Explore the liability of a director under the Indian Companies Act 2013, covering offenses, duties, fines, and potential imprisonment. Understand scenarios like breach of fiduciary duty, ultra vires acts, negligence, and liability to third parties. Learn about the Limitation Act’s applicability to proceedings and appeals before the Tribunal or Appellate Tribunal, with varying limitation periods based on specific situations.
The director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure. He can be held liable for the offences made by the company at the time of his office as a director.
In addition to this section 166 of the companies act 2013 lays down the duties of director, when contravened attract a fine of extending up to INR 500,000. One of the duties of the director is to not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
Further, any person who is found to be guilty of fraud involving an amount of at least ten lakh rupees or one per cent. of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
The liability of a director towards company could arise in the following cases:
Breach of fiduciary duty: As the directors hold the office of trust along with power they are expected to exercise this power in the best interest of the company. There is always a possibility of a conflict of interests but should such a conflict arise the concerned director should make complete disclosure and try to obtain the confidence of stakeholders in the general meeting. If such is not a case then it shall be held as a breach of fiduciary duty and he will be liable for indemnification to the company. It has been held that directors being the trustee have to deal with business and its property the way they treat their own personal property and interest.
Ultra vires act: Directors have powers subject to Companies Act, Memorandum and Articles of association. Whenever they exceed these limits they are personally liable for the act being ultra vires. But if acts are intra-vires the company such acts can be subsequently ratified by the shareholders in the general meeting, otherwise, if a company suffers a loss on ultra-vires acts of its directors, the company can claim such loss from the directors.
Negligence: As soon as there is the failure to exercise due care and precaution directors are deemed to be negligent in their conduct and are personally liable for the consequent damages. However, the error of judgement will not be deemed as negligence.
Liability to third parties
The directors as agents of the company are not most of the times personally liable to third parties for any transaction entered on behalf of the company. Their acts bind the company to third parties. Generally, the rule is that wherever an agent, in a principal- agency concept liable, directors would be liable. They can be held personally liable as per contract act only in exceptional circumstances when they contract in a personal capacity, or when the principal is not disclosed, or when it is a pre-incorporation contract or when the contract is ultra vires the company and is not ratified subsequently.
Limitation — The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to proceedings or appeals before the Tribunal or the Appellate Tribunal, as the case may be. Generally limitation period under the limitation varies form one situation to another, the same are mentioned under its Schedule. However, 3 years of the limitation period for any other application for which no period of limitation is provided elsewhere in the act.
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