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Liability of a Company’s Director

December 22, 2021

The Companies Act 2013 is the statutory authority governing the happenings of a company from its inception till dissolution including its responsibilities and the duties vested upon its directors. Under the same, certain liabilities of a Director have been charted out post the incorporation of a company. The said liabilities aid in the regulation of the demeanor of the director of a company. A further analysis of the same may be dwelled into through this article.

Personal Liability

Personal Liability may be defined as liability which is held against a single individual for an act. Whilst generally speaking the liability of a company is not transferred upon its director, the Companies Act, 2013 has been vested with certain conditions under which such liability may be imposed, mostly with respect to fiduciary responsibilities. Some such circumstances are as follows:

  1. Tax Liability

If Section 179 of the Income Tax Act 1961 may be examined, in the instance that dues from a private company cannot be recovered or the tax assessed is not found to be recoverable, in such a scenario, when any private company is wound up and the tax assessed cannot be recovered, then the director, or directors are jointly liable for the same. It is for the Director to show that the default of the company was not attributable to any breach of duty on his part.[1]

  1. False Statements

If false statements are meted out by a Director with respect to his company, he may be held personally liable for the same unless it can be proven that the said statements were made in true faith, or withdraws consent with respect to the same via a public declaration of its falsehood.

  1. Company Debts

With regards to the debt of a company, or the debts owed, a director cannot personally be held liable for the same unless it may be deduced that the same is the result of indulgence in fraudulent activities by the director in which case, personal liability is vested.

  1. Fraudulent Business Conduct

If a director is seen to be indulgent in undertakings which are contrary to the visions or interests of his or her company, personal liability may be vested for such acts especially if they are malicious in nature.

  1. Liability with respect to Shareholding

In the circumstance that a company goes bankrupt or begins to undergo the process of liquidation, the personal stakes held by the director with respect to his or her shares and shareholding in the company would vest personal liability upon the director.

Criminal Liability

  1. Dishonored Cheques

If a director of a company knowingly or willingly signs a cheque which is deemed to be dishonored, he can be held criminally liable for the same as a result of willingly abetting financial fraud or malfeasance.

  1. Labor Law offenses

The ambit of Labour Laws in India is very vast in nature. Each statute pertains to a different aspect of the same. Compliance with the labour laws is sine qua non and must be ensured by the director of a company. If there is seen to be a breach of the same under the supervision or instructions given by a director, he or she may be held criminally liable for the same.

Vicarious Liability

The concept of vicarious liability mandates that an individual is deemed to personally hold liability for the wrongful acts of another individual. It has been held by the Supreme Court that the director of a company cannot be held liable on behalf of the company unless such act has statutory backing. Further, only if there is significant evidence to prove that a person played an active role in the wrongdoings only then, specific liability can be imposed.

Conclusion

Until and unless a person is held accountable for his/her act he might do any act in pursuance of his interest. Therefore it becomes utmost important for a business to make sure that none of its members are sacrificing the interest of the business for fulfilling his/her own motives. Every company must have a well-planned out evaluation mechanism in order to assess the work of its directors. However, it must be made sure that any rigid mechanism of evaluation will interrupt the effectiveness of the director’s work who is in charge of running the company. The principle of equity which lays down that no person can be made liable until and unless he’s a party to the commission of offence or he’s aware of the offence also applies while assessing the liability of a Company’s Director.

To know more about Company Law, read below:

Company Law in India

[1] Gurudas Hazra v. P.K.Chowdhury.

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