This article has been written by Ms.Taranjot Kaur, a 1st year law student of Panjab University,Chandigarh.
Introduction
The definition of a director is provided under section 2(34) and its appointment under section 149 of The Companies Act, 2013.Generally, directors are someone who are elected or appointed as an agent to act on the behalf of the company. The company is an artificial person so the director has the power to make decisions for the company. Any act done which is harmful to the company will make the directors personally liable.There are various types of directors, some of them are Executive and Non-executive Directors, Residential Directors, Small shareholder Director, Women Director, Additional Director, Alternate Director, Nominee Director. The definition of KMPs is provided under section 2(51) and its appointment under section 203 of The Companies Act, 2013.Generally, KMPs is the group of persons who are in charge of maintaining the operation of the company. It is mandatory for every company that is listed and every public company whose paid-up capital is 10 crore rupees or more to appoint these KMPs. Various types of KMPs are Chief executive officer/ Managing Director, Company secretary, Whole-time director, Chief financial officer. Generally, a director and KMPs are equally responsible for running the business and in case of any misconduct or fraudulent activity both of them would be equally liable. Liabilities of directors of an Indian Company may arise under the Companies Act, 2013 or under any other legislations that apply to the company due to the nature of its business. Responsibility for violations under the Companies Act is placed on the ‘Officer in default’, as defined under the Act.
Liability of Directors and Key Managerial Persons
Liability to a company: This liability arises when the act was done by the director/KMPs is ultra vires.
From breach of fiduciary duty: If the director works dishonestly to the benefit of the company then he would be held liable for the breach of fiduciary duty. As most of the powers are in the hands of directors/KMPs and whenever in their work they perform any misconduct or any fraudulent activity, they stand liable for that and it is termed under breach of fiduciary duty because they are expected to perform their duty with bona fide intent.
Ultra Vires Act: Every person in the company should work according to the provision of the law and Article of Association of the company. AOA provides the limits to the activity of the members and directors/KMPs of the company if they go beyond such limit the act will be considered ultra vires and they will be held personally liable for that.
Negligence: When directors/KMPs act with reasonable care and diligence than they would not be held liable but if they were negligent in performing their duty and the reasonable care was not taken then they would be held liable for that.
Mala fide act: As the directors are the trustees of the company and they have the power to use the assets, money and property of the company but by using their power if they act mala fide and try misusing their powers due to which company suffers than they would be held liable for the lose and damage caused by them to the company.
Liability to the third party: Generally, the directors/KMPs are not liable to the third party as they are the agents and working on the behalf of the company. They will be held liable when they contract in a personal capacity and it is disclosed by the third party.
Section 35 of Companies Act,2013: According to this section if any individual has subscribed for the security by acting on the behalf of the misleading prospectus, the director/KMPs will be liable for all the losses and damage incurred from that misleading prospectus.
Section 34 of the Companies Act,2013: According to this section if any prospectus is issued, circulated or distributed which have a misleading statement than the directors/KMPs will be held liable and punished under section 447.There is a penal provision of section 447 which includes imprisonment of not less than 6 months extended to 10 years. A fine is also charged which is the amount involved in fraud or which may extend to 3 times the amount.
Section 40 of the Companies Act,2013: According to this section the company has to make an application to the stock exchange to obtain permission for securities before dealing with the public. Money received should be kept in a separate bank account. Default in compliance leads to company liability. The director/KMPs shall be punished with imprisonment which may extend up to 1year and fine not less than fifty thousand and which may extend up to 3lakh or both.
Section 399 of the Companies Act,2013: According to this section if any fraudulent conduct is done in business then every person who is the part of that misconduct would be liable under section 447 of the act which includes imprisonment of not less than 6 months extended to 10 years.
Criminal Liablity – Sometimes, there might be criminal liability which arises when the company is engaged in any such fraudulent activity which comes under an offence which is punishable under IPC. All the criminal punishments which are prescribed by any law would impose on the directors/KMPs and they would be held liable for that activity.
Environment Liability – Depending on their operations, companies, especially those involved in construction or manufacturing in India are expected to comply with various Indian environmental legislations that aim to prevent and contain environmental pollution. The primary laws that may apply are the Air (Prevention & Control of Pollution) Act, 1981 and the Water (Prevention & Control of Pollution) Act, 1974 and several rules and regulations framed there under.
Punishment for various offences under Environmental Laws can be imprisonment up to 6 years and/or fine, depending on the nature of the offence and degree of non-compliance. However, discharge or emission of any environmental pollutants in excess of the prescribed standards is considered a serious offence that may attract criminal prosecution, especially if the non-compliance leads to loss of life or property.
Liable under section 141 of Negotiable Instrument Act, 1881: Person who is at the place when the offence is committed is considered to be in charge or responsible to the company for the conduct of business as vicarious liable and will be punished. Therefore, if the directors/KMPs is present or part of the decision making of the company then they will be held liable for any loss caused and get punishment accordingly.
Liable under section 42 of Foreign Exchange Management,1999: According to this section, any rules, directions, orders or any provision which are made under this act should be followed and any person will be held liable for the contravention of the act and shall be punished accordingly. Therefore, the directors/KMPs will be liable for the contraventions of the provision under this act.
If the director or any KMPs has given resignation from his post but the act which has caused harm or loss to the company then also they would be personally liable for loss occurred to the company.
Conclusion –
Basically, the directors/KMPs play a very important role in the decision making of the company and they are responsible for the day to day affairs of the company. If by chance they fail to follow the provision of company law or any other law which are applicable to the company, they have to bear the penalties and liabilities on the behalf of the company. Further, if there is any criminal offence then also the directors and KMPs will be personally liable for the act done on the behalf of the company. It should be ensured that all governmental and regulatory filings, to the extent practical, identify the directors, officers and/or executives who are responsible for the day to day administration of the company and complying with the requirements of applicable laws.
References –
https://blog.ipleaders.in/study-liabilities-directors-officers-key-professionals-associated-company/
https://www.legalwindow.in/liabilities-of-directors-and-kmps-under-different-laws/