LIABILITY OF EXECUTIVE DIRECTORS
1. Towards the company:
Whenever a director acts intentionally to harm the interest of company and acts dishonestly, he will be held liable under breach of fiduciary duty. Whenever a director does not act within the prescribed limits of the memorandum or articles of association of the companies, company is not liable for such acts and director concerned is liable for all such actions. Whenever a director does not act with due skill, care and intelligence, he is said to be liable under negligence. Directors who are the trustees of the assets of the company but if they exercise their powers dishonestly and does not act in good faith, they will be considered to be liable.
2. Towards third party:
If a director acts within the limits of the powers vested to them by board of directors, they will not be personally liable to the third parties and if they have made a contract on behalf of the company, they will also not be liable.
3. Towards Statutory Compliances:
If there is any statutory duty which has been imposed upon the director and the director fails to perform those duties, he will be held liable and consequently will be provided with penal punishment.
4. Towards Criminal Acts:
The liability basically arises when a director engaged by a company has done something which is punishable under Indian Penal Code(IPC). For any criminal offence of the company, such person shall be held responsible. All criminal punishments prescribed for a company in any law, would be imposed on the director responsible.
The directors of the company may also be held liable for criminal offences or civil offences under the Companies Act. Any such offence committed by a company in which the director was somehow involved will make the director liable for such criminal offences under the Companies Act.
5. Towards other laws providing Vicarious Liability:
Several laws provide for the vicarious liability of all persons who are in charge. The legal principle of vicarious liability applies to hold one person liable for the actions of another when engaged in some form of joint activity. Thus each law has to be examined to find out the liability of the other executive directors/KMPs to find out their vicarious liability, arising due to act of other persons.
5.1 An example of the vicarious liability provision can be seen u/s 141 of the Negotiable Instruments Act, 1881, which provides that “every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly”.
5.2 Similarly, Section 42 of Foreign Exchange Management Act, 1999, provides that “where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.”
LIABILITY OF NON-EXECUTIVE DIRECTORS/INDEPDENT DIRECTORS:
1. Towards Company Law:
Section 149(12) of the Companies Act, 2013 provides that the liability of IDs or NEDs, is restricted to actions of omission or commission committed by a company which had taken place with the knowledge of ID or NED and with his or her consent, connivance, or where he/she had not acted diligently.
2. Towards other laws providing Vicarious Liability:
Normally there should not be even vicarious liability for IDs / NEDs. However, the law enforcement agencies and Judicial Magistrates keep issuing summons to all the IDs/ NEDs due to their lack of knowledge or involvement in legal infractions by the company. Going by past experiences, frivolous criminal prosecutions are initiated for mere technical violations of the Shops & Establishments Act, Standards of Weights & Measures Act, Drugs & Cosmetics Act, Insecticides Act etc. on all directors including IDs and NEDs.
Reason for not accepting IDs: Reputational loss, mental stress and hardships caused by protracted legal proceedings have discouraged and de- incentivized several professionals from accepting board positions of IDs and NEDs.
LIABILITY OF KEY MAN PERSONS(KMPs):
The liability of KMP of any company is same as that of a director because both of them are responsible for running of company and for any offence, both the KMPs and the directors will be held equally responsible if found that they have a hand in that offence.
Therefore, it must be taken into consideration that the companies are governed by Companies Act, 2013 and according to any rule that has been amended, modified or substituted from time to time, key managerial personnel are responsible for and are to be held liable for any offence or wrongdoing done on the part of the company.