RESEARCH PROJECT ON

Duties and liabilities of directors

SUBMITTED TO

CORPORATE LAWS II

By

VENUGOPALAN. R

(Regd. No.BA0140074)

SUBMITTED TO

Prof. Mr. Shankar Kaarmukilan

 DUTIES AND LIABILITIES OF DIRECTORS

Objective

The researcher’s objective in this project is,

1. To study the duties of the directors of the company

2. To examine the liabilities of the directors of the company under the section 62, 69, 70 of the
Companies act, 2013.

Research Questions

What are the powers and duties of the directors of the company?

Whether a director made liable has any relief from his liability?

Research methodology

This is a Doctrinal Research project and the relevant material for this project has been collected from
the articles referred and as well as the books referred. Doctrinal Research is a research as it is based
on the principles. It is more based on the sources like books of the library, statutes and through
various websites. At this point of time it is pertinent to review the literature from where the relevant
material has been collected. For the Research Project the Researcher has collected the relevant
material from books on Companies Act 2013 and also from articles and reports.

Review of literature

The researcher has extensively relied upon articles referred, the books referred. The companies act
explains the duties and liabilities of the directors in the companies under the Companies act, 2013.
Tentative Chapterisation

CHAPTER I
Introduction

CHAPTER II
Duties

CHAPTER III
Liabilities
Relief from liability

CHAPTER IV

Conclusion
CHAPTER I

Introduction

A company is a legal entity and does not have any physical existence. It can act only through
natural persons to run its affairs. It has neither a mind nor a body of its own which it requires to
carry out its operations and so here Directors come into the picture and company’s business is
entrusted to them as human agents. “A corporation is an artificial being, invisible, intangible and
existing only in contemplation of law”1. A corporation can not have the intention. It is only the
intention of its agents, which make it liable for the wrongs in the nature of torts or the criminal
wrong. A corporation has its separate identity than its shareholders and its agents. Directors are
often treated as mind and will of the company. Also section 252 of Act says that every public
company shall have three Directors and every private company shall have two directors. So
Directors in a company play a very vital role. 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 directors of the company serve as the
required channel to accomplish the decision-making and action-taking task of the corporation.

Position of Directors

Directors are professional men hired by the company to direct its affairs. They are not the
servants of a company rather they are the officers who manage everything in the company
unlikely to the shareholders who are the owners of the company. A director may also work as an
employee in different capacity. They can also work sometimes as agents, sometimes as trustees
and sometimes as managing partners. But each of these expressions is used not as their powers
and responsibilities, but as indicating useful points of view from which they may for the moment
and for the particular purpose, and be considered.

1
MARSHALL J in Trustees of Dartmouth College v. Woodward, (1819) 17 US 518, 636
CHAPTER II

DUTIES

Statutory Duties

To file return of allotment - Section 75 of the Companies Act, 2013 explains a company to 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 five thousand per day till the default continues may be levied.

To disclose interest - section 299 casts an obligation on a director to disclose the nature of his
concern or interest (direct or indirect), if any, at a meeting of the Board of directors. The section
explains that in case of a proposed contract or arrangement, the required disclosure shall be made
at the meeting of the Board at which the question of entering into the contract or agreement is
first taken into consideration. In the case of any other contract or arrangement, the disclosure
shall be made at the first meeting of the Board held after the director become interested in the
contract or arrangement. Every director who fails to comply with the aforesaid requirements as
to disclosure of concern or interest shall be punishable with fine, which may extend to fifty
thousand rupees.

To disclose receipt from transfer of property2 - Any money received by the directors from the
transferee in connection with the transfer of the company’s property or undertaking must be
disclosed to the members of the company and approved by the company in general meeting. Or,
the amount shall be held by the directors in trust for the company. This money may be in the
nature of compensation for loss of office but in essence may be on account of transfer of control
of the company. But if it is bona fide payment of damages for the breach of contract, then it is
protected by section 321(3). Even no director other than the managing director or whole time
director can receive any such payment from the company itself.

To disclose receipt of compensation from transferee of shares 3 - If the loss of office results from
the transfer of all or any of the shares of the company, its directors would not receive any
compensation from the transferee unless the same has been approved by the company in general
meeting before the transfer takes place. If the approval is not sought or the proposal is not
2
Sec. 319
3
Sec.320
approved, any money received by the directors shall be held in trust for the shareholders, who
have sold their shares.

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 vacant4.

The duties of directors also include the following duties,

 To convene statutory, Annual General meeting (AGM) and also extraordinary general
meetings5.
 To prepare and place at the AGM along with the balance sheet and profit & loss account
a report on the company’s affairs including the report of the Board of Directors6.
 To authenticate and approve annual financial statement7.
 To appoint first auditor of the company8.
 To make a declaration of solvency in the case of Members voluntary winding up9.

General Duties

Duty of good faith - A director cannot escape from his duty to account for his profit by resigning
from his office of director in order to obtain a profit thereafter. The directors must act in the best
interest of the company. Interest of the company implies the interest of the present and future
members of the company on the footing that company would be continued as going concern.

In Burland v. Earle10, the director was instructed to purchase some property for the company. But
he first purchased the same for himself and then sold it to the company for the profit. The lower
court held him liable for the profit so made, which in equity belonged to the company.

4
Section 283(1)(g)
5
Section 165,166 &169
6
Section 173, 210 & 217
7
Section 215
8
Section 224
9
Section 488
10
(1902) AC 83 (PC)
Duty of care - the directors of a company must discharge their duties and obligations with skill
and diligence as expected from a reasonable person of his knowledge and experience. A director
must display care in performance of work assigned to him. However, director is not expected to
display an extraordinary care but that much which a man of ordinary prudence would take in his
own case. Any provision in the company’s Articles or in any agreement that excludes the
liability of the directors for negligence, default, misfeasance, breach of duty or breach of trust, is
void. The company cannot even indemnify the directors against such liability.

Duty not to delegate - Director being an agent is bound by the maxim delegatus non potest
delegare, which means a delegatee cannot further delegate. Thus, a director must perform his
functions personally. However, he may delegate his in certain conditions.

CHAPTER III

LIABILITES

Liability to the company

The liability of directors to the company arises under the following,

 Breach of fiduciary duty

 Ultra vires acts
 Negligence
 Mala fide acts

Breach of fiduciary duty - whenever a director works dishonestly to the interest of the company,
the director 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 benefit of the company and not in the
benefit of the directors or any other members.

Ultra vires acts - Directors are to act with provisions of the Companies Act, Memorandum and
Articles of Association, since the articles and memorandum 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.

Negligence - As long as the directors act within their powers with reasonable skill and care as
expected of them as prudent businessman, 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. Although, there are no objective standards of skill and care with the help of
which we can decide whether a director has been negligent, instead, there are only general
principles which may be applied depending on the facts of each case. The directors are not bound
to bring any special qualification into their office. The mere omission to take every possible care
will not amount to negligence.

Mala fide acts - directors are the trustees of the assets of the company including money, property
and also exercise power over them. And they exercise such power dishonestly or perform their
duties in a malafide manner, they held liable for the breach of trust and would be asked to
reimburse the company of whatever the loss company has suffered of such malafide act. It is the
foremost duty of director to disclose all the facts to the company which is known to him and so
he could be made accountable to the company for any secret profits he might have earned in the
course of performing duties on behalf of the company. Directors can also be made liable for the
acts of misconduct or wilful misuse of powers.

Liability to third parties under Companies Act

Prospectus - in case of any omission to state any particulars as per the requirement of the section
56 and Schedule II of the act or mis-statement of facts in prospectus renders a director personally
liable for damages to the third party. Also if the party subscribes for any shares or debentures on
faith of the prospectus then for any loss or damage may sustain by reason of any untrue or
misleading statement included therein, director shall be made liable to pay compensation, as it is
given in the Section 62. The director may escape his liability if the director proves his innocence.

With regard to allotment - Directors may also incur personal liability for irregular allotment, i.e.,
allotment before minimum subscription is received (Section 69), or without filing a copy of the
statement in lieu of prospectus (Section 70) - under section 71(3), if any director of a company
knowing contravenes or willfully authorizes or permits the contravention of any of the provisions
of section 69 or 70 with respect to all allotment, he shall be liable to compensate the company
and the allottee respectively for any loss, damages or costs which the company or the allottee
may have sustained or incurred thereby.

Fraudulent trading - if the Directors have been found guilty of fraudulent trading during the
course of business, they may also be made personally liable for the debts or liabilities of a
company by an order of the court under section 542. Section 542(1), in this regard, provides that
if in the course of the winding up of a company, it appears that any business of the company has
been carried on, with intent to defraud creditors of the company or any other person, or for any
fraudulent purpose, the court, on the application of the Official Liquidator, or the liquidator or
any creditor or contributory of the company may if it thinks it proper so to do, declare that any
persons who were knowingly parties to the carrying on business in the manner aforesaid shall be
personally responsible without any limitation of liability, for all or any of the debts or other
liabilities of the company as the court may direct.

Further, section 542(3) provides that every person who was knowingly a party to the carrying on
of the business in the manner aforesaid, shall be punishable with imprisonment for a term which
may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

Liability for breach of warranty

Directors are supposed to function within the scope of their authority as given in articles of
association of the company and the Companies Act. Thus, where they exceed the limit of their
authority, which is ultra vires to the company or ultra vires to the articles, they may be proceeded
against personally for any loss sustained by any third party.

Liability for breach of statutory duties

The Companies Act, 2013 imposes numerous statutory duties on the directors under various
sections of the Act. Any default in compliance of these duties attracts penal consequences. The
various statutory penalties which directors may deserve by reason of non-compliance with the
requirements of Companies Act are referred to in their appropriate places.
Liability for acts of co-directors

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. And nothing done by the Board can
enforce liability on a director who did not participate in the Board’s action or did not know about
it. To liability the director must either be a party to the wrongful act or later consent to it. And
the absence of a director from meeting of the Board does not make him liable for the fraudulent
act of a co-director on the ground that the director have to discovered the fraud.

Contractual Liability

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 Administration11, 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”.

Civil Liability

Director’s liability to the Company may arise where the directors are guilty of negligence, the
directors committed breach of trust, there has been misfeasance and 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 is 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 Company12. 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. 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 may not be liable
for any such unlawful act if he had no knowledge of such payments.

11
AIR 1962 SC 1821
12
LTD [1925] CH 407
Criminal liability

Criminal Liability is basically defined as the liability of a person authorized by the company, and
the liability is such that the provisions of the Indian Penal Code can be actually applied for the
illegal act he committed. Crime against the state for which an officer of the state can bring legal
action. Society is harmed by an individual breaking the laws of the state. Usually there is no
statute of limitations for criminal liability. Property and casualty insurance is not designed to
provide coverage for the criminal acts of an insured individual. Directors of a company also
incur criminal liability other than the civil liability under the Companies Act or Common law.
The director will be held criminally liable for any of the act committed by company where he has
aided, abetted or procured the commission of such act. There may also be investigations done on
them and may also be prosecuted or fined by criminal or regulatory authorities over acts or
omissions. Just as individuals owe a duty not to harm or injure others in society without
justification, so do companies owe a duty not to poison our water and food, not to pollute our
rivers, beaches and air, not to allow their workplaces to endanger the lives and safety of their
employees and the public, and not to sell commodities, or provide transport, that will kill or
injure people.

In Standard Charted Bank v. Directorate Of Enforcement, appellant filed writ petition before
High Court Of Bombay challenging various notices issued under section 50 read with section 51
of Foreign Exchange Regulation Act, 1973 and contended that the appellant company was not
liable to be prosecuted for an offence under section 56 of FERA Act, 1973. Against the decision
of High Court appellant filed a special leave before Supreme Court, contended that no criminal
proceeding can be initiated against appellant company as the minimum punishment prescribed
under section 6(1)(i), imprisonment for a term which shall not be less than six months and with
fine.

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.
Relief from Liability

The Act extends relief from the liability of the directors that may have been incurred in good
faith. There are several ways where a director can be relieved from his liability which would
otherwise be incurred for breach of duty. In a proceeding for negligence, default, breach of duty,
breach of misfeasance, if it appears to the court that the directors may be liable for the act
complained of but that,

 he has acted honestly,

 he has acted reasonably, and
 having regard to the circumstances of the case, he ought fairly to be excused,

The court may relieve him from the liability section 633. In Swarmal Goenka and another v.
ROC and others, it was held that the directors can be granted relief from liability, where loss has
been caused to the company and such relief shall be granted only from civil liability and not
against prosecution. The High Court can grant anticipatory relief and if a case is actually
initiated, only the Court before which the complaint or trial is going on can grant relief. (Sri
Krishna Parshad v. ROC (1978)). The granting of relief under the Section is discretionary. It
may be partial or complete, or on certain terms or unconditional. (Ramkrishan Dalmia v.
Registrar of Joint Stock Companies, Delhi (1962)).

Shareholders Ratification – a directors some of breaches can be remedied through the director's
conduct being disclosed to a general meeting and being ratified by the shareholders passing an
Ordinary Resolution. However, the following breaches of duty by the directors cannot thus be
ratified, any breach of duty which results in the company performing an act which it cannot
lawfully do e.g. by reason of some prohibition imposed by statute or the general law, a breach of
duty bearing directly upon the personal rights of the individual shareholders, a breach of duty
with fraud on the minority, and any breach involving a failure of honesty on the director's part.

With consent of all Shareholders - The common principle of law of common approval by all the
shareholders is effective in relieving a director from liability for any breach of duty, provided
only that the breach does not involve fraud on its creditors and is not ultra vires in the company,
still that doctrine still exists.
Judicial Relief - The court has power to relieve a director from some civil or criminal liabilities
for negligence, default or breach of trust if it is satisfied that the director has acted honestly and
reasonably and in all the circumstances the director have to fairly to be excused. This is not
available in respect of all defaults, in particular it is not available in a case of wrongful trading.

Contractual Relief – If there is any contract between the directors and the company, or any
similar provision in the Articles which attempts to excuse the directors from his liability for
negligence, default or breach of trust towards the company is void. However, directors may
exclude their liability to third parties by means of an express contractual provision or a
disclaimer.

CHAPTER IV

Conclusion

The director can be made liable for the act only if he was in charge of the act and if he knew
about it and this is also supported by principles of equity wherein no person can be made liable
until and unless he’s a party to the commission of offence or he’s aware of. The directors must
act in good faith and in the best interest of the company they must not exercise powers conferred
upon them for purposes different from those for which they are given and the directors should
not act without the consent of the company. And therefore director has relief from his liability if
he proves his innocence.
 BIBLIOGRAPHY

Articles Referred

 Corporations Duties of Directors. Neglect Resulting from Absence upon Vacations,

Source: Harvard Law Review, Vol. 23, No. 4 (Feb., 1910), p. 309, Published by: The
Harvard Law Review Association
 H. L. W., Duty of a Managing Director of a Corporation to an Individual Shareholder,
Source: Michigan Law Review, Vol. 5, No. 6 (Apr., 1907), pp. 454-456, Published by:
The Michigan Law Review Association
 Frederick Dwight, Liability of Corporate Directors, Source: The Yale Law Journal, Vol.
17, No. 1 (Nov., 1907), pp. 33-42, Published by: The Yale Law Journal Company, Inc.
 C. Brewster Rhoads, Personal Liability of Directors for Corporate Mismanagement,
Source: University of Pennsylvania Law Review and American Law Register, Vol. 65,
No. 2, (Dec., 1916), pp. 128-144, Published by: The University of Pennsylvania Law
Review

Books Referred

 Iyer, L V V, ‘Guide to Company Directors’ Powers, Rights, Duties & Liabilities’, 2nd
Edn, Wadhwa & Company, Nagpur, 2003.
 Gower and Davies, Modern company law, Ninth Edition
 Avtar Singh, ‘Company Law,’ 14th Edn, Eastern Book Company, Lucknow, 2005.
 Companies Act, 2013

Websites Referred

 http://www.icsi.edu/cs/Articles/Directors
 http://ssrn.com/abstract=930402
 http://www.jstor.org/stable/1324623
 http://www.jstor.org/stable/1272624
 http://www.jstor.org/stable/1097918
 http://www.jstor.org/stable/3313956