August 1, 2021

Corporate Illegal Conduct and Directors Liability: Approach Towards Personal Liability

Companies Act

Directors are often held liable both jointly and collectively, for any and every act, commission or omission which is prejudicial to the interests of the corporate and violates any of the duties to be discharged by them. The directors control the company’s affairs and act as its agent. A company is a legal person; hence the directors aren’t personally answerable for performing on behalf of it. They have a fiduciary relationship with the company and its shareholders. However, if a director acts beyond his power, he can be held personally liable.

Circumstances where the directors are personally liable are:

1. Tax Liability

As per the income tax Act, if any tax of any previous year is due whose recovery is yet not made by the private company; then every director of the company will be responsible for this default jointly and severally.

2. False Statement within the Company’s Prospectus

Directors are going to be responsible for writing any false statements within the prospectus. The liability is often waived as long as, He withdraws the consent before issuance of the prospectus; He was not consulted, or he did not authorize this action; He withdraws his consent once he has knowledge of it and gives a public notice regarding the same; He proves that he believed the false statements to be true. It is related to the personal debt of the company

3. Company Debts

A director is not personally responsible for any debts the corporate has unless the director is involved in some fraudulent activity regarding it.

4. Fraudulent business conduct

Director will have personal liability in all the situations where he acts against the company’s interest. If his actions are malicious and wrong and it is proven that his actions are fraudulent, he will be liable.

5. Default in Payment of the hare Application Money

In case the director(s) fail to repay the share application money, he will be liable with the corporate.

6. Failure to Acquire Qualifications of Shares

Directors are going to be susceptible to pay for qualification of shares if the failure to do so within the given time and therefore the company goes into liquidation.

7. Share Application Money Payment

Directors of a corporation are personally liable alongside the corporate for repaying the share application money or the surplus share application money received if it is not repaid within the required time period.

8. Liability to Acquire Qualification Shares

In case the Director hasn’t acquired the qualification shares within the stipulated time frame and such a corporation goes into the liquidation. The official liquidator can claim the worth payable for the shares from him.

9.Debts of the Company

Generally, a Director is not personally responsible for any debt of the corporate unless fraud on a part of such Director are often established.

10.Liability for Company’s Contracts

A Director is, generally, not responsible for any contract entered into by the corporate, unless expressly provided for, or fraud on a part of such Director are often established.

11.Refund of Share Application Money

A Director is personally liable alongside the corporate to repay the share application or excess share application money, because the case could also be, if an equivalent is not repaid within the stipulated deadline.

12.Liability to pay for qualification Shares

If the Director has not acquired his or her qualification shares within the prescribed period of time and therefore the company goes into liquidation the day after this era expires, the Director will be called upon by the Official liquidator to pay for the shares he or she was alleged to have purchased.

13.Fraudulent Conduct of Business

A Director could also 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 party to the fraudulent carrying on of business.

14.Unlimited Liability

The liability of any or all of the administrators of a limited company can be unlimited if so provided by the Memorandum, or can be so done if approved by a special resolution as authorized by the Articles.

The Directors of a company are faced with criminal liability in the following cases:

1. Dishonoured Cheques

Signing a dishonoured cheque is against the law. If a director does any such act, he can be held criminally liable alongside the company for this action.

2. Labour Law offenses

Criminal liability is often imposed on a director if there is a breach of any labour law under his supervision. If the corporate is liable for any such breach under the administrators who have overall control over operations and management, they will be held liable. Directors who are not in overall charge of the corporate but are only on top of things of certain aspects; or are conscious of the policy of the corporate, but are not responsible of it, would not be held liable.

The company’s separate legal identity lifts the burden of personal liability from the directors. However, the concept of the lifting of the corporate veil adds a special dimension to this.

2.Lifting the Corporate Veil

Directors are not personally liable, because a corporation may be a legal person. However, the concept of the lifting of the company veil shifts the liability. This usually is seen when the administrators attempt to depart their illegal acts under the corporate name.

If a finding is formed that the corporate was carrying the business with an aim to defraud the creditors; and therefore, the directors were involved during this action the veil will be lifted. Proof of any wrongdoing with the director’s knowledge is enough to shift the liability.

This is mainly wiped out public interest so that, the directors don’t misuse the safety of limited liability that the corporate offers.

Author Details: Chandana Pradeep (UPES)

The views of the author are personal only. (if any)


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