LIABILITY OF DIRECTORS

• LIABILITY OF DIRECTORS
  COMPANY MANAGEMENT
  COMPANY LAW 2013
• DR SHASHI AGAGRWAL
• CLASSIFICATION OF LIABILITY OF DIRECTORS

1. CIVIL LIABILITY TO THE COMPANY  AND TO THE THIRD PARTIES
2. CRIMINAL LIABILITY

• CIVIL LIABILITY
• THE COMPANY :- DIRECTORS ARE THE AGENTS AND TRUSTEE OF THE COMPANY AND BREACH OF THESE DUTIES OR NEGLIGENCE IN PERFORMING THEM MAY MAKE THEM LIABLE TO THE COMPANY AND ITS SHAREHOLDERS. THEY MAY BECOME LIABLE FOR

1. NEGLIGENCE
2. MISFEASANCE
3. BREACH OF TRUST
4. ULTRAVIRES ACT

• NEGLIGENCE
• DIRECTOR MUST EXERCISE DUE CARE AND DILIGENCE IN THE PERFORMANCE OF HIS DUTIES.
• WHEN DIRECTORS ACTING WITH IN THEIR POWERS FAILS TO USE SUCH REASONABLE SKILL AND DILIGENCE HELD FOR NEGLIGENCE
• IF THEY ACT BOANAFIDE FOR THE BENEFITS OF THE COMPANY,THEY WILL NOT HELD LIABLE FOR THE MERE ERRORS OF JUDGMENT RESULTING IN LOSS
• FOREST OF DEAN COAL MINING COMPANY

1. P OWED SOME MONEY TO A COMPANY
2. THE DIRECTORS IN EXERCISE OF THEIR DISCRETION DECIDE NOT TO SUE TO RECOVER THE DEBT AND CONSEQUENTLY THE MONEY WAS LOST ON ACCOUNT OF DELAY IN ACTION.
3. HELD IT WAS TECHNICALLY AMOUNT OT BREACH OF DUTY OF NEGLIGENCE BUT IF THEIR DISCRETION BONAFIDE AND IN THE BEST INTEREST OF THE COMPANY BUT IT WOULD NOT BE ACTIONABLE BREACH NOR AN AMOUNT TO NEGLIGENCE.

• WHAT IS NOT NEGLIGENCE

1. A DIRECTOR IS NOT NECESSARILY NEGLIGENT IF HE FAILS TO ATTEND A BOARD MEETING BUT CONTINUANCE NON ATTENDANCE MAY BE TREATED AS NEGLIGENCE
2. HE SHALL NOT BE HELD LIABLE FOR NEGLIGENCE IF BY TRUSTING HE GAVE SOME WORK AND IF SUCH OFFICER CAUSES SOME LOSS OR DAMAGE TO THE ORGANIZATION.
3. SECTION 197 OF THE COMPANIES ACT PROVIDES THAT ANY PROVISIONS IN THE ARTICLES OF A COMPANY OR IN AGREEMENT WITH THE COMPANY EXEMPTING ANY OFFICER OF THE COMPANY FROM ANY LIABILITY ARISING FROM ANY NEGLIGENCE.DEFAULT OR MISFEASANCE SHALL BE VOID.
4. RELIEF AGAINST SUCH LIABILITY MAY BE GRANTED UNDER 633 BY A COURT

• MISFEASANCE
• IS DEFINED AS BREACH OF DUTY IN THE CONDUCT OF COMPANY ‘S AFFAIRS WHICH CAUSE LOSS TO THE COMPANY.
• SOMETHING MORE THAN NEGLIGENCE AND FRAUD OR UNDERHAND DEALING BY THE DIRECTOR WILL RENDER HIM LIABLE TO THE COMPANY FOR ANY LOSS SUFFERED BY COMPANY.
• CONDITIONS FOR TAKING ACTION AGAINST A DIRECTOR ON THE GROUND OF MISFEASANCE :

1. MUST BE MISCONDUCT OR NEGLIGENCE ON THE PART OF DIRECTOR
2. SUCH ACT MUST BE WILFUL

3.     DURING WINDING UP : APPLICATION TO THE COURT MAY BE MADE BY THE LIQUIDATOR OR CREDITOR

4.     COURT MAY REQUIRE THE DIRECTORS TO MAKE GOOD THE LOSS TO THE COMPANY

5.     DIRECTOR MAY APPLY FOR RELIEF U/S 640

• BREACH OF TRUST

1. MEANS ANY MISAPPLICATION OF THE FUNDS OF THE COMPANY
2. DIRECTORS ARE TRUSTEE OF THE COMPANY
3. MUST EXERCISE THEIR POWERS BONAFIDE
4. ASSETS OF THE COMPANY SHOULD BE USED FOR THE DEFINED PURPOSE
5. LIKE PAYING DIVIDEND OUT OF CAPITAL OR USING THE FUNDS OF THE COMPANY FOR THE ULTRAVIRES PURPOSE AMOUNT TO BREACH  OF TRUST
6. WHERE A DIRECTOR : ALLOTTED TO SHARES TO HIS MINOR CHILDREN

• PERSONALLY LIABLE
• ULTRAVIRES ACT

1. WHERE DIRECTORS DO ANY ACTS WHICH ARE IN EXCESS OF THEIR POWER OR WHICH ARE ULTRAVIRES AND THE COMPANY SUFFERS A LOSS
2. DIRECTOR SHALL BE PERSONALLY LIABLE TO THE COMPANY TO MAKE THE GOOD LOSS
3. NOT NECESSARY TO PROVE FRAUD IN SUCH CASE
4. DIRECTORS PAY DIVIDEND OUT OF CAPITAL,WOULD BE COMPELLED TO PAY BACK THE AMOUNT TO THE COMPANY
5. WHERE THEY USED TO PART THE MONEY OF THE COMPANY FOR A PURPOSE WHICH LAW FORBIDS,THEY SHALL BE PERSONALLY LIABLE TO THE COMPANY.

• LIABILITY TO THE THIRD PARTIES
• AS TO CONTRACTS :
• DIRECTOR BEING AGENT OF THE COMPANY ARE NOT LIABLE TO THE THIRD PARTIES WHICH THEY MAKE ON BEHALF OF THE COMPANY.
• WHEREVER AN AGENT IS LIABLE,THEN DIRECTORS WOULD BE LIABLE,WHERE LIABILITY WOULD ATTACH TO THE PRINCIPAL AND PRINCIPAL ONLY,THEN LIABILITY IS OF THE COMPANY.
• LIABLE WHERE ULTRAVIRES TRANSACT ON AMOUNT OT BREACH OF AN IMPLIED WARRANTY OF AUTHORITY HELD OUT BY THE DIRECTORS THEY MUST BE LIABLE FOR THE DAMAGES.

• CASE STUDY : WEEKS VS PROPERT

1. A RAILWAY COMPANY HAD FULLY EXERCISED HIS BORROWING POWERS
2. MR WEEKS LENT RS 500 TO THE COMPANY AND RECEIVED A DEBENTURE
3. WHICH SUBSEQUENTLY DECLARED VOID BECAUSE THE COMPANY HAD EXHAUSTED ALL ITS BORROWING POWERS.
4. HELD THAT THE DIRECTORS WERE LIABLE IN DAMAGES BECAUSE THEY HAVE WARRANTED THAT THEY HAD  AUTHORITY ON BEHALF OF THE COMPANY AND COMPANY HAD POWERS TO ISSUE SUCH DEBENTURES.
5. WHEN DIRECTOR ENTER INTO CONTRACT,WITHOUT DISCLOSING THE FACT THAT THEY ARE ACTING FOR THE COMPANY,THEY ARE PERSONALLY LIABLE ON THE CONTRACTS.

• AS TO FRAUD AND TORTS
• A DIRECTOR WHO IS A PARTY TO A FRAUD OR TO THE COMMISSION OF ANY OTHER TORT IS PERSONALLY LIABLE TO THE INJURED PARTY
• IF BY THE ORDER OF DIRECTORS A PATENT IS INFRINGED OR ANOTHER WRONGFUL ACT IS COMMITTED BY THE DIRECTORS WHO ARE PARTIES TO IT ARE PERSONALLY LIABLE
• BUT A DIRECTOR IS NOT LIABLE FOR THE FRAUD OF HIS CO DIRECTORS UNLESS IT IS AUTHORISED BY HIM OR HE HS PARTICIPATED THERIN.

1. LIABILITY UNDER THE PROVISIONS OF THE ACT
   PERSONALLY LIABLE TO THIRD PARTIES
2. MISSTATEMENT IN A PROSPECTUS AND DIRECTORS WILL BE LIABLE IN RESPECT OF ANY FRAUDULENT STATEMENT IN PROSPECTUS WHICH HAS INDUCED A PERSON TO SUBSCRIBE FOR SHARES IN THE COMPANY
3. FAILURE TO PAY THE APPLICATION MONEY FOR SHARES
4. KNOWINGLY CONTRAVENES THE PROVISIONS OF ALLOTMENT,ARE LIABLE TO COMPENSATE THE COMPANY AND ALLOTTEE. PROCEEDING AGAINST THE DIRECTORS MUST BE COMMUNICATED WITH IN TWO YEARS OF ALLOTMENT.
5. FAILURE TO REPAY APPLICATION MONEY FOR SHARES IF APPLICATION FOR THESE TO BE DEALT ON THE STOCK EXCHANGE IS NOT MADE REFUSED
6. IN CASE OF FRAUDULENT TRADING BY COMPANY,DIRECTORS MAY BE HELD PERSONALLY LIABLE BY AN ORDER OF THE COURT UNDER SECTION 339 OF THE COMPANIES ACT

• CRIMINAL LIABILITY
• IMPOSE CERTAIN DUTIES UPON THE DIRECTORS AND THEY MAY BE LIABLE TO PENALTIES BY WAY OF FINE OR IMPRISONMENT IF THEY FAIL TO PERFORM
• PERSON WHO ARE HELD CRIMINALLY LIABLE FOR ANY NON COMPLIANCE ARE THOSE WHO WERE CHARGE
• DIRECTORS OR OFFICER IN DEFAULT UNDER WHOSE DIRECTIONS ANY ONE OR MORE DIRECTORS ARE ACCUSTOMED TO ACT

• SECTIONS DETERMINING CRIMINAL LIABILITIES

1. SECTION 34 : ISSUE OF PROSPECTUS WITH UNTRUE OR MISLEADING STATEMENT :EVERY PERSON WHO AUTHORIZE HE ISSUE OF SUCH PROSPECTUS INDUCING ANOTHER PERSON TO BUY SHARES ON THAT FAITH WILL BE SUBJECT TO IMPRISONMENT WHICH MAY EXTEND FROM MINIMUM 6 MONTHS TO TEN YEARS
2. SECTION 53 ISSUE OF SHARES BY A DISCOUNT :- THIS SECTION PROHIBITS ANY COMPANY TO ISSUE SHARES AT A DISCOUNT AND NON COMPLIANCE OF THIS  SECTION RESULT IN FINE FOR THE COMPANY WHICH CAN RANGE  FROM ONE TO 5 LACS.THE OFFICER IN DEFAULT IS HELD CRIMINALLY LIABLE  AND IS PUNISHABLE WITH IMPRISONMENT A PERIOD UP TO 6 MONTH OR FINE UPTO FIVE LACS OR BOTH
3. SECTION 74 INVITING DEPOSITS IN CONTRAVENTION OF THE RULES OR MANNER OR CONDITIONS 7 YEARS IMPRISONMENT AND FINE NOT LESS THAN 25 LACS
4. SECTION 26 ISSUING FALSE ADVERTISEMENT INVITING DEPOSITS THREE YEARS IMPRISONMENT /FINE 50000 OR BOTH
5. SECTION 66 CONCEALING NAMES OF CREDITORS IMPRISONMENT UPTO TEN YEARS OR BOTH

6. SECTION 68 BUY BACK OF SHARES BY A COMPANY “ACCORDING TO SECTION 68(11) IN CASE OF DEFAULT BY THE COMPANY IN COMPLYING WITH THE PROVISIONS /GUIDELINES LAID DOWN BY SEBI. CRIMINAL LIABILITY FOR OFFICER IN DEFAULT OF SUCH COMPANY SHALL BE IMPRISONMENT UP TO THREE YEARS OR FINE OF NOT LESS THAN ONE LACS OR BOTH
7. SECTION 71 :- ISSUE OF DEBENTURES BY THE COMPANY :- THIS SECTION DEALS WITH ISSUING OF DEBENTURE BY THE COMPANY FOR FINANCING WITH AN OPTION TO CONVERT SUCH DEBENTURES INTO SHARES WHOLLY OR PARTLY AT THE TIME OF REDEMPTION/ ACCORDINGLY THE COMPANY MUST APPOINT  A DEBENTURE TRUSTEE FOR THE PROTECTION OF THE RIGHTS OF DEBENTURE HOLDERS. WHERE THEY FEEL THAT THE COMPANY WOULD NOT BE LIABLE TO DISCHARGE THE PRINCIPAL AMOUNT WHEN REQUIRED,THE DEBENTURE HOLDER MAY FILE PETITION BEFORE TRIBUNAL,PASS THE RESTRICT THE COMPANY FROM INCURRING ANY FURTHER LIABILITY
8. WHEN AT THE TIME OF REDEMPTION  NOT PAYMENT OF PRINCIPAL AND INTEREST,THE TRIBUNAL ON THE PETITION MAY ASK THE COMPANY TO MAKE PRINCIPAL AND INTEREST AMOUNT

9. NON COMPLIANCE OF SUCH AN ORDER OF TRIBUNAL SHALL MAKE THE OFFICER IN DEFAULT LIABLE FOR IMPRISONMENT FOR A PERIOD WHICH MAY EXTEND UP TO 3 YEARS OR FINE 2 LACS TO 5 LACS OR BOTH
10. SECTION 92 FILING OF ANNUAL RETURN BY THE COMPANY BEFORE ROC :-RETURN NEEDS TO BE FILED BEFORE THE REGISTER OF COMPANY WITH IN 69 DAYS FROM THE DATE OF AGM OR TIME PRESCRIBED  UNDER SECTION 403 AND FAILURE TO THE ANNUAL RETURN MAY LEAD TO FINE FOR THE COMPANY 50,000 AND CRIMINAL LIABILITY FOR THE OFFICER IN DEFAULT OF IMPRISONMENT FOR A PERIOD EXTENDING UP TO SIX MONTHS  OR FINE BETWEEN 50,00 TO FIVE LACS.
11. SECTION 164 UNDISCHARGED INSOLVENT ACTING AS DIRECTOR IMPRISONMENT OR FINE OR BOTH
12. SECTION 127 DEFAULT IN DISTRIBUTING DIVIDEND -2 YEARS IMPRISONMENT AND FINE NOT LESS THAN 1000 RS PER DAY OF DA FAULT
13. SECTION 207 ,208 A  FAILURE TO ASSIST REGISTRAR IN INSPECTION OF BOOKS OF ACCOUNT ETC IMPRISONMENT UP TO ONE YEAR AND FINE NOT LESS THAN RS 25,000 WHICH MAY EXTEND TO ONE LACS
14. SECTION 129 FAILURE TO LAY BALANCE SHEET AT ANNUAL GENERAL MEETING IMPRISONMENT UP TO ONE YEAR OR FINE UP TO 50,000 OR BOTH

• POWER OF THE COURT TO GRANT RELIEF
• UNDER SECTION 453,THE COURT HAS POWER TO RELIEVE AN OFFICER OF A COMPANY FROM LIABILITY FOR NEGLIGENCE,DEFAULT,BREACH OF THE DUTY,MISFEASANCE OR BREACH OF TRUST IF IT APPEARS TO THE COURT THAT HE HAD ACTED HONESTLY AND REASONABLY .