The directors control the company’s affairs and act as its agent. A company is a legal person; hence the directors are not personally liable for acting 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.
The following are the examples when the directors can be held liable:
1. Tax liability
As per the Income Tax Act, if any income 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 liable for this default jointly and severally.
2. False statement in the company’s prospectus
Directors will be liable for writing any false statements in the prospectus. The liability can be waived only if,
- 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 liable for any debts the company 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 share application money
In case the director(s) fail to repay the share application money, he will be liable with the company.
6. Failure to acquire qualifications of shares
Directors will be liable to pay for qualification of shares if the failure to do so within the given time and the company goes into liquidation.
7. Share application money payment
Directors of a company are personally liable together with the company for repaying the share application money or the surplus share application money received if it is not repaid within the specified time period.
8. Liability to pay for qualification shares
In case the Director hasn’t acquired the qualification shares within the stipulated time frame and such a company goes into the liquidation. The official liquidator can claim the value payable for the shares from him.
1. Dishonoured Cheques
2. Labour Law offenses
Criminal liability can be imposed on a director if there is a breach of any labour law under his supervision. If the company is responsible for any such breach under the directors who have overall control over operations and management, they can be held liable. Directors who are not in overall charge of the company but are only in control of certain aspects; or are aware of the policy of the company, but are not in charge 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 different dimension to this.
Lifting the corporate veil.
Directors are not personally liable, because a company is a legal person. However, the concept of the lifting of the corporate veil shifts the liability. This usually is seen when the directors try to set off their illegal acts under the company name.
If a finding is made that the company was carrying the business with an aim to defraud the creditors; and the directors were involved in this action the veil will be lifted. Proof of any wrongful conduct with the director’s knowledge is enough to shift the liability.
This is mainly done in public interest so that, the directors don’t misuse the security of limited liability that the company offers.