With the introduction of New Companies Act i.e The Companies Act, 2013, it became very important for us to understand the Rights and liabilities of directors of the Company. As per the provisions of Companies Act,2013 legal proceedings can be initiated against the directors of the company. So, every person before becoming director of the company should understand their duties and liabilities as a director.
A person is appointed as a director under the Companies Act, however, his / her liabilities as a director are not just limited to the offences committed under the Companies Act but he is also liable for the offenses committed under the various other statutes like the Negotiable Instruments Act, 1881, Labour Laws, GST Act, Income-tax Act etc.
Section 166 of the Companies Act, 2013 explains about the duties of Director i.e
1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the Company.
2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of environment.
3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives , partners, or associates 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.
6) A director of a company shall not assign his office and any assignment so made shall be void.
7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
The act cleary mentions that every director is to act in accordance with MOA & AOA and shall exercise his duties with due and reasonable care. Where a registrar or inspector calls for the books of accounts and other books and papers under Section 206, it shall be duty of every director, officer or other employee of the company to produce all such documents to the registrar or inspector. There are other cases also in which the director has to perform his duties.
Liabilities of Director under the Act
The liabilities of director are mentioned in various sections of The Companies Act,2013 which contains criminal liability, liability on fraud, liability for breach of warranty, liability to the third parties, liability for breach of statutory duties , liabilities to the company and liabilities for acts of other directors.
A Liabilities to the Company: The director has liability to the company i.e Breach of fiduciary duty, ultra vires acts, Negligence, Malafide acts.
Where a director acts dishonestly to the interest of the company it Breach of fiduciary duty.
Liability on ultra vires acts means memorandum and articles of association, restrict the power and activities of director and if the director acts beyond restrictions he shall be held personally liable for acts beyond the aforesaid limits.
The duty of director is to safeguard and accountable the property of company, if they fail to act deligently they shall be deemed to have acted negligently and they shall be held liable for any loss or damage.
What are the malafide acts for which director is liable?
Directors are the trustee for the money and property of the company. 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 malafide acts. Directors are also held liable for their act of misconduct or willfull misuse of powers.
B. Liability to the third parties
Liabilities under The Companies Act,2013 is towards the issue of prospectus, with regard to allotment of shares, any fraudulent trading and unlimited liability.
C. Liability for Breach of Warranty
Directors are supposed to function within the scope of their authority. Thus, where they transact any business in respect of matters, ultra vires the company or ultra vires the articles, they may be proceeded against personally for any loss sustained by any Third party.
D. Liability for breach of statutory duties
Companies Act imposes numerous statutoty duties on the directors under various section of the act. Default in compliance of these duties attract penal consequences. The various statutory penalties which director may incur by reason of non-compliance with the requirements of companies act are referred to in their appropriate places. Some of the sections with penalties are mentioned below.
E. Liability for acts of other directors
If any act done by other director of the same company, in absence of other director then the penalty will be levied only on such director who participated in such act. If any resolution or consent is taken from all directors then he can be liable but not for the act done by other director individually.
F. Criminal Liability
As the liabilities mentioned above, there are other liabilities also which director may incur i.e criminal liability under various other acts. Like
1. Cheque given to third person got dishonoured or fake.
2. Ignorance of other laws
3. Negligence of Labour laws applicable on company
4. Any offence mentioned in Income Tax Act.
The companies act defines the Liabilities of Non-executive/Independent directors :
Notwithstanding anything contained in this Act,-
(i) an independent director
(ii) a non-executive director not being promoter or key managerial personnel.
Shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or where he had not acted deligently.
On an average, the minimum amount of fine that is imposed under certain Sections of the Act is Rs. 25,000/- which in certain cases extends to Rs.25 crores or even more. Set out below is the list of few contraventions, where the penalties are Rs.1 crore or more:
a. Violation of provisions relating to not-forprofit companies (Section 8):
b. Violation of provisions relating to subscription of securities on private placement (Section 42);
c. Issue of duplicate share certificates with an intent to defraud (Section 46 (5));
d. Failure to repay deposits within specified time (Section 74 (3));
e. Contravention of provisions relating to insider trading (Section 195 (2)).
There are certain offences which attract imprisonment also apart from monetary penalty. Most of the offences leading to imprisonment under the 2013 Act are non-cognizable that it would need warrant to arrest but there are certain serious offences which are cognizable in nature and would not require a warrant to arrest. These offences are mainly connected to fraud or intent to defraud. Some of such offences are listed below:
(a) Section 7(6) - Furnishing of any false or incorrect particulars regarding any information or suppressing any material information, in any of the documents filed with the Registrar of Companies in relation to the registration of a company.
(b) Section 34 - Including in the prospectus, any statement which is untrue or misleading in form, or context in which it is included, or where any inclusion or omission of any matter is likely to mislead.
(c) Section 36 - Fraudulently inducing persons to invest any money.
(d) Section 56 - Default under Section 56 relating to transfer and transmission of shares with an intent to defraud;
(e) Section 66 - Offences relating to reduction of share capital.
(f ) Section 53- Prohibition on issue of shares at discount
Fine on Company - Not less than Rs.1 lakh and may extend to Rs.5 lakhs.
Officer in default- Maximum imprisonment of 6 months or a fine not less than Rs.1 lakh which may extend to Rs.5 lakhs or both.
(g) Section 57 - Punishment for personation of shareholder
Such a person in default- Minimum 1 year to maximum 3 years imprisonment or a fine not less than Rs.1 lakh which may extend to Rs.5 lakhs.
(h) Section 58(6) - Refusal of registration to transfer after order of tribunal
Such person in default- Minimum 1 year to Maximum 3 years imprisonment or a fine not less than Rs.1 lakh which may extend to Rs.5 lakhs.
(i) Section 59(5) - Non-rectification of register of members as per the order of tribunal
Fine on Company - Not less than Rs.1 lakh which may extend to Rs.5 lakhs
Officer in default– Maximum imprisonment of 1 year or a fine not less than Rs. 1 lakh which extend to Rs.3 lakhs or both.
(j) Section 68(11) - Power of Company to purchase its own securities
A fine on Company not less than Rs.1 lakh which may extend to Rs.3 lakhs.
Officer in default- Maximum imprisonment of 3 years or a fine not less than Rs.1 lakh which may extend to Rs.3 lakhs or both.
(k) Section 71(11) - Debentures
Officer in default- Maximum imprisonment of 3 years or a fine not less than Rs.2 lakh which may extend to Rs.5 lakhs or both.
(l) Section 86 - Failure to Register Charge
A fine on Company not less than Rs.1 lakh which may extend to Rs.10 lakhs.
Officer in default- Maximum imprisonment of six months or a fine not less than Rs. 25,000 which may extend to Rs.1 lakh or both.
(m) Section 92(5) - Failure to file Annual return
A fine on Company not less than Rs. 50,000/- which may extend to Rs.5 lakhs.
Officer in default - Maximum imprisonment of six months or a fine not less than Rs. 50,000/- which may extend to Rs.5 lakhs or both.
(n) Section 118(12) - Tampering with the minutes of proceedings of general meeting, meeting of Board of Directors and any other meetings and resolutions passed by postal ballot. Any person found guilty of tampering with the minutes - Maximum imprisonment for 2 years and a fine not less than Rs. 25,000/- but which may extend to Rs.1 lakh.
(o) Section 128(6) - Failure to keep Books of accounts.
Officer in default- Maximum imprisonment of 1 year or a fine not less than Rs. 50,000 which may extend to Rs.5 lakhs or both.
(p) Section 185(2) - Loan to directors in contravention of section 185
A fine on Company not less than Rs.5 lakhs which may extend to Rs.25 lakhs.
Officer in default– Maximum imprisonment of 6 months or a fine not less than Rs.5 lakhs which may extend to Rs.25 lakhs or both.
(q) Section 186(13) - Loan and investment by Company.
A fine on Company not less than Rs. 25,000/- which may extend to Rs.5 lakhs.
Officer in default- Maximum imprisonment of 2 years or a fine not less than Rs. 25,000/- which may extend to Rs.1 lakh or both.
(r) Section 187(4) - Investments held in its own name.
A fine on Company not less than Rs. 25,000/- which may extend to Rs.25 lakhs.
Officer in default- Maximum imprisonment of 6 months or a fine not less than Rs. 25,000/- which may extend to Rs.1 lakh or both.
The company has the right to initiate legal action against directors, in case of breach of their duties. Apart from this, the 2013 Act has also introduced the novel concept of 'class action suits' under Section 245. Under this concept, a group of shareholders (constituting a minimum of 100 shareholders or such minimum percentage of total shareholders as may be prescribed) can bring an action on behalf of all affected parties, against the company and/or its directors, for any fraudulent or wrongful act or omission of conduct on its/their part.
There are other sections also which deals with the liability imposed on director for fraud done by them. If any fraud is done by director then the punishment for fraud is mentioned in Section 447 of the Companies Act,2013. It says
"Any person who is found guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extent 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 extent to three times the amount involved in fraud."
There are other cases also where the penalties are mentioned. Many of them are explained in this article.
