Page 307 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Where a director has misapplied or misappropriated money or property of the company or has
been guilty of breach of trust or misfeasance, the court may order him to repay the money or
restore the property or to pay compensation [P.K. Nedungadi v. Malayalee Bank Ltd., AIR (1971)
S.C. 829].
Liability to third parties. The discussion on liability of directors towards third parties may be
grouped as under: (a) Liability under the provisions of the Act. (b) Liability for breach of
warranty of authority.

(a) Liability under the Act. The following provisions make directors personally liable to
third parties:
(i) With regard to prospectus. Failure to state any particulars as per the requirements of
s.56 or misstatement of facts in a prospectus renders a director personality liable of
damage to the third party. Section 62 provides that a directors shall be liable to pay
compensation to every person who subscribes for any shares or debentures on the
faith of the prospectus for any loss or damage he may have sustained by reason of
any untrue statement included therein. He may, however, escape liability where he
proves his innocence.

(ii) With regard to allotment. Directors may also incur personal liability for: irregular
allotment, i.e., allotment before minimum subscription is raised or without filing a
copy of the statement in lieu of prospectus [s.71(3)]. - for failure to repay application
money in case of minimum subscription having not been received [s.69(5)]. - for
failure to repay application money when application for listing of securities is not
made or is refused (s.73).
(iii) Unlimited liability. Directors will also be held personally liable to the third parties
where their liability is made unlimited in pursuance of s.322 (i.e., vide memorandum)
or s.323 (i.e., vide alteration of memorandum by passing special resolution).

(iv) Fraudulent trading. Directors may also be made personally liable for the debts or
liability of a company by an order of the court under s.542. Such an order shall be
made by the Court where directors have been found guilty of fraudulent trading.
(b) Liability for breach of warranty. Directors are supposed to function within the scope of
their authority. Thus, where they transact business in respect of matters ultra-vires the
company or ultra-vires the Articles, they may be proceeded against personally for any
loss sustained by the third party.

Liability for Breach of Statutory Duties. The Act, imposes numerous statutory duties on the
directors under its various sections. Default in compliance of these duties attracts penal consequences.
For instance, they are liable as ‘officer-in-default’ for default in filing return of allotments (s.75);
for failure to comply with the provisions of the Act relating to issue of redeemable preference
shares or redemption of irredeemable preference shares, etc. (Ss.80, 80A).
Liability for acts of co-directors. A director is the agent of the company and not of the other
members of the Board. Accordingly, nothing done by the Board can impose liability on a
director who did not participate in their action or did not know it. His liability shall not arise
even where he attends the subsequent Board meeting at which minutes recording the wrongful
action of the earlier meeting are confirmed. To incur liability he must either be a party to the
wrongful act or later acquiesce (consent) to it. Thus, the absence of a director from Board meetings
does not make him liable for the fraudulent acts of a co-director on the ground that he ought to
have discovered the fraud.

Where a director is made liable for the acts of co-director he is entitled to contribution from the
other director or co-director who were a party to the wrongful act [Ramskil v. Edwards (1885)

300 LOVELY PROFESSIONAL UNIVERSITY