Liabilities of Directors of a Company | Company Law Notes for B.Com, BBA and MBA | CBCS Pattern

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.