Liability of a Director of A Company by Shikha at LexCliq

A director is defined as a director appointed to a company’s board of directors in section 2(34) of the Companies Act, 2013. Because a corporation is a legal entity, it requires the services of an agent to act on its behalf. A corporate director works as a trustee for the business’s assets and acts as an agent for the company. The directors, along with the board of directors, serve as the company’s public face and make decisions on its behalf while keeping the company’s best interests in mind.

A director’s liability may be of following kinds:

  1. Statutory Liability:

A company’s director has fiduciary duties, which are outlined in Section 166 of the Companies Act, 2013, which states that a director must act in good faith and execute his duties with reasonable care, skill, and diligence. He shall not engage in any action that may result in undue profit or advantage for himself or his relatives.

Section 250 of the Companies Act, also states that once a company is dissolved under the strike-off procedure, it ceases to exist as a company except for the purpose of realizing the money due to the company and for the payment or discharge of the company’s liabilities and obligations. As a result, the liability of every director, manager, or other official exercising any management power, as well as every member of the dissolved company, shall continue and may be enforced as if the company has not been yet dissolved.

Furthermore, Section 339 of the Companies Act, provides that if it appears during the winding up of a company that any business of the company has been carried on with the intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may, if it considers it appropriate, declare that any person who is or has been a director, manager, or shareholder of the company is or has been a director, manager, or shareholder of the company is or has been a director, manager. As a result, if the business is operated for fraudulent reasons or a fraud is discovered, the director in charge of the operation will be held personally liable. Also, for misstatements in prospectus the director may be held responsible under Section 34 and for breach of solvency declaration under section 68 of the Companies Act.

  1. Income Tax Liability:

When a private company is in liquidation and the tax assessed cannot be collected, then under Section 179 of the Income Tax Act, 1961, everyone who was a director of the private company during the relevant prior year is jointly and severally liable for the payment of that tax. The directors must then show that the non-recovery is not due to any gross negligence, misfeasance, or breach of duty on their part in regard to the company’s affairs.

  1. Contractual Liability:

A director may be regarded of as a company’s agent who enters into contracts on the company’s behalf. As a result, the ordinary principle of agency will apply, and a director cannot be held personally liable on a contract unless it is expressly provided for or unless he has offered personal assurance for contract fulfillment. Apart from that, if a contract is breached, a director must be able to prove that he honestly and diligently performed his obligations and has not committed any fraud or breach of trust.

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