Chapter: 8.3 Liabilities of Directors in Company

Liabilities of Directors

The Liabilities of directors may be discussed under the following4 heads:
1. Liabilities to Third Parties: This may arise
2. Under the Act: Liabilities of directors t third parties ma arise in connection with the issue of a prospectus which does not contain the particulars required by the Companies Act, or which contains material misrepresentation. This liability may be enforced by the subscribers who have suffered loss or damage by an action for damages or by an action for deceit or fraud under the general law.

Directors may also incur personal liability:
a)    On their failure to repay application money if minimum subscription has not been subscribed (Section 69)
b)    On an irregular allotment of shares to an allottee (and likewise to the company) if loss or damages is sustained (Section 71)
c)    On their failure to repay application money if the application for the securities is to be dealt in on recognized stock exchange is not made or is refused (Section 73).
d)    On failure by the company to pay a bill of exchange, hundi promissory note, cheque or order for money or goods wherein the nature of the company is not mentioned in legible characters Section 147~. Further where the liability of directors has been made unlimited in pursuance of Section 322 and 323, they may become liable to third parties. Finally the directors responsible for fraudulent trading on the part of the company may, by an order of the court, be made personally liable for the debts as liabilities of the company at the time of tis winding up (Section 542).
e) Independent of the Act: Directors, as agents of a company, are not personally liable on contracts entered into as agents on behalf of the company.

But there are number of exceptions to this rule. If a director fails to exclude personal liability, for instance, by signing a negotiable instrument without mentioning the company' name and the fact that he is signing on company's behalf, he is personally liable to the holder of such instrument. He is also personally liable if he acts in his own name.

Liability for acts ultra vires the company: where a director enters into a contract, which is ultra vires the company, the director is personally liable for breach of implied warranty of authority.

Liability for frauds and torts: Any directors who personally commits a fraud or any other tort in the course of his duties is liable to the injured party. This is on the principle that whoever commits a wrong is liable for it himself. The contract of agency or service cannot impose any obligation on the agent or servant to commit, or assist in the committing of fraud or any other wrong. The company may also be liable, but that does not exonerate the director.

2. Liability of the Company: The liability of directors towards the company may cause from:

i)    Ultra Vires Acts: Directors are personally liable to the company in respect of ultra vires acts and it is not necessary to prove fraud in such cases e.g. where they pay dividends out of capital or when they dissipates the funds of the company in ultra vires transactions. They are liable jointly and severally and, inter se, they have a right to rateble contribution.
ii)    Negligence: A director may occur liability for the negligence in the exercise of his duties. There is no statutory definition of negligence and as such each case has to be decided after due consideration of the particular facts thereof. The question to be answered in each case is: "Has the director exercised necessary care and shown the necessary diligence in the discharge of his duties?" If he has not, he is liable. If he has, there can be no question of liability. It is essential in an action for negligence that the company suffers some damage, as negligence without damage or damage without negligence is not actionable.
This onus of proving that the directors diet not act in good faith lies on the person who challenges the acts of directors. But if they are guilty of negligence, they would be liable even if the Articles otherwise provide Section 201~ relief against such liability may granted under Section 633.
iii)    Breach of Trust: Directors of a company, being in a fiduciary position hold the position of trustees as regards its money and property which causes into their hands and of the powers entrusted to them by the Articles. They must discharge their duties as such trustees in the best interest of the company. They are liable to the company for any loss resulting from breach of trust.

Directors are also accountable to the company for any secret profits hey might have made in transaction on behalf of the company.

iv) Misfeasance: Directors are liable to the company for misfeasance which means willful conduct of directors for which they may be sued in a law count. In case of misfeasance proceedings the directors may apply for relief under Section 633.

3. Liability for Breach of Statutory Duties: There are numerous statutory duties of directors which they must carry out. Most of these duties relate to maintenance of proper amounts, filing of returns or observance of certain statutory formalities. If they 'fail to perform these duties, they render themselves liable to penalties.

The Act, for instance, imposes penalty upon the director for not complying with, or contravening the provisions of, to mention a few, Section 63 Criminal Liability for misstatements in prospectus Section 68 Penalty for fraudulently inducing persons to invest money) Section 77 Purchase by a company of its own shares~. Section 105 Concealment of names of creditors entitled to object to reduction of capitals, Section 142 Penalty for default in filing with the Registrar for registration the particulars of any charge created by the Company). In all these sections, the person sought to be made liable is described as an officer who is in default. The expression 'office in default' is defined in Section 5 of the Act. According to Section 2(30) officer includes director also.

Liability for Acts of his Co-directors: A director is not liable for the acts of his Co-directors provided he has no knowledge and he is not a party. These Co directors are not his servants or agent who can by their acts impose liability on him.