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.
(c) Misfeasance
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
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