Liability of Directors
1.0 Introduction:-
Directors are the agents of the Company. When company does transactions its directors
who enter into on behalf of the Company. Let see what the characteristics is of to be
Director of a company
Directors are not agents for individual shareholders or members.
He should be the an employee, a servant or even a worker of the company
A Director occupies the position of a trustee, though he is not a trustee in the strict
sense in respect of the Company’s properties and funds. His liabilities arises
because of;
a) Agents or Officers
b) Trustee or
c) Fiduciary relation with the Company or its shareholders
d) Liabilities are in contract
e) Tort
f) Under the criminal law
g) Others are statutory, i.e., under the Companies Act, 1956 and other laws,
and
h) Court can decide the liability of Directors on his position as a whole
To sing the copy of the annual return to be filed with the Registrar under
161 Section 159 or 160 as well as the certificate (additional certificate in the
case of a private company) specified in sub-section (2) of Section 161.
162 To comply with provisions relating to annual return.
To comply with Section 165 in connection with the statutory meeting and
165
statutory report of the company.
To comply with Section 169 in connection with the extraordinary general
169 meeting on requisition, and to repay any reasonable expenses incurred by
the requisitionists for failure by the board of directors to call that meeting
To file with registrar declaration by persons not holding beneficial interest
187C
in any share.
197A Not to employ more than one category of managerial personnel.
203 Not to act as director in certain case.
To transfer unpaid dividend account to special dividend account; not to
declare dividends out of reserves except in certain cases; to transfer
205A
dividends unpaid or unclaimed for seven years to the Investor Education
and Protection Fund.
To Keep the dividend in special account or to pay the transferee duly
206 A
authorised by the transferor, pending registration.
To take all reasonable steps to secure compliance with the requirements
209 (5)
of Section 209 regarding book of account to be kept by the company.
209 A To produce book of account etc. before persons making inspection.
To take all reasonable steps to comply with the provisions of Section 210
210 (5) as to the laying before the company the annual account, balance
sheet,etc.
To approve the balance sheet and profit and loss account before they are
215 submitted to the auditors for their report thereon, and to authenticate them
as provided in Section 215.
To take all reasonable steps to comply with the provisions of Section 217
217
regarding the report of the board of directors
233 B To give assistance and provide facilities to Cost Auditors.
To sign and file with company and Registrar a consent in writing to act as
264 a director of a public company or its subsidiary private company and to
/266 comply with clause (b) of Section 266(1) relating to his qualification
shares.
To obtain his qualification shares within tow months after his appointment
270
as director of a public company or its subsidiary private company.
Not to hold office as director, save as otherwise provided in Section 276,in
275
more than 15 companies.
Not to give political contributions in case of Government companies and/or
the companies which are in existence for les than three financial years. In
293A
case of other companies, not to give donation in excess of 5% of average
of last 3 years net Profits.
Not to receive any loan from a public company or its subsidiary private
295
company of which he is direct, in contravention of Section 295.
To obtain sanction of the board of directors for entering into a contract with
297 the company, (a) for the sale, purchase or supply of any goods, materials
or services, or (b) for underwriting the subscription of any shares in, or
Matters Wherein A Director has Personal Liability Under the Companies Act, 1956
Section Event when there is personal liability
Every member of a company, association or partnership carrying on
11 (4) business in contravention of Section 11 shall be personally liable for all
liabilities incurred in such business.
Members of company are severally liable for debts where business is
45 carried on with fewer than two members in the case of a private company,
and fewer than seven members in the case of any other company.
62 & To pay compensation by a director or other person specified in clauses (a)
607 to (d)
Of Section 62(1) to every person who subscribes for any shares or
607 debentures on the faith of the prospectus containing any untrue statement
therein.
By the directors to repay money with interest at 6 percent per annum
69(5) received form applicants for shares, if the provisions of Sec tion 69 are not
complied with.
In case of contravention by a director of any of the provisions of Section 69
71 (3) or 70 with rest to allotment, he is to compensate the company and the
allottee for any loss, damages or costs which they have sustained thereby.
If the moneys received from applicants in pursuance of the prospectus are
not repaid by the company as provided in sub-Section (2) of Section 73,
73
the directors are to repay the same with the interest at the rat between 4%
to 15% per annum as may be prescribed1 on the delay.
An officer of company or any person on its behalf doing any of the cats
147 (4)
specified in clauses (a) to (d) of Section 147 (4)
All persons who are knowingly parties to any contravention of Section
295 (5) 295(1) or Section 295(3) shall be liable, jointly and severally, to the lending
company for the repayment of the loan.
If any office or place of profit under the Company or its subsidiary is held
in contravention of Section 314(1), the director concerned shall be liable to
314 (2)
refund to the company any remuneration received or the monetary
equivalent of any perquisites or advantages so enjoyed by him
All persons who are knowingly parties to any contravention of Section 369,
370 or 370A regarding loans to companies under the same management
371 (2)
shall be liable, jointly and severally, for the repayment of the loan or other
sum mentioned in sub-Section (2) of Section 371.
Persons who are knowingly parties to the carrying on of business with
intent to defraud creditors of the company or any other person or for any
542
fraudulent purpose shall be personally responsible, without any limitation
of liability, for all any of the debts or other liabilities of the Company.
For any misapplication of retainer of any money or property of the
company, or misfeasance or breach of trust in relation to the company, a
543 promoter, any past or present director, manager, liquidator or officer of the
company are to repay or restore the money or property with interest or to
contribute sums to the assets of the company by way of compensation.
The liability under Section 542 and 543 extends or partners or directors in
544
the firm or the company.
If a voluntary liquidator retains for more than 10 days a sum exceeding
Rs..500 or such other amount as the court authorises him to retain, he is
(a) to pay interest at 12 per cent per annum or the amount so retained and
553 (2)
also to pay such penalty as may be determined by the Registrar; (b) to pay
any expenses occasioned by his default; and (c) to have his remuneration
disallowed.
Any liquidator retaining any money which should have been paid by him to
the companies Liquidation Account under Section 555, (a) to pay interest
555 (9) at 12 per cent per annum on the amount retained and also such penalty as
may be by the Registrar; and (b) to pay any expenses occasioned by his
default.
Due diligence can be established if the record or evidence shows the directors made an
informed decision. This is demonstrated by:
Obtaining necessary information relating to the issues involved;
Examining the information;
Making inquiries;
Where appropriate, seeking outside professional advice; and
Taking the time necessary to ensure that the decisions are informed decisions.
It helps if directors put in place systems to address compliance and that the systems are
periodically reviewed for adequacy. That is why a Director's Handbook, including
various check sheets, are commonly developed by societies and associations. Of course,
if check sheets are available and not followed, then the directors will likely pay.
charges and expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by the director in respect to any civil, criminal or administrative
action if:
The director acted honestly and in good faith with a view to the best interests of
the association; and
In the case of a criminal or administrative action that is enforced by a fine, the
director had reasonable grounds for believing his or her conduct was lawful.
A couple of things can be done to ensure that a director does not face personal loss. First
the association's by-laws should state that if a director's actions meet the statutory
fiduciary requirements, the director would be indemnified. Second, protection for a
director may be improved by an agreement for indemnification between the director and
the association.
Now the only problem is whether or not the association has the money to pay the director
back. This leads to the topic of directors' insurance.
6.5 Insurance:-
An association may purchase and maintain insurance for the benefit of current and former
directors against liability incurred in the capacity as a director or officer of the
association. Of course, the general exception still applies. The director must act honestly
and in good faith and in the best interests of the association, otherwise the insurance will
not cover the problem.
.
6.6 Risk Management:-
Risk management is not buying insurance or winning lawsuits. It is protecting and
conserving the association's resources and providing membership services sensibly. The
purpose of risk management is to improve your operations by having risks acknowledged
and controlled. Remember, insurance should be the last decision - not the first - otherwise
it is substituting action for thought.
Know the nature and extent of the association by-laws and policies.
Install internal controls to oversee cheques and execution of contracts.
Maintain a director's manual containing all corporate documents and relevant
information, and ensure that is kept up to date.
Comply with the duty of confidentiality for all corporate information.
7.0 Conclusion: -
Accountability is an important element of Board effectiveness. 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. 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.
8.0 Bibliography:-
1. A Manual of Business Law (2008) by Dr.S.N.Mahashewari &
Dr.S.K.Mahashewari,Himalaya Publishing House
2. Introduction To Company Law (2008) by Avtar Singh, Eastern Book Company.
3. http://www.legalservicesindia.com/articles/dl.htm
4. http://www.businessdictionary.com/
5. Isehwar Consultant House of Consultant & IPR Law
http://eshwars.com/practice.html