What are the duties and liabilities of a company director ?

The duties of directors are many and varied and difficult to describe in general terms. There are numerous statutory duties of the directors under the Companies Act on the one hand and on the other, there are duties of a general nature under the general law. To enumerate their statutory duties in detail is not possible as they are spread up throughout the Companies Act, right from incorpo­ration of the company till its liquidation. Moreover these statutory duties have been discussed at appropriate places in the text. For the sake of example, however, a few statutory duties of directors are enumerated below:

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(i) It is the duty of the Board to see that all moneys received from applicants for shares is deposited in a scheduled bank until the ‘certificate to commence business’ is obtained under Section 149 or the money is returned to the applicants under Section 69(5) [Sec. 69(4)].

(ii) Section 165 requires the Board of Directors to forward a copy of the Statutory Report at least 21 days before the Statutory Meeting to every member of the company and to the Registrar.

(iii) The Board is required to call, on the requisition of the specified number of members, an extraordinary general meeting of the com­pany [Sec. 169(1)].

(iv) At every Annual General Meeting of a company, the Board shall lay before the company a Balance Sheet and a Profit and Loss Account [Sec. 210(1)].

(v) The Board of Directors has to make a ‘declaration of solvency’ of the company in the case of members’ voluntary winding up (sec.488)

(vi) At the meeting of the creditors’ voluntary winding up, the Board of Directors of the company must (a) cause a full statement of the positions of the company’s affairs together with a list of creditors and the estimated amount of their claims to be laid before the meeting [Sec. 500(3)].

The  duties of directors under the general law may briefly be put as follows:

1. They must always act bona fide for the benefit of the company. They stand in a fiduciary relationship with the company and there fore must not make any secret profit.

2. They must discharge their duties with such care as is reasonable in a person of their knowledge and experience.

3. They must not be negligent. The directors must attend Boards’ meetings unless impossible otherwise.

4. They must perform their duties personally. The maxim delegatus non protest delagare (a delegate cannot delegate further) applies to them like all agents. Hence, unless permitted by the articles specifically, the directors must not delegate any of their powers to some other person.

Liability of Directors :

So long as the directors act intra vires, in good faith, bona fide and take reasonable care in the discharge of their duties, they incur no personal liability. But they may become personally liable to make good the loss to the company:

(i) For ultra-vires acts—where they enter into contracts ultra vires the memorandum or ultra vires their powers e.g., selling the whole undertaking.

(ii) For breach of trust—where they make secret profits or use company’s funds for their personal use.

(iii) For acting dishonestly e.g., purchasing property in their own name first and then selling it to the company at a higher price with an intention to make profits.

(iv) For gross negligence in the performance of their duties e.g., dele­gation of power when the articles do not permit or paying dividends when there are no profits. It is to be noted that an error of judgement will not make them liable so long as they are honest and careful.

(v) For wilful misconduct e.g., misappropriation of the company’s assets wilfully.

(vi) For the acts of his co-directors where he habitually absents himself from the Board meetings.

The directors may also incur personal liability to third parties:

(i) For mis-statements or concealments in the prospectus.

(ii) For acting in their own name e.g., signing a negotiable instru­ment without mentioning the name of the company.

(iii) For breach of implied warranty of authority—where they enter into any contract which is ultra vires the company or ultra vires their powers e.g., where moneys are borrowed beyond the powers of the company from a lender who advanced the loan in good faith and without knowledge that the limits imposed by the Articles had been exceeded (Weeks vs. Proper).

(iv) Where their liability has been made unlimited by a provision in the memorandum.

(v) For the debts and liabilities of the company at the time of winding up, if the court hold them so liable because of fraudulent tra­ding by them (Sec.542).

(vi) For acting fraudulently they may be asked to pay damages.

Criminal liability. The directors also incur criminal liability for fraud and non-compliance of the various provisions of the Act. Here they are punishable with fine or imprisonment or both under various Sections of the Act. For example, they will be liable to penalty under the following Sections of the Act:

(i) Section 63—for mis-statements in the prospectus.

(ii) Section 75—for failure to file return as to allotments with the Registrar.

(iii) Section 95—for failure to give notice to the Registrar of consolidation of share capital, conversion of shares into stock, etc.

(iv) Section 113—for failure to issue certificates of shares and debentures within specified time limits.

(v) Section 142—for default in filing with the Registrar for registra­tion the particulars of any charge created by the company requiring registration or of any fact connected therewith.

(vi) Section 150—for not keeping registers of members and deben­ture-holders.

(vii) Section 168—for default in holding annual general meeting in accordance with Section 166.

(viii) Section 210—for failure to lay before the company at every annual general meeting, annual accounts and balance sheet.

(ix) Section 279—for holding office as director in more than twenty companies in contravention of the provisions of the Act.

(x) Section 295—for taking loan from the company without the approval of Central Government, thus contravening the provisions of this Section.

In all the penal provisions of the Act, the person sought to be made liable is described as an ‘officer who is in default’. The expression ‘officer in default’ means any officer of the company who is knowingly guilty of the default, non-compliance, failure, refusal or contravention mentioned in that provision, or who knowingly and wilfully authorizes or permits such default, non-compliance, failure, refusal or contraven­tion (Sec. 5). The term “officer” includes a director as well [Sec. 2(30)3.

It must, however, be noted that a director against whom an action is brought is entitled to contribution from as many of his co-directors as were equally at fault.