Liabilities of director
The liabilities of directors may be discussed under three heads:
The directors are not personally liable to outsiders if they act within the scope of powers vested in them. The general rule in this regard in that wherever an agent is liable, those directors would be liable, but where the liability would attach to the principal only, the liability is the liability of the company. The directors are personally liable to third parties of contracts in the following cases:
a. They contract with outsiders in their personal capacity
b. They contract as agents of an undisclosed principal
c. They enter into a contract on behalf of a prospective company.
d. When the contract is ultra-vires the company.
In default of statutory duties, the directors shall be personally liable to third parties in the following cases:
1. Mis-statement in prospectus.
2. Irregular allotment.
3. Failure to repay application money if the minimum subscription is not received.
4. Failure to repay application money if allotment of shares and debentures is not dealt in on the stock exchange as specified in the prospectus.
The directors shall be liable to the company for in the following cases:
(a) Where they have acted ultra-vires the company
For example, where they apply the funds of the company to objects not specified in the memorandum of association or when they pay dividends out of capital.
(b) Where there is a breach of trust
Directors being the trustees of the company, they should discharge their duties in the best interest of the company; Where they commit a breach of trust resulting in a loss to the company, they are bound to make good the loss. For example, where the directors of the companies utilise company’s property for their own benefit, they are guilty of breach of trust.
Directors are liable to the company for misfeasance. The word misfeasance covers willful negligence. However mere failure on the part of the director to take necessary steps for recovery of debts due to the company does not constitute misfeasance.
Directors will be liable with a fine and imprisonment or both for fraud of non-compliance of any statutory provisions in the following situations where
(i) There is mis-statement in Prospectus
(ii) There is failure to file return on allotment with the registrar
(iii) There is failure to give notice to the registrar for conversion of share into stock
(iv) There is failue to issue share Certificate and Debenture certificate
(v) There is failure to maintain register of the members and register of debenture holders
(vi) There is default in holding Annual General Meeting
(vii) There is failure to provide Financial Statements