1. Introduction : Directors have to manage the company sincerly as representatives of shareholders. Moreover they have to manage the assets and funds of the company as trustee of shareholders. If directors perform thier duties complying the provisions of company law, then they do not become liable but if they misuse their power or act beyond thier power or proved to be negligent in performing their duties then they are held personally liable towards the third parties or towards the company. 2. LiabiIities of Directors: Main liabilities of directors are as under
I Liabilities of Directors Civil Liabilities I Criminal Liabilities Towards Company Towards Third Party I (1) Civil Liability : When a director is held liable to compensate the financial loss suffered by any person on account of negligence of directors, then it is called civil liability of director. If the directors act within the limit of law in good faith, bonafide and take reasonable care in discharge of thier duties, they cannot be held liable for any damage caused. Civil liability arises towards two parties: (A) Liability towards company (B) Liability towards third party
(A) Liability towards Company : When directors perform their duty beyond the powers acquired by Memorandum of Association (ultra vires), they are liable to the company. In following circumstances liability of directors arises towards the company.
(1) When they purposely misappropirates the accounts of the company.
(2) When they declare dividend even though company ‘has not earned enough profit.
(3) When they use company’s fund or properties for thier personal use and thus commit breach of Trust.
(4) Directors behave dishonestly or carryout fraudulent transactions, purchasing property in thier own name first and then after selling it to the company at a profit.
(5) When Director remains constantly absent from the Board meetings causing losses to the company.
(B) Liability towards third party : Generally third party is not directly connected with the company. Still in the following circumstances, directors become liable towards them.
(1) When directors give misleading or false information in the prospectus or cancel some important information, as a result some share applicants have to suffer financial loss.
(2) When directors enter in to any transaction with their own name without mentioning the name of their company.
(3) When they enter into fraudulent transactions with third parties.
(4) When directors liability is unlimited as per Memorandum of Association (Table D & E).
(5) When director borrows money in excess of permitted limits.
(6) When the court holds directors liable to a third party at the time of winding up of the company.
(2) Criminal Liability: The liability for which directors can be punished with imprisonment or with fine or both, is called criminal liability of director. According to the provisions of Companies Act in the following circumstances criminal liability arises.
(1) When directors commit cheating fraud or breach of turst with the company.
(2) When directors disobey various provisions of Company Act.
(3) When directors give misleading or false information in the prospectus or hide some important information.
(4) When directors commit a criminal offence at the time of incorporation, management or winding up the company.
Que. Explain civil liabilities of a director towards the company. OR 1. Introduction : Directors have to manage the company sincerly as representatives of shareholders. Moreover they have to manage the assets and funds of the company as trustee of shareholders. If directors perform thier duties complying the provisions of company law, then they do not become liable but if they misuse their power or act beyond thier power or proved to be negligent in performing their duties then they are held personally liable towards the third parties or towards the company.
2. LiabiIities of Directors: Main liabilities of directors are as under
I Liabilities of Directors Civil Liabilities I Criminal Liabilities Towards Company Towards Third Party I (1) Civil Liability : When a director is held liable to compensate the financial loss suffered by any person on account of negligence of directors, then it is called civil liability of director. If the directors act within the limit of law in good faith, bonafide and take reasonable care in discharge of thier duties, they cannot be held liable for any damage caused. Civil liability arises towards two parties: (A) Liability towards company (B) Liability towards third party
(A) Liability towards Company : When directors perform their duty beyond the powers acquired by Memorandum of Association (ultra vires), they are liable to the company. In following circumstances liability of directors arises towards the company.
(1) When they purposely misappropirates the accounts of the company.
(2) When they declare dividend even though company ‘has not earned enough profit.
(3) When they use company’s fund or properties for thier personal use and thus commit breach of Trust.
(4) Directors behave dishonestly or carryout fraudulent transactions, purchasing property in thier own name first and then after selling it to the company at a profit.
(5) When Director remains constantly absent from the Board meetings causing losses to the company.
(B) Liability towards third party : Generally third party is not directly connected with the company. Still in the following circumstances, directors become liable towards them.
(1) When directors give misleading or false information in the prospectus or cancel some important information, as a result some share applicants have to suffer financial loss.
(2) When directors enter in to any transaction with their own name without mentioning the name of their company.
(3) When they enter into fraudulent transactions with third parties.
(4) When directors liability is unlimited as per Memorandum of Association (Table D & E).
(5) When director borrows money in excess of permitted limits.
(6) When the court holds directors liable to a third party at the time of winding up of the company.
(2) Criminal Liability: The liability for which directors can be punished with imprisonment or with fine or both, is called criminal liability of director. According to the provisions of Companies Act in the following circumstances criminal liability arises.
(1) When directors commit cheating fraud or breach of turst with the company.
(2) When directors disobey various provisions of Company Act.
(3) When directors give misleading or false information in the prospectus or hide some important information.
(4) When directors commit a criminal offence at the time of incorporation, management or winding up the company.