LIABILITIES OF DIRECTORS:-

Directors can be held liable both jointly and collectively, for any and every act, commission or
omission which is harmful to the interests of the company and violates any of the duties to be
discharged by them.

In the Companies Act 1956, there was two types of liabilities of Directors :-

i) Criminal Liabilities

Ii) Civil Liabilities

But after passing some difficulties in the year 2013 of the Companies Act , the liabilities of directors may
be considered under the following heads:-

I). Liability to the Company

II). Liability to Third Parties

III). Liabilities for Breach of Statutory Duties

IV). Liability for Acts of Co-Directors

V). Criminal Liability

VI). Director’s Personal Liabilities

I) Liability to the company :-

Breach of fiduciary duty: where a director acts dishonestly to the interest of the company, he
must be held liable for breach of fiduciary duty. Directors should be exercised in the interest of
the company and not in the interest of the directors or any section of members.

Ultra vires acts: Directors acts within the parameters of the provisions of the Companies Act,
Memorandum and Articles of Association, since these lay down the limits to the activities of the
company and accordingly to the powers of the Board of directors. Further, the powers of the
directors shall be limited in terms of specific restrictions contained in the Articles of Association.
The directors shall be personally liable for acts beyond the aforesaid limits, being ultra vires the
company or the directors.
Negligence: Directors shall be acted within their powers with reasonable skill and care as
expected of them as sensible businessman, they discharge their duties to the company. But
where they fail to exercise reasonable care, skill and diligence, they shall be liable for any loss or
damage .

Mala fide acts: Directors are the trustee for the moneys and property of the company handled by
them, as well as exercises of the powers conferred in them. If they dishonestly or in a mala fide
manner, exercise their powers and perform their duties, they shall be liable for breach of trust.
They are also responsible to the company for any secret profits they might have made in course
of performance of duties on behalf of the company.
In case of P.K. Nedungadi V. Malayalee Bank Ltd. AIR 1971 SC 829, it was held that where a
director misapplies or misappropriates money or properties of the company or has been guilty
of breach of trust or misfeasance, the Court may order him to repay the money or restore the
property to pay compensation.

II) Liability to third parties :-

Fraudulent trading: Directors shall also be made individually liable for the debts or liabilities
of a company by an order of the court. Such an order will be made by the court where the
directors have been found guilty of fraudulent trading.

Liability for breach of warranty:

Directors play role on behalf of the company, thus where they transact any business in resect of
matters, ultra vires the company or ultra vires the articles; they shall be proceeded against
personally for any loss continued by any third party.

III) Liability for breach of statutory duties:-

The Companies Act, 2013 imposes numerous statutory duties on the directors under various
sections of the Act. Default in compliance of these duties shall be liable with penalty.
 IV) Liability for acts of co-directors:-

A director is the agent of the company, all directors have to present in board meeting,
consequently nothing done by the Board can impose liability on a director who did not
participate or contributed in the Board’s action or did not know about it.

. ‘’In R.K. Dalmia and others v. The Delhi Administration,AIR 1962 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”.

Civil Liability to the Company:

Director’s liability to the Company may arise where
 the directors are guilty of negligence,

 the directors committed breach of trust,

 there has been misfeasance and

 Where the director has acted ultra vires and the funds of the company have been applied
for such an act.

V) Criminal liability:-

A director may be held criminally liable for any offence committed by the company, where he
has aided, abetted, counseled, or procured the commission of the offence.

Dishonoured Cheques:-
The Director signing a cheque which is dishonoured so as to constitute an offence under the
Negotiable Instruments Act, 1881, can be prosecuted along with the company.

Mis-statement in the Prospectus:-

The Companies Act imposes criminal liability on any person who was responsible for a mis-
statement in the prospectus of a public company.

Offences under the Income Tax Act:-

An offence committed by a company under the Income Tax Act, 1961 is attributed to the persons
who were responsible for and in charge of the business of such company.

Offences under Labour Laws:-

An offence, committed by a company under the various labour legislations (specifically in case
of Employees Provident Funds and Miscellaneous Provisions Act, 1952 and Factories Act, 1948)
is imposed to the persons who were accountable for and had control over the affairs of the
company. Hence, Directors would be personally liable for offences committed by a company
under the relevant labour legislations. However, this liability is not one imposed on all
Directors uniformly; it is only imposed on such Directors who are in overall control of the affairs
of the company.

In 2003 Supreme Court in Assistant Commissioner, Assessment-ll, Banglore & Ors. v.

Velliappa Textiles Ltd & Anr, took the view that since an artificial person like a company could
not be physically punished to a term of imprisonment and such a section, which makes it
compulsory to impose minimum term of imprisonment, generally cannot apply to the case of
artificial person.

However, Supreme Court in 2005 in Standard Charted Bank v. Directorate Of Enforcement in

this case majority decision of 3:2 expressly overruled the Velliapa Textiles case on this issue.

VI) Director’s personal liability:-

Liability for Tax:-

Under the Income Tax Act, 1961 provides that where any tax due from a private company in
respect of any income of any previous year cannot be recovered from such private company,
then, every person who was a Director of such private company at any time during the relevant
previous year is liable, jointly and severally, for the payment of such tax.

Debts of the Company:-

Generally, a Director is not personally liable for any debt of the company unless fraud on the part
of such Director can be established.

Liability for company’s Contracts:-

A Director is generally not liable for any contract entered into by the company, unless fraud on
the part of such Director can be established.

Refund of Share application money:-

A Director is personally liable along with the company to repay the share application or excess
share application money, if is not repaid within the stipulated time limit.

Mis-statement in the Prospectus:-

Civil liability can be imposed on a Director for providing any untrue statement in the prospectus
of a public company if he or she is a Director at the time of the issue of the prospectus, unless he
proves that he withdrew consent before the issue of the prospectus or it was issued without his
authority or consent or without his knowledge.
Fraudulent Conduct of Business:-
A Director may be held personally responsible for fraudulent carrying on of business.

Relief From Liability :-

There are several ways in which a director may be relieved from liability :-

Ratification by the Shareholders:-

Some breaches may be remedied through the director's conduct being
disclosed to a general meeting and being endorsed by the shareholders
passing an Ordinary Resolution.

Ratification by Consent of all Shareholders.

If any breach of duty which has been done by the director may be relieved
by all shareholders if the breach does not involve fraud on its creditors and
(probably) is not ultra vires the company.

Judicial Relief.

The court has power to relieve a director from some civil or criminal
liabilities for negligence, default or breach of trust if it is satisfied that the
director has acted honestly and reasonably and in all the circumstances he
ought fairly to be excused..

POWERS OF BOARD :-
According to Companies Act 1956 and Companies Act 2013 did not define directly power of
directors but the acts have mentioned the power of Board of Directors in the Companies Act
1956 Sec (291) and in the Companies Act 2013 Sec (179) .

(1) The Board of Directors of a company shall be entitled to exercise all such powers, acts and
things, as the company is authorized to exercise and do: -
The Board shall be subject to the provisions contained in that behalf in this Act, or in the
memorandum or articles, or in any regulations made by the company in general meeting:

Provided further that the Board shall not exercise any power, acts or thing which is directed or to
be exercised or done by the company in general meeting.

(2) Any regulation which are passed by the company in general meeting shall not invalidate any
regulations that the board of directors made prior to the resolution.
(3) The Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:—

(a) to make calls on shareholders

(b) to authorise buy-back of securities under section 68
(c) to issue securities, including debentures, whether in or outside India
(d) to borrow monies
(e) to invest the funds
(f) to grant loans or give guarantee or provide security in respect of loans
(g) to approve financial statement
(h) to diversify the business
(i) to approve amalgamation, merger or reconstruction
(j) to take over a company
(k) any other matter which may be prescribed
In Shubh Shanti Services Ltd. V. Manjula S. Agarwalla AIR 2005 held any director
individually has no power to act on behalf of the company in respect of any matter except any
power or powers of the Board who have been delegated to him.