Company Law-1 Project

Legal position of Directors

Submitted to :

Proff Amit Bhaskar

Submitted by :

Preet Patel (sem 5)

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 Declaration

The Project on “Company Law-1” is do hereby submitted to the Law faculty of United World
School of Law, Karnavati University. And it is purposely consecrated to the Respected Professor
Amit Bhaskar and honorable Dean of the faculty Mr. Malay Patel. I have tried out best not to
fall into lapses of the subject matter and the language but errors the habit of creeping in
inadvertently. I hope that you and my fellow classmates, friends will help me in making the
project more useful.

Table of Contents
INTRODUCTION......................................................................................................................... 3

DIRECTORS OF THE CORPORATION ................................................................................. 3

POSITION OF DIRECTORS ...................................................................................................... 4

DUTIES ...................................................................................................................................... 4

LIABILITES .............................................................................................................................. 8

Special statutory protection against liability ............................................................................ 15

Relief from Liability ................................................................................................................ 15

CONCLUSION ........................................................................................................................... 17

BIBLIOGRAPHY ....................................................................................................................... 18

Books ........................................................................................................................................ 18

Statutes ..................................................................................................................................... 18

URLs ......................................................................................................................................... 18

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 INTRODUCTION

HUMAN BEINGS HAVE THEIR HANDS AND ALSO POSSESS THE MENTAL FACULTY. THEY ARE THUS,
CAPABLE OF TAKING RIGHT DECISIONS AND ACTIONS. BUT A CORPORATION, NOT BEING THE

NATURAL PERSON, IS DEVOID OF THESE ESSENTIAL ELEMENTS AND HENCE, IT CAN NOT TAKE AN

ACTION OR A JUDGMENT ITSELF. RATHER IT REQUIRES A CHANNEL THROUGH, WHICH IT CAN TAKE

ACTIONS AND DECISIONS.

THE DIRECTORS OF THE COMPANY THUS SERVE AS THE REQUIRED CHANNEL TO

ACCOMPLISH THE DECISION-MAKING AND ACTION-TAKING TASK OF THE CORPORATION. “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.
DWELLING UPON THE NECESSITY OF THE AGENTS FOR CARRYING OUT ITS TASK, THE ROLE OF THE
DIRECTORS OF A COMPANY BECOMES OF PARAMOUNT ESSENCE.

DIRECTORS OF THE CORPORATION

THE COMPANIES ACT, 1956 DOES NOT MAKE ATTEMPT TO DEFINE THE TERM “DIRECTOR”. RATHER
IT ENTAILS THE PROVISION OF THE DIRECTORS IN TERMS THAT “DIRECTOR INCLUDES ANY PERSON

OCCUPYING THE POSITION OF A DIRECTOR, BY WHATEVER NAME CALLED”1. BOWEN LJ. HAS MADE

EFFORTS TO DEFINE THE POSITION OF THE DIRECTOR IN FOLLOWING WORDS 2:

DIRECTORS ARE DESCRIBED SOMETIMES AS AGENTS, SOMETIMES AS TRUSTEES AND

SOMETIMES AS MANAGING PARTNERS. BUT EACH OF THESE EXPRESSIONS IS USED NOT AS

EXHAUSTIVE OF THEIR POWERS AND RESPONSIBILITIES, BUT AS INDICATING USEFUL POINTS

1 Sec. 2 (13) of the Act.

2
Imperial Hydropathic Hotel Co. v. Hampson, (1882) 23 Ch D 1 49 LT 150.

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 OF VIEW FROM WHICH THEY MAY FOR THE MOMENT AND FOR THE PARTICULAR PURPOSE BE

CONSIDERED.

POSITION OF DIRECTORS

IT IS NOT AN EASY TASK TO EXPLAIN THE POSITION OF THE DIRECTORS IN A CORPORATION. THEY
ARE THE PROFESSIONAL HIRED BY THE COMPANY TO CARRY OUT ITS AFFAIRS . THEY ARE NOT THE

SERVANTS OF THE COMPANY, RATHER OFFICERS OF THE COMPANY. IN CASE OF MORIARTY V.

REGENT’S GARAGE & ENGG CO.3, LUSH J. OPINED THAT “A DIRECTOR IS NOT A SERVANT OF ANY
MASTER. HE CAN NOT BE DESCRIBED AS A SERVANT OF THE COMPANY OR OF ANYONE ”. IN THE

SAME CASE MC CARDIE LJ. DELIVERED THE OPINION THAT “A DIRECTOR IS IN FACT A DIRECTOR

OR CONTROLLER OF THE COMPANY’S AFFAIRS. HE IS NOT A SERVANT”4.

DUTIES
UNDER THE COMPANIES ACT DIRECTORS ARE ACCOUNTABLE TO FOR THEIR ACTS DONE ON BEHALF
OF THE COMPANY. BESIDES THE STATUTORY DUTIES, WHICH THE DIRECTORS HAVE TO PERFORM TO

ENSURE STRICT COMPLIANCE WITH THE VARIOUS PROVISIONS OF THE ACT THEY ALSO HAVE

CERTAIN DUTIES WHICH ARISE OUT OF THEIR FIDUCIARY RELATIONSHIP WITH THE COMPANY.

STATUTORY DUTIES:

1. TO FILE RETURN OF ALLOTMENT: SECTION 75 OF THE COMPANIES ACT, 1956 REQUIRES A

COMPANY TO FILE WITH THE REGISTRAR, WITHIN A PERIOD OF 30 DAYS, A RETURN OF THE

ALLOTMENTS STATING THE SPECIFIED PARTICULARS .

2. NOT TO ISSUE IRREDEEMABLE PREFERENCE SHARE OR SHARES OR SHARE REDEEMABLE AFTER

20 YEARS: SECTION 80, AS AMENDED BY AMENDMENT ACT, 1996, FORBIDS A COMPANY TO
ISSUE IRREDEEMABLE PREFERENCE SHARES OR PREFERENCE SHARES REDEEMABLE BEYOND

3
Moriarty v. Regent’s Garage & Engg Co [1921] 1 KB 423.
4
Ibid at 446.

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 20 YEARS. DIRECTORS MAKING ANY SUCH ISSUE MAY BE HELD LIABLE AS OFFICER IN
DEFAULT AND MAY BE SUBJECT TO FINE UP TO RS. 10,000/-.

3. TO DISCLOSE INTEREST5: IN RESPECT OF CONTRACTS WITH DIRECTOR, 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 SAID

SECTION PROVIDES 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.

THE DELHI HIGH COURT IN M/S. RAJ CYLENDRS & CONTAINERS V. HINDUSTAN GENERAL
INDUSTRIES LTD6, HAS OBSERVED THAT WHERE THE DIRECTORS ARE PERSONALLY
INTERESTED IN THE DEAL, THE CONTRACT IS TO THE DETRIMENT OF THE COMPANY AND

HENCE NOT BINDING ON IT.

4. TO DISCLOSE RECEIPT FROM TRANSFER OF PROPERTY7: 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. OTHERWISE, 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 SEC. 321(3). EVEN

NO DIRECTOR OTHER THAN THE MANAGING DIRECTOR OR WHOLE TIME DIRECTOR CAN

RECEIVE ANY SUCH PAYMENT FROM THE COMPANY ITSELF.

5. TO DISCLOSE RECEIPT OF COMPENSATION FROM TRANSFEREE OF SHARES 8: IF THE LOSS OF

OFFICE RESULTS FROM THE TRANSFER (UNDER CERTAIN CONDITIONS) OF ALL OR ANY OF

THE SHARES OF THE COMPANY, ITS DIRECTORS WOULD NOT RECEIVE ANY COMPENSATION

5
Sec. 299-300.
6
M/S. RAJ CYLENDRS & CONTAINERS V. HINDUSTAN GENERAL INDUSTRIES LTD (1998) AIR Del. 418.
7
Sec. 319.
8
Sec.320.

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 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 APPROVED, ANY MONEY RECEIVED BY THE DIRECTORS SHALL BE

HELD IN TRUST FOR THE SHAREHOLDERS, WHO HAVE SOLD THEIR SHARES.

6. 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 VACANT9.

7. OTHER DUTIES:
a. TO CONVENE STATUTORY, ANNUAL GENERAL MEETING (AGM) AND ALSO
EXTRAORDINARY GENERAL MEETINGS10.

b. 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 DIRECTORS11.

c. TO AUTHENTICATE AND APPROVE ANNUAL FINANCIAL STATEMENT12.

d. TO APPOINT FIRST AUDITOR OF THE COMPANY13.
e. TO APPOINT COST AUDITOR OF THE COMPANY14.
f. TO MAKE A DECLARATION OF SOLVENCY IN THE CASE OF MEMBERS VOLUNTARY
WINDING UP15.

GENERAL DUTIES:

1. DUTY OF GOOD FAITH: THE DIRECTORS MUST ACT IN THE BEST INTEREST OF THE COMPANY.
INTEREST OF THE COMPANY IMPLIES THE INTEREST OF THE PRESENT AND FUTURE MEMBERS

9
Section 283(1)(g).
10
Section 165,166 &169.
11
Section 173, 210 & 217.
12
Section 215.
13
Section 224.
14
Section 233B
15
Section 488.

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 OF THE COMPANY ON THE FOOTING THAT COMPANY WOULD BE CONTINUED AS GOING

CONCERN.

IN BURLAND V. EARLE16, 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. BUT THE JUDICIAL COMMITTEE

OF THE PRIVY COUNCIL SET ASIDE THE DECISION OF THE LOWER COURT.

A DIRECTOR CAN NOT ESCAPE FROM HIS DUTY TO ACCOUNT FOR HIS PROFIT BY RESIGNING
FROM HIS OFFICE OF DIRECTOR IN ORDER TO OBTAIN A PROFIT THEREAFTER 17.

2. 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. HE IS, HOWEVER, 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. IN JORCHESTER FINANCE CO. LTD. V. STEBBING18,

IT HAS BEEN HELD THAT THE DUTY OF CARE EXTENDS UNIFORMLY TO ALL THE DIRECTORS

OF A COMPANY, WHETHER THEY ARE EXECUTIVE OR NON-EXECUTIVE DIRECTORS.

IN G.D. BHARGAVA V. REGITRAR OF COMPANIES19, THE HIGH COURT OF ALLAHABAD RULED

THAT PROTECTION UNDER SECTION 633 OF THE COMPANIES ACT SHALL NOT BE

AVAILABLE, WHERE THE NEGLIGENCE OF THE DIRECTOR AMOUNTS TO AN OFFENCE SO AS TO

ATTRACT THE PROVISIONS OF THE IPC RELATING TO FRAUD OR FORGERY.

16
BURLAND V. EARLE (1902) AC 83 (PC).
17
Industrial Development Consultant Ltd. v. Cooley, (1972) 2 All ER 162.
18
JORCHESTER FINANCE CO. LTD. V. STEBBING (1989) BCLC 498.
19
G.D. BHARGAVA V. REGITRAR OF COMPANIES (1970) 40 Comp Cas 664.

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 3. DUTY NOT TO DELEGATE: DIRECTOR BEING AN AGENT IS BOUND BY THE MAXIM DELEGATUS
NON POTEST DELEGARE, WHICH MEANS A DELEGATEE CAN NOT FURTHER DELEGATE. THUS,

A DIRECTOR MUST PERFORM HIS FUNCTIONS PERSONALLY. HOWEVER, HE MAY DELEGATE

HIS IN CERTAIN CONDITIONS.

LIABILITES
LIABILITY TO THE COMPANY:

1. BREACH OF FIDUCIARY DUTY: WHERE A DIRECTOR ACTS DISHONESTLY TO THE INTEREST OF

THE COMPANY, HE 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 INTEREST OF THE COMPANY AND NOT IN THE INTEREST OF THE DIRECTORS OR ANY

SECTION OF MEMBERS.

2. ULTRA VIRES ACTS: DIRECTORS ARE SUPPOSED TO ACT WITHIN THE PARAMETERS OF THE
PROVISIONS OF THE COMPANIES ACT, MEMORANDUM AND ARTICLES OF ASSOCIATION,

SINCE THESE 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.

3. 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 THEREFROM.

4. MALA FIDE ACTS: DIRECTORS ARE THE TRUSTEE FOR THE MONEYS AND PROPERTY OF THE
COMPANY HANDLED BY THEM, AS WELL AS EXERCISES OF THE POWERS VESTED IN THEM. IF

THEY DISHONESTLY OR IN A MALA FIDE MANNER, EXERCISE THEIR POWERS AND PERFORM

THEIR DUTIES, THEY WILL BE LIABLE FOR BREACH OF TRUST AND MAY BE REQUIRED TO

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 MAKE GOOD THE LOSS OR DAMAGE SUFFERED BY THE COMPANY BY REASON OF SUCH MALA

FIDE ACTS. THEY ARE ALSO ACCOUNTABLE TO THE COMPANY FOR ANY SECRET PROFITS

THEY MIGHT HAVE MADE IN COURSE OF PERFORMANCE OF DUTIES ON BEHALF OF THE

COMPANY. DIRECTORS CAN ALSO BE HELD LIABLE FOR THEIR ACTS OF .MISFEASANCE. I.E.,

MISCONDUCT OR WILLFUL MISUSE OF POWERS.

LIABILITY TO THIRD PARTIES:

LIABILITY UNDER THE COMPANIES ACT:

1. PROSPECTUS: FAILURE 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. SECTION

62 PROVIDES THAT A DIRECTOR SHALL BE LIABLE TO PAY COMPENSATION TO EVERY

PERSON WHO SUBSCRIBES FOR ANY SHARES OR DEBENTURES ON THE FAITH OF THE

PROSPECTUS FOR ANY LOSS OR DAMAGE HE MAY HAVE SUSTAINED BY REASON OF ANY

UNTRUE OR MISLEADING STATEMENT INCLUDED THEREIN.

2. WITH REGARD TO ALLOTMENT: DIRECTORS MAY ALSO INCUR PERSONAL LIABILITY FOR:
a. 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.

b. FOR FAILURE TO REPAY APPLICATION MONIES IN CASE OF MINIMUM SUBSCRIPTION

HAVING NOT BEEN RECEIVED WITHIN 120 DAYS OF THE OPENING OF THE ISSUE: UNDER

SECTION 69(5) READ WITH SEBI GUIDELINES, IN CASE MONEYS ARE NOT REPAID

WITHIN 130 DAYS FROM THE DATE OF THE ISSUE OF THE PROSPECTUS, THE

DIRECTORS OF THE COMPANY SHALL BE JOINTLY AND SEVERALLY LIABLE TO REPAY

THAT MONEY WITH INTEREST AT THE RATE OF 6 % PER ANNUM ON THE EXPIRY OF

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 130TH DAY. HOWEVER, A DIRECTOR SHALL NOT BE LIABLE IF HE PROVES THAT THE
DEFAULT IN REPAYMENT OF MONEY WAS NOT DUE TO ANY MISCONDUCT OR

NEGLIGENCE ON HIS PART.

c. FAILURE TO REPAY APPLICATION MONIES WHEN APPLICATION FOR LISTING OF

SECURITIES ARE NOT MADE OR IS REFUSED: UNDER SECTION 73(2) .WHERE THE

PERMISSION FOR LISTING OF THE SHARES OF THE COMPANY HAS NOT BEEN APPLIED

OR SUCH PERMISSION HAVING BEEN APPLIED FOR, HAS NOT BEEN GRANTED, THE

COMPANY SHALL FORTHWITH REPAY WITHOUT INTEREST ALL MONIES RECEIVED

FROM THE APPLICANTS IN PURSUANCE OF THE PROSPECTUS, AND, IF ANY SUCH

MONEY IS NOT REPAID WITHIN EIGHT DAYS AFTER THE COMPANY BECOMES LIABLE

TO REPAY, THE COMPANY AND EVERY DIRECTOR OF THE COMPANY WHO IS AN

OFFICER IN DEFAULT SHALL, ON AND FROM THE EXPIRY OF THE EIGHTH DAY, BE

JOINTLY AND SEVERELY LIABLE TO REPAY THAT MONEY WITH INTEREST AT SUCH

RATE, NOT LESS THAN FOUR PER CENT AND NOT MORE THAN FIFTEEN PER CENT, AS

MAY BE PRESCRIBED, HAVING REGARD TO THE LENGTH OF THE PERIOD OF DELAY IN

MAKING THE REPAYMENT OF SUCH MONEY.

3. UNLIMITED LIABILITY: DIRECTORS WILL ALSO BE HELD PERSONALLY LIABLE TO THE THIRD
PARTIES WHERE THEIR LIABILITY IS MADE UNLIMITED IN PURSUANCE OF SECTION 322(I.E.,

VIDE MEMORANDUM) OR SECTION 323(I.E., VIDE ALTERATIONS OF MEMORANDUM BY

PASSING SPECIAL RESOLUTION). BY VIRTUE OF SECTION 322, THE MEMORANDUM OF A

COMPANY MAY MAKE THE LIABILITY OF ANY OR ALL DIRECTORS, OR MANAGER UNLIMITED.

IN THAT CASE, THE DIRECTORS, MANAGER AND THE MEMBER WHO PROPOSES A PERSON FOR
APPOINTMENT AS DIRECTOR OR MANAGER MUST ADD TO THE PROPOSAL FOR APPOINTMENT

AS A STATEMENT THAT THE LIABILITY OF THE PERSON HOLDING THE OFFICE WILL BE

UNLIMITED. NOTICE IN WRITING TO THE EFFECT THAT THE LIABILITY OF THE PERSON WILL

BE UNLIMITED MUST BE GIVEN TO HIM BY THE FOLLOWING OR ONE OF THE FOLLOWING

PERSONS, NAMELY: THE PROMOTERS, THE DIRECTORS, MANAGER AND OFFICERS OF THE

COMPANY BEFORE HE ACCEPTS THE APPOINTMENT.

FURTHER, IN CASE OF LIMITED LIABILITY COMPANY, THE COMPANY MAY, IF AUTHORIZED

BY THE ARTICLES, BY PASSING RESOLUTION ALTER ITS MEMORANDUM SO AS TO RENDER

THE LIABILITY OF ITS DIRECTORS OR OF ANY DIRECTOR OR MANAGER UNLIMITED. BUT THE

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 ALTERATION MAKING THE LIABILITY OF DIRECTOR OR DIRECTORS OR MANAGER UNLIMITED

WILL BE EFFECTIVE ONLY IF THE CONCERNED OFFICER CONSENTS TO HIS LIABILITY BEING

MADE UNLIMITED. THIS ALTERATION ALSO, UNLESS SPECIFICALLY CONSENTED TO BY ANY

OR ALL DIRECTORS WILL NOT HAVE ANY EFFECT UNTIL EXPIRY OF THE CURRENT TERM OF

OFFICE.

4. FRAUDULENT TRADING: DIRECTORS MAY ALSO BE MADE PERSONALLY LIABLE FOR THE
DEBTS OR LIABILITIES OF A COMPANY BY AN ORDER OF THE COURT UNDER SECTION 542.

SUCH AN ORDER SHALL BE MADE BY THE COURT WHERE THE DIRECTORS HAVE BEEN FOUND
GUILTY OF FRAUDULENT TRADING. 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. THUS, WHERE
THEY TRANSACT ANY BUSINESS IN RESECT OF MATTERS, ULTRA VIRES THE COMPANY OR ULTRA

VIRES THE ARTICLES; THEY MAY BE PROCEEDED AGAINST PERSONALLY FOR ANY LOSS SUSTAINED

BY ANY THIRD PARTY.

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LIABILITY FOR BREACH OF STATUTORY DUTIES:

THE COMPANIES ACT, 1956 IMPOSES NUMEROUS STATUTORY DUTIES ON THE DIRECTORS UNDER
VARIOUS SECTIONS OF THE ACT. DEFAULT IN COMPLIANCE OF THESE DUTIES ATTRACTS PENAL

CONSEQUENCES. THE VARIOUS STATUTORY PENALTIES WHICH DIRECTORS MAY INCUR 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. ACCORDINGLY,

NOTHING DONE BY THE BOARD CAN IMPOSE LIABILITY ON A DIRECTOR WHO DID NOT PARTICIPATE

IN THE BOARD’S ACTION OR DID NOT KNOW ABOUT IT. TO INCUR LIABILITY HE MUST EITHER BE A

PARTY TO THE WRONGFUL ACT OR LATER CONSENT TO IT.

THUS, 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 HE OUGHT TO HAVE

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

ADMINISTRATION20, 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 TO THE COMPANY:

DIRECTOR’S LIABILITY TO THE COMPANY MAY ARISE WHERE

20
R.K. DALMIA AND OTHERS V. THE DELHI ADMINISTRATION (1962) AIR SC 1821.

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 • 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

HAS BEEN 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 COMPANY21.

ANY WILLFUL MISCONDUCT OR CULPABLE NEGLIGENCE FALLS WITHIN THE CATEGORY OF

MISFEASANCE. IT WAS HELD IN RE DUOMATIC LTD22, “A DIRECTOR HAS TO ACT IN THE WAY IN

WHICH A MAN OF AFFAIRS DEALING WITH HIS OWN AFFAIRS WITH REASONABLE CARE, AND

CIRCUMSPECTION COULD REASONABLY BE EXPECTED TO ACT.....”

CRIMINAL LIABILITY:

A DIRECTOR MAY BE HELD CRIMINALLY LIABLE FOR ANY OFFENCE COMMITTED BY THE COMPANY,
WHERE HE HAS AIDED, ABETTED, COUNSELED, OR PROCURED THE COMMISSION OF THE OFFENCE.

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.

21
RE CITY AQUINTABLE FIRE INSURANCE COMPANY Ltd [1925] Ch 407.

22
RE DUOMATIC LTD [1969] 2 Ch 365

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 IN 2003 SUPREME COURT IN ASSISTANT COMMISSIONER, ASSESSMENT-LL, BANGLORE & ORS.
V. VELLIAPPA TEXTILES LTD & ANR.,23 TOOK THE VIEW THAT SINCE AN ARTIFICIAL PERSON LIKE A

COMPANY COULD NOT BE PHYSICALLY PUNISHED TO A TERM OF IMPRISONMENT, SUCH A SECTION,

WHICH MAKES IT MANDATORY TO IMPOSE MINIMUM TERM OF IMPRISONMENT, CANNOT APPLY TO

THE CASE OF ARTIFICIAL PERSON. HOWEVER, SUPREME COURT IN 2005 IN STANDARD CHARTED

BANK V DIRECTORATE OF ENFORCEMENT24 IN MAJORITY DECISION OF 3:2 EXPRESSLY OVERRULED

THE VELLIAPA TEXTILES CASE ON THIS ISSUE.

IN STANDARD CHARTED BANK V. DIRECTORATE OF ENFORCEMENT, APPELLANT FILED A 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 UNDER SECTION 56(1) OF FERA

ACT, 1973 AS THE MINIMUM PUNISHMENT PRESCRIBED UNDER SECTION 6(1) (I) IS IMPRISONMENT
FOR A TERM WHICH SHALL NOT BE LESS THAN SIX MONTHS AND WITH FINE.

THE QUESTION FOR CONSIDERATION BEFORE COURT WAS: WHETHER A COMPANY OR A

CORPORATION BEING A JURISTIC PERSON, CAN BE PROSECUTED FOR AN OFFENCE FOR WHICH

MANDATORY PUNISHMENT PRESCRIBED IS IMPRISONMENT AND FINE PROSECUTION IS PRE-

REQUISITE FOR INFLICTING ANY PUNISHMENT. IT IS CLEAR FROM STANDARD CHARTED CASE THAT

PROSECUTION CAN BE INITIATED AND FINE CAN BE IMPOSED EVEN WHEN IMPRISONMENT IS GIVEN

AS MANDATORY PUNISHMENT 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

23
BANGLORE & ORS. V. VELLIAPPA TEXTILES LTD & ANR (2003) JT (suppl. 2) SC 99] ; (2003)11 SCC 405.
24
STANDARD CHARTED Bank v DIRECTORATE OF ENFORCEMENT ( 2005) JT (5) SC 267; (2005) 4 SCC 50

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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.

Special statutory protection against liability

THE ACT EXTENDS SPECIAL PROTECTION AGAINST A LIABILITY THAT MAY HAVE BEEN INCURRED IN
GOOD FAITH. A GOOD ILLUSTRATION HERE WILL BE TO CITE AN EARLY CASE OF RE CLARIDGE’S

PATENT ASHPHALT CO25, WHERE THE COURT SAID THAT THE DIRECTORS WERE ACTING FOR THE
BENEFIT OF THE COMPANY AND TOOK THE BEST ADVICE FROM THE COMPANY ’S SOLICITOR AND

THUS WERE NOT HELD LIABLE. THE BOMBAY HIGH COURT IN THE CASE OF GAUTAM KANORIA V.

ASSTT ROC26 ALSO GRANTED RELIEF TO THE DIRECTORS WHERE THE AGMS COULD NOT BE HELD
AND ANNUAL RETURNS COULD NOT BE FILED DUE O THE TAKEOVER OF THE COMPANY BY THE

GOVERNMENT AND THE MATTERS BEING BEYOND THEIR CONTROL. THE TOTALITY OF THE
CIRCUMSTANCES HAS TO BE EXAMINED FOR CONSIDERING WHETHER RELIEF IS TO BE ALLOWED OR

NOT. IT WAS ALSO OBSERVED IN OM PRAKASH KHAITAN V. SHREE KESHARIYA INVESTMENT LTD27

THAT IT WOULD BE PROPER TO RELIEVE DIRECTORS OF CONSEQUENCES OF DEFAULTS AND THE

BREACHES UNLESS THEY ARE DIRECTLY INVOLVED IN THE ACTS OR OMISSION COMPLAINED OF OR

HAVE OTHERWISE NOT ACTED HONESTLY OR REASONABLY OR HAVE FINANCIAL INVOLVEMENT IN

THE COMPANY.

Relief from Liability

THERE ARE A NUMBER OF WAYS IN WHICH A DIRECTOR MAY BE RELIEVED FROM LIABILITY WHICH
WOULD OTHERWISE BE INCURRED FOR BREACH OF DUTY.

25
RE CLARIDGE’S PATENT ASHPHALT CO [1921] 1 CH 543: 125 LT 255.

26
GAUTAM KANORIA V. ASSTT ROC (2002) 108 Comp Cas 260 Bom.

27
OM PRAKASH KHAITAN V. SHREE KESHARIYA INVESTMENT LTD 48 Company Cases 85.

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• RATIFICATION BY THE SHAREHOLDERS. SOME BREACHES MAY 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 CANNOT THUS BE RATIFIED:

o ANY BREACH INVOLVING A FAILURE OF HONESTY ON THE DIRECTOR'S PART;

o 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;

o ANY BREACH OF DUTY WHICH RESULTS IN THE COMPANY PERFORMING AN ACT NOT
IN ADHERENCE WITH THE COMPANY'S ARTICLES;

o A BREACH OF DUTY BEARING DIRECTLY UPON THE PERSONAL RIGHTS OF THE

INDIVIDUAL SHAREHOLDERS;

o A BREACH OF DUTY INVOLVING "FRAUD ON THE MINORITY".

• RATIFICATION BY CONSENT OF ALL SHAREHOLDERS. THE COMMON LAW PRINCIPLE OF
UNANIMOUS 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 (PROBABLY) IS NOT ULTRA VIRES THE

COMPANY, SO FAR AS THAT DOCTRINE STILL EXISTS.

• CONTRACTUAL RELIEF. ANY CONTRACT BETWEEN THE DIRECTORS AND THE COMPANY, OR
ANY SIMILAR PROVISION IN THE ARTICLES WHICH ATTEMPTS TO EXEMPT THE DIRECTORS

FROM 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.

• 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 HE OUGHT FAIRLY TO BE EXCUSED. THIS IS NOT HOWEVER AVAILABLE IN

RESPECT OF ALL DEFAULTS, IN PARTICULAR IT IS NOT AVAILABLE IN A CASE OF WRONGFUL

TRADING.

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 CONCLUSION

Accountability is an important element of Board effectiveness. There should be some mechanism

for evaluating the performance of the directors. The extent of liability of a director would depend
on the nature of his directorship. In applying the general equitable principles to company
directors, four separate rules have emerged.

THEY ARE (1) THAT DIRECTORS MUST ACT IN GOOD FAITH IN WHAT THEY BELIEVE TO BE THE IN THE
BEST INTEREST OF THE COMPANY (2) THEY MUST NOT EXERCISE POWERS CONFERRED UPON THEM

FOR PURPOSES DIFFERENT FROM THOSE FOR WHICH THEY ARE CONFERRED. (3) THAT THEY MUST

NOT FETTER THEIR DISCRETION AS TO HOW THEY SHALL ACT AND (4) THAT WITHOUT THE

INFORMED CONSENT OF THE COMPANY, THEY MUST NOT PLACE THEMSELVES IN A POSITION IN

WHICH THEIR PERSONAL INTERESTS OR DUTY TO OTHER PERSONS ARE LIABLE TO CONFLICT WITH

THE DUTIES TO THE COMPANY.

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 BIBLIOGRAPHY
Books
• IYER, L V V, ‘GUIDE TO COMPANY DIRECTORS’ POWERS, RIGHTS, DUTIES & LIABILITIES’,
2ND EDN, WADHWA & COMPANY, NAGPUR, 2003.
• SINGH, AVTAR, ‘COMPANY LAW,’ 14TH EDN, EASTERN BOOK COMPANY, LUCKNOW,
2005.

Statutes
• COMPANIES ACT, 2013.

URLs

• HTTP://WWW.IBA.ORG.IN/EVENTS/2.2HSU_YING.PPT.

• HTTP://WWW.SASKJUSTICE.GOV.SK.CA/CORPORATIONS/PDFFORMS/NPDIRLIABILITY.PD

F.

• HTTP://WWW.NAM-AON.COM/PDFS/NAMDOH105.PDF.

• HTTP://WWW.ICSI.EDU/CS/DECEMBER2006/ARTICLES/DIRECTORS

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