Personal Liability of Directors

Dear All.

In the recent time, India has witnessed various corporate scandals, Shardha, Purti; Satyam etc. are to name a few. Somehow all the cases has pointed wrongdoing on the part of directors and created much attention and debate on the role of Company's Directors. Even, in The Company's Bill 2012 (2013), there has been a lots of focus on the role and selection of independent Directors.

Directors are expected to act honestly and with due diligence. As per proposal, Directors are liable for misdoing in the conduct of the business even though no specific act of dishonesty is proved personally against him. Director can be held personally liable to any party who has an interest in the affairs of the Company like shareholders, government, regulators, creditors, liquidators, etc. these liability are well established and with increasing statutory duties and in increasing litigious environment, the number of actions against Director are expected to increase.

As per section 2(13) of the Companies Act 1956, Directors is any person who is in-charge of an activity, department, or organisation or a member of the board of people that manages or oversees the affairs of a business whether or not occupying the position of Directors by whatever name called. This definition of Director is inclusive definition and includes every one sitting at the top of any functional area.

Usually directors are appointed by the Company through Articles of Association or in general meeting and control the business of the Company.

He has to exercise strategic oversight over business operations while directly measuring and rewarding management's performance. Simultaneously he has to ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholder through proper and timely disclosures.

The Companies Act does not define the actual position of Directors liabilities however the Director are expected to act as an agent or trustee owner/shareholders.

In agency term, the Director acts on behalf of the Company. So the Company is liable for contracts in which Director enter into. He stands in a fiduciary position towards the company in respect of his powers and capital under his control. The directors have been held trustees of the assets of the Company and in many cases the courts have directed them to reimburse the loss to the Company, where it was found that directors have applied the Company's money for personal purpose or taken undue advantage.

The ministry of Company Affairs has issued one circular no. 08/2011 relating to "Prosecution of Director" on 25th March 2011. Independent Director, Director appoint under section 408 by central government, nominee director on PSU appoint by government shall be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred with his knowledge attributable through Board process and with his consent or connivance or where he has acted diligently in the Board process. Also, this circular stated that the director shall be liable, if they are in default to comply the specific responsibility which assign under section 209(5), 209(6), 211 and 212 of the Companies Act 1956. As per section 5 of the Companies Act 1956, if the Director who is in default to comply with specific responsibility, shall be treated as "officer in default". In given case, all directors were aware about the fact and also they approved the annual statement without considering their reliability. They unable to comply with provision of the Companies act 1956. Therefore they found to be guilty as a "officer in default"

The Directors enjoys the vast power of management and acts as a decision making body. The Director can be held personally liable in following cases-

1)    If he contracts in his own name

2)    If he use the companies name incorrectly

3)    If he exceeds his authority

4)    If he sign the contract in such way that it is not clear whether it is company or agent who is signing.

He must display care in performance of work assigned to him.

Director's are required to use fair and reasonable diligence while discharging their duties and shall act honestly, with such care as may be reasonably expected from person with equivalent knowledge and experience. It is duty of director to follow laws applicable to the Company. If not, then he is liable for breach of fiduciary duties. Also, the Directors can be made liable for acts of misconduct or willful misuse of powers. If they fail to exercise reasonable care, skill and diligence, they shall be liable for any loss or damage resulting there from.

The similar type of responsibility lies on Independent Directors, they cannot take stand that they have relied on the representations made to them during meeting. It is responsibility of Independent Director to ensure due diligence on the matter on hand and the decision taken is not prejudices to the company or its stakeholder.

The liabilities of Director depend on his role which he plays in the Company. Directors found to be guilty cannot take shelter under the stand that verification made by professional experts.

In nutshell, Directors have both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of company business to enable them properly to discharge of their duties as director. The duty, care, diligence, verification of critical points cannot be abdicated by directors.