PROJECT ON: COMPANY LAW

DUTIES AND LIABILITIES OF THE DIRECTORS OF

A COMPANY: A DETAILED ACCOUNT
Table of Contents
INTRODUCTION ............................................................................................................................................. 3
THE LIABILITIES OF THE DIRECTORS OF A COMPANY TOWARDS THE COMPANY ........................................ 6
Breach of fiduciary duty: ........................................................................................................................... 6
Ultra vires acts: ......................................................................................................................................... 6
Negligence: ............................................................................................................................................... 6
Mala fide acts ............................................................................................................................................ 7
CONTRACTUAL LIABILITY OF THE DIRECTORS............................................................................................... 7
PRE- INCORPORATION LIABILITY- ................................................................................................................. 8
LIABILITY OF DIRECTORS FOR TORTS OF THE COMPANY.............................................................................. 8
CIVIL LIABILITY TO THE COMPANY ................................................................................................................ 8
LIABILITY OF CO-DIRECTOR’S DEFAULTS ....................................................................................................... 9
TAX LIABILITY .............................................................................................................................................. 10
DIRECTORS WITH UNLIMITED LIABILITY ..................................................................................................... 11
STATUTORY LIABILITY.................................................................................................................................. 11
Misleading Prospectus ............................................................................................................................ 11
Inducement to invest .............................................................................................................................. 11
Maintenance of proper books of accounts ............................................................................................. 11
Annual General Meeting ......................................................................................................................... 12
Liability on winding up ............................................................................................................................ 12
Special statutory protection against liability .......................................................................................... 12
CONCLUSION............................................................................................................................................... 14
INTRODUCTION

Meaning of Director as per the Companies Act, 1956

A company is a legal entity and does not have any physical existence. It can act only through
natural persons to run its affairs. The person, acting on its behalf, is called Director. A Director is
any person, occupying the position of Director, by whatever name called. They are professional
men, hired by the company to direct its affairs. But, they are not the servants of the company.
They are rather the officers of the company.

The definition of Director given in this clause is an inclusive definition. It includes any person
who occupies the position of a director is known as Director whether or not designated as
Director. It is not the name by which a person is called but the position he occupies and the
functions and duties which he discharges that determine whether in fact he is a Director or not.
So long as a person is duly, appointed by the company to control the company's business and,
authorized by the Articles to contract in the company's name and, on its behalf, he functions as a
Director.

The Articles of a company may, therefore, designate its Directors as governors, members of the
governing council or, the board of management, or give them any other title, but so far as the law
is concerned, they are simple Directors.

Duties of a Director

There is no exhaustive list defining the duties of the Board of Directors towards the company and
shareholders. But based on the analysis of the provisions of the Companies Act, 1956 with
regards to a director, some general duties of a Director are mentioned herein:
To file return of allotments: a company must file with the Registrar, within a period of 30 days, a
return of the allotments, stating the specified particulars. Failure to file such return shall make
the Directors liable as 'officer in default'. A fine, up to Rs.500 per day, till the default continues
may be levied.
Not to issue irredeemable preference shares or shares, redeemable after 20 years: A company
cannot issue irredeemable preference shares or preference shares, redeemable beyond 20 years.
Directors, making any such issue, may be held liable as 'officer in default' and, may be subject to
a fine, up to Rs.1, 000.

To disclose interest: A Director, who is interested in a transaction of the company, must disclose
his interest to the Board. The disclosure must be made at the first meeting of the Board, held
after he has become interested. This is because a Director stands in a fiduciary capacity with the
company and, therefore, he must not place himself in a position in which his personal interest
conflicts with his duty.

A company is not debarred from entering into a contract in which a Director is interested. It only
requires that such interest be disclosed. An interested Director should not take part in the
discussion on the matter of his interest. His presence shall not be counted for the purpose of
quorum for that item. He shall not vote on that matter. If he does vote, his vote shall be void.
Non-disclosure of interest makes the contract avoidable and not void. However, the concerned
Director may be subjected to fine, up to Rs. 5,000.

Duty to attend Board meetings - A number of powers of the company are exercised by the Board
of Directors in their meetings, held from time to time. Although, a Director may not be able to
attend all the meetings, but, if he fails to attend three consecutive meetings or, all meetings for a
period of three months, whichever is longer, without permission of the Board, his office shall,
automatically, fall vacant.

A Director's duties also include the following:

• To convene Statutory, Annual General Meeting (AGM) and also Extraordinary General
Meetings;
• To prepare and place at the AGM, along with the balance sheet and, profit and loss account, a
report on the company's affairs, including the report of the Board of Directors;

• To authenticate and approve annual financial statement;

• To appoint first auditor of the company;

• To appoint cost auditor of the company;

• To make a declaration of solvency in the case of a Members' voluntary winding up;

It is difficult to describe the duty of directors in general terms, whether by way of analogy or
otherwise. The nature of duties of director would depend not only on the nature of the company's
business but also on the manner in which the work of the company is distributed between
directors and other officials. A director need not exhibit in the performance of his duties a greater
degree of skill than may reasonably be expected from a person of his knowledge and experience.
In case of a Non Executive Director: A director is not bound to give continuous attention to the
affairs of his company. His duties are of an intermittent nature to be performed at periodical
board meetings, and at meetings of any committee of the board upon which he happens to be
placed. He is not, however, bound to attend all such meetings, though he ought to attend
whenever, in the circumstances, he is reasonably able to do so. However an Executive Director
needs to give constant attention and take active interest in the affairs of the Company.

In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director, is in the absence if grounds
for suspicion justified in trusting that officer to perform such duties honestly. A director must of
necessity trust the officials of the company to perform properly and honestly the duties allocated
to those officials.

When presenting their annual reports and balance sheet to their shareholders and when
recommending the declaration of a dividend, directors ought not to be satisfied as to the value of
their company's assets merely by the assurances neither of their chairman, nor with the
experience or the belief of the auditor howsoever competent and trust worthy he is. All in all,
there is no difference between legal and equitable duties of directors. If the directors act within
their power with such care as is reasonably to be expected from them, having regard to their
knowledge and experience, and if they act honestly for the benefit of the company. They
discharge both their legal as well as equitable duty to the company. The directors are not liable
for all mistakes they make, although if they had taken more care they might have avoided them.
 THE LIABILITIES OF THE DIRECTORS OF A COMPANY
TOWARDS THE COMPANY

The liability of a Director to the company may arise from:

Breach of fiduciary duty: Where a Director acts dishonestly to the interest of the company,
he will be held liable for breach of fiduciary duty. Most of the powers of Directors are powers in
trust and, therefore, should be exercised in the interest of the company and, not in the interest of
the Directors or, any section of members. Thus, in a case where the Directors, in order to
forestall a take-over bid, transferred the unissued shares of the company to trustees, to be held for
the benefit of the employees, and an interest-free loan from the company was advanced to the
trustees to enable them to pay for the shares, it was held to be a wrongful exercise of the
fiduciary powers of the Directors.

Ultra vires acts: Directors are supposed to act within the parameters of the provisions of the
Companies Act, Memorandum and Articles of Association, since these lay down the limits to the
activities of the company and, consequently, to the powers of the Board of Directors. Further, the
powers of the Directors may be limited in terms of specific restrictions, contained in the Articles
of Association. The Directors shall be held, personally, liable for acts beyond the aforesaid
limits, being ultra vires the company or the Directors. Thus, where the Directors pay dividends or
interest out of capital, they will be liable to indemnify the company for any loss or damage,
suffered due to such act.

Negligence: As long as the Directors act within their powers with reasonable skill and care, as
expected of them as prudent businessmen, they discharge their duties to the company. But, where
they fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted,
negligently, in discharge of their duties and, consequently, shall be liable for any loss or damage,
resulting there from. However, error of judgment will not be deemed as negligence. The
Directors cannot be absolved of their liability for negligence by any provisions in the Articles of
Association.
Mala fide acts: Directors are the trustees for the money and property of the company, handled
by them, as well as for exercise of the powers, vested in them. If they dishonestly or in a mala
fide manner, exercise their powers and perform their duties, they will be liable for breach of trust
and, may be required to make good the loss or damage, suffered by the company by reason of
such mala fide acts. They are also accountable to the company for any secret profits they might
have made in course of their performance of duties on behalf of the company. Directors can also
be held liable for their acts of 'misfeasance', i.e., misconduct or willful misuse of powers.
However, misconduct, which is not willful, shall not amount to 'misfeasance'.

Where a Director misapplies or misappropriates the money or properties of the company or, has
been guilty of breach of trust or misfeasance, the Court may order him to repay the money or,
restore the property or, to pay compensation.

CONTRACTUAL LIABILITY OF THE DIRECTORS

Directors are bound to use fair and reasonable diligence in discharging the duties and to act
honestly, and act with such care as is reasonably expected from him, having regard to his
knowledge and experience.

In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be
personally liable on a company contract when he has accepted personal liability either expressly
or impliedly. Directors are the agents or the trustees of a Company."

Express liability will usually arise only when a director has personally guaranteed the
performance of a contract. Implied liability will arise when a director signs a contract for the
Company or mentioning the name but failing to add the vital word "limited" or its abbreviation.
This rule rests on the ordinary principle of agency that where an agent enters into a contract
without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose
v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it.
The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable
by the Court of Exchequer Chamber.

As far as fiduciary duties/obligations are concerned, any breach by any director would visit them
with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been
observed in Official Liquidator vs. PA Tendulkar.

PRE- INCORPORATION LIABILITY-

A Company cannot make a contract before it is incorporated because, before incorporation, it has
no legal existence. Therefore, a Company after incorporation cannot ratify a contract previously
made. It must make a fresh contract. But, those who act on behalf of the unincorporated
company may find themselves personally liable. In Kelner v. Baxter the Court of Common Pleas
held that where a person purports to sign a contract as agent, but has no principle in existence at
the time, he is personally responsible.

LIABILITY OF DIRECTORS FOR TORTS OF THE COMPANY

Directors as such are not liable for the torts or civil wrongs of their company. To make a person
liable for a tort, e.g. for negligence, trespass, nuisance or defamation it must be shown that he
was himself the wrongdoer or that he was the employer or principal of the wrongdoer in relation
to the act complained of, or that the tort was committed on his instructions.

CIVIL LIABILITY TO THE COMPANY

Director’s liability to the Company may arise where

(1) the directors are guilty of negligence,

(2) the directors committed breach of trust,

(3) there has been misfeasance and (4) the director has acted ultra vires and the funds of the
company have been applied for such an act.

A director is required to act honestly and diligently applying his mind and discharging his duties
as a man of prudence of his ability and knowledge would do. It has been explained in the duties
of directors as to what is standard or due care and diligence expected from him as explained by
Justice Romer in Re City Aquintable Fire Insurance Company.

Any willful misconduct or culpable negligence falls within the category of misfeasance. It was
held in Duomatic Ltd, Re- "A director has to act in the way in which a man of affairs dealing
with his own affairs with reasonable care, and circumspection could reasonably be expected to
act....."

Therefore, Directors would decidedly be liable for omitting to do what they could have done in
the circumstances. A Director is liable to make good with interest all amount paid from time to
time out of the funds of the company for the purchase of shares of the company. He is not
entitled to spend money for a purpose not covered by the Memorandum of Association although
such payment is sanctioned by the Board of Directors and by the majority of shareholders. A
shareholder can maintain an action against the director to compel them to restore to the company
its funds employed in transactions that the directors have no authority to enter into. The funds of
the company cannot be used by the Directors to pay their litigation costs, although these would
not have been incurred if they had not been directors. A Director will, however, not be liable for
any such unlawful act if he had no knowledge of such payments.

LIABILITY OF CO-DIRECTOR’S DEFAULTS

A Director is the agent of the company, except for matters to be dealt with by the company in
General Meeting and, not of the other members of the Board. Accordingly, except in one
instance, nothing done by the Board can impose liability on a Director, who did not participate in
the Board's action or, did not know about it. To incur liability, he must either be a party to the
wrongful act or, later acquiesce (consent) to it. Thus, the absence of a Director from a meeting of
the Board does not make him liable for the fraudulent act of a co-Director, on the ground that he
ought to have discovered the fraud, except where he had the knowledge or, he was a party to
confirm that action.

Where a Director is made liable for the acts of a co-Director, he is entitled to contribution from
the other Directors or co-Directors, who were a party to the wrongful act. However, where the
Director, seeking contribution alone, benefited from the wrongful act, he is not entitled to
contribution.

A director is bound by the maxim delegatus non-potest delegare. Shareholders appoint him
because of their faith in his skill, competence and integrity and they may not have the same faith
in another person. It was held in the case of J.K. Industries v. Chief Inspector of Factories that
the directors being in control of the company’s affairs cannot get rid of their managerial
responsibility by nominating a person as the occupier of the factory. The rule is, however, not
inflexible. The Act or Articles of Association of the Company may make a delegation of
functions to the extent to which it is authorized. Also, there are certain duties, which may, having
regard to the exigencies of business, properly be left to some other officials. A proper degree of
delegation and division of responsibility is permissible but not a total abrogation of
responsibility. A director might be in breach of duty if he left to others the matters to which the
Board as a whole had to take responsibility. Directors are responsible for the management of the
company and cannot divest themselves of their responsibility by delegating the whole
management to agent and abstaining from all enquiries. If the latter proves unfaithful, the
liability is that of the directors as if they themselves had been unfaithful.

TAX LIABILITY
Under Section 179 of the Income Tax Act 1961, when any private company is wound up and the
tax assessed cannot be recovered, then every person who was a director of the private company
shall be jointly and severely be liable for the payment of such tax. Where the bank account of a
Director was frozen for recovering income tax dues of the Company, it was held in Gurudas
Hazra v. P.K.Chowdhury that it was for the Director to show that the default on the part of the
company was not attributable to any breach of duty on his part. The case of Peter J R Prabhu v.
Asstt Commissioner of Commercial Taxes stated that apart from any provisions of the taxing
statute, arrears of the tax amount are not to be recovered from the directors personally.

DIRECTORS WITH UNLIMITED LIABILITY

The liability of the directors like the shareholders is limited to the extent of the shares held by
them remaining unpaid. A limited liability can make the liability of any or all of its directors
unlimited. A provision to this effect has to be contained in the Memorandum. that a person who
becomes director after incorporation of such a clause will have unlimited liability.

STATUTORY LIABILITY

Misleading Prospectus

A director is liable to compensate a person who has subscribed shares on the faith of a
prospectus, which contained untrue statement. The Director should compensate every such
subscriber for any loss or damage he may have sustained by reason of such untrue statement in
an action in tort and also under section 62 of the Act to pay compensate. If the Director discovers
a mistake in the prospectus, it is his duty to specifically point it out. The Director may also have
to face criminal prosecution for untrue statement in the prospectus. He may be imprisoned for
two years and fined Rs.5000.

Inducement to invest

The Directors are liable to criminal prosecution for inducing or attempting to induce a person by
statement or even forecast which is false or misleading to enter into or to offer to enter into any
agreement to buy shares of the company. They shall be punishable with imprisonment for a term
which may extend to five years, or with fine which may extend to Rs.10,000, or with both.

Maintenance of proper books of accounts

Where directors manage a company then each director shall be responsible (if there is no
managing director) that the company should maintain and keep proper books of account. Default
or non-compliance will make the Director punishable with imprisonment for a term not
exceeding six months or fine of Rs.100 or both. In the event of winding up, failing to keep
proper accounts will make him punishable with one-year imprisonment and for falsification of
book imprisonment for eight years.

Annual General Meeting

Directors must hold the meeting even though the accounts are not ready or the company is not
functioning or the management of the business is vested in the Central Government. The holding
of the meeting must be within the period of 15 months after the preceding annual general
meeting (AGM). The Board of Directors shall at the meeting lay a balance sheet and a profit and
loss account for the financial year. For default, the Directors are liable to be punished with
imprisonment for a term of six months and fine of Rs.1,000.

Liability on winding up

A Director of a company in liquidation must co-operate with the liquidator in realizing the assets
of the company and distributing them among the creditors and contributors of the company. If
they fail to do so they are liable to imprisonment, which may extend to five years and fine.

Therefore, Directors are liable for theft of the company’s property or for false accounting.
Directors are liable to prosecution on several issues. There are more than 150 sections dealing
with criminal or penal liability of the Directors and other officers of the company. Some of these
provisions have been listed and explained above.

Special statutory protection against liability

The Act extends special protection against a liability that may have been incurred in good faith.
A good illustration here will be to cite an early case of Claridge’s Patent Ashphalt Co, Re where
the Court said that the Directors were acting for the benefit of the company and took the best
advice from the company’s solicitor and thus were not held liable. The Bombay High Court in
the case of Gautam Kanoria v. Asstt ROC also granted relief to the Directors where the AGMs
could not be held and annual returns could not be filed due o the takeover of the company by the
Government and the matters being beyond their control. The totality of the circumstances has to
be examined for considering whether relief is to be allowed or not. It was also observed in Om
Prakash Khaitan v. Shree Keshariya Investment Ltd that it would be proper to relieve directors of
consequences of defaults and the breaches unless they are directly involved in the acts or
omission complained of or have otherwise not acted honestly or reasonably or have financial
involvement in the company.
 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. Three propositions in
regard to the duties and responsibilities of directors:

(1) a director need not exhibit, in the performance of his duties, a greater degree of skill than
may reasonably be expected from a person of his knowledge and experience
(2) a director is not bound to give continuous attention to the affairs of his company, his
duties being of an intermittent nature to be performed at periodical board meetings or
committee meetings

(3) in respect of such duties as may be properly left to some other official having regard to
the exigencies of business or the articles of association of the company, a director is, in the
absence of grounds for suspicion, justified in trusting that official to perform such duties
honestly.
 BIBLIOGRAPHY

1. BOOKS

1) A Ramaiya “Ramaiya Guide to The Companies Act” 17th Edition, 2010, Lexis Nexis
Butterworths Wadhwa Publications

2. WEBSITES
1) Legalserviceindia.com
2) Google.com
3) Vakilno1.com