Liabilities of Company Directors
Provisions of Companies Act' 2013
Company Law Notes for B.Com, BBA and MBA
Liability of Directors
Directors being a principal officer of a company
can be held liable not only towards company and shareholders but also towards
outsiders. Liability of directors can be studied in the following heads:
1. Liability of directors towards Company:
Directors have some duties towards the company by virtue of their office. The
directors are liable to the company in the following cases:
a) Ultra vires Acts: Directors are personally
liable to the company for ultra vires acts i.e., acts which are beyond their
powers. For example, if they pay dividends out of capital, they will be liable
to the company for any loss or damage suffered due to such ultra vires acts.
b) Negligence: If the directors are negligent
about their duties, they are personally liable for any loss cause to the
company. They are, however, not liable for errors of judgement.
c) Breach of trust: The directors occupy a
fiduciary position towards the company. They must act honestly and in the
interest of the company. If the directors make some secret profits or use the
property of the company for their personal purpose, then they shall be liable
to the company.
d) Misfeasance: The misfeasance means willful
misconduct or willful negligence resulting in some loss to the company. The
company can take action against the directors for any loss or damages caused to
the company in case of misfeasance.
2. Liability of directors towards outsiders:
Directors acts on behalf of the company, so they cannot be held personally
liable to outsiders for any acts done by them on behalf of the company. They
would, however, be personally liable to outsiders in the following
circumstances:
a) When they enter into contracts in their own
names and not in the name of the company.
b) Where the directors act ultra vires the
company i.e., acts beyond their powers, in such a case company will not be
liable but directors will be personally liable to third parties for breach of
implied warranty of authority.
c) Where they have permitted the issue of a
prospectus which contains misstatements or which does not present the true
position, the directors shall be personally liable.
d) Where the directors fail to return the
application money within the specified time, if the minimum subscription is not
subscribed.
e) Where there is irregular allotment of
shares,
f) Where the directors act fraudulently.
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