Useful Notes on Liabilities of the Directors of a Company in India

The directors would, be personally liable to third parties in the following circumstances:

(a) Directors shall be held liable for all the ultra-vires transactions amounting to a breach of an implied warranty of authority held out by the directors.

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(b) Directors shall also be liable on all those contracts which they enter in their own name. They shall also be personally liable on contracts entered into on behalf of the company when they have expressly or by implication personally undertaken the responsibility for the same.

(c) Directors shall be personally liable to the outsiders if they are found guilty of fraud or other torts. Outsiders who have subscribed for shares on the basis of false statement can make the directors liable either under Section 62 by an action for damage or by an action for deceit under general law.

2. Liability to the Company:

The liability of directors towards the company may arise in the following four circumstances:

(a) Liability for “ultra-vires” acts:

Directors are responsible to the company for any loss that it may suffer on account of ultra-vires acts e.g. application of funds of company for objects not sanctioned by the company’s memorandum or payment of dividend out of capital. The acts may not have been committed with any fraudulent intention on their part.

(b) Liability for negligence:

Directors shall be liable to the company for negligence, when they do not use so much skill and care in the management of the affairs of the company as an ordinary man would reasonably use in his own case or which may be expected from person of such experience and knowledge.

Directors are, however, not liable for mere errors of judgment when they have acted within their powers in the bona fide exercise of their discretion or negligence of the subordinates relied upon by them, in the absence of any ground for suspicion.

(c) Liability for breach of trust:

Directors shall be held liable for misapplication of the funds of the company or for misappropriation of assets or for making a secret profit out of their dealings on behalf of the company.

He will also be liable for breach of trust if he fails to act honestly and in the interests of the company as a whole. He will be liable to make good any loss sustained by the company as a result of any wrongful act committed or authorised by him or which he has joined in sanctioning at a board’s meeting.

(d) Liability for misfeasance:

Misfeasance implies misconduct on the part of a director concerning the company’s affairs which cause loss to the company. In order to take action against a director on the ground of misfeasance, two conditions must be fulfilled: (i) there must be misconduct or negligence on the part of a director and (ii) such misconduct or negligence must be willful. Mere failure on the part of the director to take certain steps for the benefit of the company, e.g., recovery of a debt, will not amount to misfeasance.

3. Criminal Liability of the Directors:

When the directors fail to fulfill the statutory obligations imposed upon them by law, they may be held criminally liable. There are various provisions in the Companies Act under which directors shall be criminally liable.

The directors can also be held criminally liable for fraud, misapplication and embezzlement of the company’s funds under the provisions of the Indian Penal Code.

Liability for the acts of co-directors:

A director is not liable for the misconduct or wrongful acts committed by his co-directors unless he has expressly or impliedly authorized the same. A director would be liable for loss or damage to the company resulting from carrying out such decisions if he has taken an active part in giving effect to the decisions of the board. It will be immaterial whether he attended such meeting of the board or not. In case of breach of trust, directors are jointly and severally liable.