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Personal Liability of Directors

The liability of shareholders in a company, unlike that of a sole proprietorship or partnership firm, is limited. The liability of the company is generally not transferred onto the directors. However, directors can be held personally liable for their acts under the Companies Act 2013, if there is a breach of fiduciary duty or instance of fraud. In this article, we look at instances where the directors can be held personally liable under the Companies Act, 2013.

Know more about roles and responsibilities of a Director.

Breach in Fiduciary Duty

A director must comply with certain fiduciary duties, and any lapse on this part will make the directors personally liable in an action for tort. Some of these cases include fraud, breach of trust, fraudulent misrepresentation etc.

Issue of Prospectus with Intent to Defraud

If a director issues a prospectus with intent to defraud the applicants or other persons for any purpose, he/she will be personally held liable, without any limitation of liability, for the damages incurred by any person who has subscribed to the securities on the basis of such prospectus.

Acceptance of Deposits with the Intent to Defraud

If a company fails to repay the deposit or interest within the stipulated time, and it is established that the deposits were accepted for a fraudulent purpose, the concerned officer who was responsible for the acceptance of such deposit will be held personally accountable, without any limitation of liability, for all or any of the losses/damages incurred by the depositors.

Undue Advantage by Directors on Account of Fraud

An inspector may report on the occurrence of any fraudulent activity in a company. If any director, key managerial personnel, other officer of the company or any other person belonging to the company utilize this scenario in an inappropriate manner, whether in the form of asset property, cash or any other manner, the Central Government may file an application before the National Company Law Tribunal seeking appropriate orders with regard to discharge of such asset, property or cash, and holding the concerned director, key managerial personnel, officer or other person personally liable, without any limitation of liability.

Liability for Fraudulent Conduct of Business

While dissolving a company, if it is evident that any business of the entity has been pursued with intent to defraud the creditors of the company or any other persons, the National Company Law Tribunal, on the application of the Official Liquidator/Company Liquidator/Creditor/Contributor of the company, is entitled to declare that any person who is/has been a director, manager or officer of the company, or has been a part of it with the complete awareness of the events, shall be personally held liable, without any limitation of liability, for all or any of the debts or other liabilities of the company as directed by the Tribunal.

Proficiency of Directors

As per the latest amendments to the Company’s rule (2014), [Rule-8, sub-rule(5), Clause(iii)], the director of a company has to undergo online proficiency self-assessment test every year. This test will be conducted by the Ministry of Corporate Affairs. The exact amendment text is provided below:

“(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year”

The notification can be accessed below:

Proficiency test for directors

 

However, as per the latest notification on 28th February 2020, the directors does not need to undergo proficient self-assessment test for directors who serve a minimum of 10 years as on the date of inclusion in the database for a listed public company or unlisted company with a paid-up capital of minimum of ten crore or the corporate body listed in any of the stock exchange in India. The relevant notification can be accessed below:

Independent-Director-Notification