Section 2 (34) of the Companies Act, 2013 defines “Director”. In simple word director is any person occupying the position by whatever name given to him. The director plays the dual role in the company, (1) as an agent (2) a person with a fiduciary duty to the company. Director doesn’t only owe fiduciary duties towards its company, but to its shareholders, creditors, employees, members, and other fellow Director. Being fiduciary means perform in good faith and do bona fide acts towards the company. Second, there should be no conflict of interest. Corporate Directors – It’s the time to be Vigilant.

 Directors’ time to be Vigilant

DUTY OF A DIRECTOR

 

With great position comes great responsibility. Director has some Common Law Duties as well.

 

The common law duty consists of the following:

1. Duty to exercise reasonable skill (subjective) and care (objective).
2. Duty to act within the power of the company
3. Duty to exercise independent Judgment
4. Duty of Supervision

 

Beyond common law duties, there are certain duties that are prescribed under the Companies Act. They are the following:

1. Administration and Compliance

(a)    Filing returns with the Registrar of Companies

(b)    Convening Shareholders’ Meetings

 

2. Restriction on Activities and Disclosure of Information

(a)    Declaration of Interest

(b)    Attending Board Meetings

 

In simple words, a director is treated as a mind and will of the company. A company or corporation is considered to be an artificial person only in the contemplation of law otherwise in reality company neither has a mind nor a body of its own. Director is the human mind entrusted for running the company and carrying out its operation. Be it Satyam, Lilliput or NSEL, mastermind behind the fraud were done by the promoter/ director of the company.

 

Directors acting as an agent and being fiduciaries are exposed to liabilities as a consequence of a breach of their duties. After the Harshad Mehta episode, the Satyam fiasco, and various other corporate and financial scams, there has been an immense focus on the liability of the directors and in 2013 there were various amendments done to prevent their scams in future.

 

STATUTORY LIABILITIES OF DIRECTORS

 

The ubiquitous issue of corruption and the high risk of internal fraud raise serious concerns about the liability of corporate directors. Director being fiduciary of the company exposed to liabilities as a consequence of a breach of their duties. The first set of liabilities is statutory in nature, being specifically set forth in the Companies Act, 2013.

 

In Companies Act, 2013 director can be liable either for civil liability (requiring directors to make payments to victims or the state) or criminal liability (resulting in fines or imprisonment) as well as both. The approach in the new regime has been to impose stiffer penalties in case of a criminal offence so as to constitute a strong deterrent on director conduct that falls short of the desired standards.

 

The Companies Act 2013 has defined “fraud” under Section 447 that includes any act or abuse of position committed with intent to deceive, to gain undue advantage from, or to injure the interests of a person, company, shareholders, or creditors, whether or not there is wrongful gain or loss. The director who is guilty of fraud may be punished by imprisonment for up to 10 years, and where fraud involves the public interest, the minimum sentence prescribed is three years.

Directors may also face liability under other Indian laws. Such liability may not always be foreseeable, and actions such as the dishonor of checks, offenses under the Income Tax Act of 1961, violation of foreign exchange regulations, breach of securities regulations, nonpayment of provident fund contributions, violation of the Shops and Establishments Act, or food adulteration could also result in breach of duty by the director of the company.

The law and the provisions has become very strict due to the liabilities which has been highlighted by the arrests of Stefan Schlipf, the managing director of BMW India Financial Services, and William Pinckney, managing director and chief executive officer of Amway India, along with two other directors and various other directors who breached their duty as a director.

 

REASONS WHEN DIRECTOR IS PERSONALLY LIABLE

 

As per the Companies Act, the company, and its directors are separate entities, therefore, the directors are not personally liable but there are certain circumstances where directors are considered to be personally liable on the behalf of the company. The director can have (a) Personality liability (b) Criminal Liability and (c) Lifting of the corporate veil. Following are the circumstances:-

 

A. DIRECTOR’S PERSONAL LIABILITY

 

1. Liability for Tax:

Director is liable under the Income Tax Act, 1961 where the private company does not pay the income tax of any previous years then the person who is the director of that private company during that previous year is liable, jointly and severally, for the payment of such tax. A Director (including any past Director but only for the duration when he was in office) can, however, escape such liability if he or she proves that the non-recovery of such tax cannot be attributed to any gross neglect, misfeasance or breach of duty on his or her part in relation to the affairs of such private company.

 

2. Refund of Share application money:

A Director is personally liable along with the company to repay the share application or excess share application money, as the case may be if the same is not repaid within the stipulated time limit.

 

3. Mis- Statement in the Prospectus:

If the Director provides any untrue statement in the prospectus of a public company while he or she is a Director at the time of the issue of the prospectus, civil liability will be imposed on him/her unless he or she proves that he or she withdrew consent before the issue of the prospectus or that it was issued without his or her authority or consent or without his or her knowledge or that, once he or she came to know of the untrue statement, he or she withdrew consent and gave reasonable public notice of the same, or proves that he or she believed the impugned statements to be true.

 

4. Fraudulent Conduct of Business:

A Director may be held personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company if he or she was knowingly the party to the fraudulent activity carried on by the company.

 

B. CRIMINAL LIABILITY

 

1. Dishonored Cheques:

Under the Negotiable Instruments Act, 1881if Director signs a cheque and its get dishonored, he/ she can be prosecuted along with the company.

 

2. Offences under the Income Tax Act:

The director of a company is the person who is responsible for and in charge of paying the taxes of the company, therefore, if the company commits an offence under the Income-tax Act, 1961 the director will be liable.

 

3. Offences under Labour Laws:

The director is liable on the behalf of the company if a company commits any offence under various labour legislations (specifically in the case of Employees Provident Funds and Miscellaneous Provisions Act, 1952 and Factories Act, 1948) as the director is the person who has control over the affairs of the company. However, this liability is not one imposed on all Directors uniformly; it is only imposed on such Directors who are in overall control of the affairs of the company (this implies control over the day-to- day affairs of the company). Those Directors who are not in overall charge of the company, but are only in control of certain aspects; or are aware of the policy of the company, but are not in charge of it, would not be held liable.

 

C. LIFTING OF CORPORATE VEIL

 

A company is an independent entity and, as a general rule, the Director of the company is not liable for any offence or, breach or liability of the company. However, in certain cases, the common law doctrine of ‘lifting the corporate veil’ is utilized to impose penalty on the person, or persons, controlling, in reality, the actions of the company (such as Directors) and certain statutes impose liability on such person or persons in charge of, or responsible to, the company for the conduct of its business.

 

SAVIOUR  OF DIRECTORS: MITIGATING FACTORS

 

The severity of the liability provisions is softened by certain mitigating factors that operate in favour of directors.

 

1. Safe Harbor Provisions

In order to balance the extensive nature of the duties and liabilities imposed on directors, the 2013 Act seeks to limit the liability of the directors. For example, the director could seek relief on the ground that he or she acted honestly and reasonably and that having regard to all the circumstances of the case, such director ought to be excused. This relief available under the 1956 Act has been continued in the 2013 Act as well.

 

2. Indemnification

 Companies Act 2013 restricts indemnity if it is mentioned in the Articles or any other agreement, to provide indemnity on account of their negligence, default, misfeasance and breach of duty or trust is void. However, if indemnity is enforceable against any liability incurred by such Director or officer in defending any proceedings in which judgment is given in his favour or in which he is acquitted or discharged or where it is determined that, although liable, he acted honestly and reasonably and should be excused.

 

 The Indian economy is growing rapidly and coming up with numerous opportunities. But on the other hand, laws are getting more stringent day by day. Therefore, it’s the time for both the corporate directors and their lawyers to be very careful with each of their actions. Rapidly modernizing laws on director should not be avoided which might otherwise lead to huge problem.

 

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