A director of a company has various legal responsibilities, and he has to comply/look after several legal issues related to a company. The following is research on the kind of civil/criminal liability that would be on a director if he or she fails to comply with the aspects of the companies act, 2013.
The liabilities for the directors of a company can arise from
1) Negligence 2) Mala fide acts 3) Ultra vires acts 4) Breach of fiduciary duty.
Negligence: Negligence occurs when a person does not take reasonable care of his actions. The directors of a company will not be held liable if they from within their scope of authority exercise their duties and actions while taking reasonable care, with skill and diligence. But suppose their actions lead to any damages resulting from negligence in the discharge of their duties. In that case, they will be held liable for consequences or the damages resulting due to their actions. Even then, a mere omission to take all the possible care will not always amount to negligence under the law.
Mala-Fide Acts: Mala fide acts means actions carried out with bad faith. Generally, for all the assets, properties, and capital of the company, the company’s directors are regarded as the trustees for them. If, while in the discharge of their duties, the directors of the company act in with bad faith or a mala fide act, they will be held liable for breach of trust and any kind of loss caused to the company of their mala fide actions. In addition to this, the directors can also be held liable or accountable for any acts of willful or wrongful misuse of power leading to damages to the company.
Ultra Vires Act: While in a company all the employees and the directors of that company should be working within the preview, provisions, and the extent of the companies act, rules, articles of the association since all these would comprise the general structure and prescribes the limits of that company and the power of the directors of the company. This means if the directors of the company perform such activities beyond their scope and power, that would be considered an ultra vires act, and the director would be made liable for his or her actions.
Breach of Fiduciary Duty: The powers conferred to the directors of a company are the powers in the trust where they are expected to take actions and use their powers to benefit the company. But if the directors use their powers and take actions with a dishonest intention that is not in the best interests of the company, then they will be held liable for breach of fiduciary duty.
Generally, the circumstance under which liabilities of a director of a company arise is: if the director has committed a breach of trust, the director of the company has acted in ultra vires where his or her actions are not in the best interests of the company if the directors have caused negligence by their actions. A company director is expected to act and work with honesty while discharging his or her duties as the director of the company.
The director of a company would be liable to make good with interest all the amount paid out of the company’s funds from time to time for purchasing the shares of the company. However, the company’s director is not allowed or has no entitlement to spend the company’s money/funds, which does not fall or cover in the memorandum of association, although that payment is approved by the board of directors of the company or the shareholders of the company. The company’s shareholders have the right to act against the director of the company for the sake of restoring the money/funds of the company, which is being used in such transactions which the directors of the company have no power or authority to enter into. The funds of a company cannot be used to pay any such costs, such as the litigation costs of the directors, although such costs would not have been incurred if they had not been the directors at that time. In other situations where the unlawful act has occurred which the directors do not know, they will not be held liable for that unlawful act. (Legal Service India, n.d.)
Criminal liability consists of two main elements; the guilty act, which is otherwise known as actus reus, and the other is guilty mind, also known as Mens Rea. Since the company is an artificial entity, it cannot have a guilty mind or Mens rea to commit a criminal offense. So, the question that arises here is whether a company could be prosecuted for an offense that has a punishment of imprisonment. But today, the law says that if a certain company commits a criminal offense, then the liability of such offense will fall on the director of that company.
When a criminal offense committed by a company involves Mens rea, then we could establish that the offense was committed by the person acting on behalf of the company. So, the person who acts on behalf of the company, i.e., the director of the company, would be made liable since his actions perpetrated an offense on behalf of the company. (Vasani, 2019)
Some of the provisions under the Companies Act 2013 which would lead to the criminal liability of the directors of a company are as follows:
Section 34-Any untrue statements in lieu of prospectus filed under this section and the person who has authorized the filing of such statement would be punished under this section.
The punishment for this act would be imprisonment for a term that may extend to 2 years or with a fine which may extend to five thousand rupees or, in some cases, with both. He will not be held liable if he proves that the said statement is proven immaterial or there are reasonable grounds to believe that he believed such statement to be true until the time of filing that statement.
Section 53- As per this section, any shared issued with a discounted price shall be deemed void. Under this section, the punishment for the offense is would be fine, not less than one lakh rupees, and could be extended to five lakh rupees. Also, every employee or officer of the company who is at default will be punished with imprisonment for a term which may extend to 6 months or with a fine or in some cases both.
Section 68-This section talks about the rule and regulations, and guidelines that a company must adhere to while buying back its shares. As per section 68 clause 11, if in case there is a default by the company where they did not follow the said guidelines under this section, then all the officers or employees of the company in default shall be punished with imprisonment, which may extend up to 3 years or with a fine which shall not be less than one lakh rupees or in some cases both.
Section 92- As per this section, a company should mandatorily prepare annual returns in the prescribed form at the end of every financial year. This said annual return should contain all the information laid down in section 92(1). This return should also be filed by the company before the registrar of companies within sixty days as prescribed under section 403.
Suppose the company fails to comply with this section where it fails to file the annual return. In that case, the company will be liable for a fine of up to fifty thousand rupees, and the officer or the employee of the company in default shall be punished with imprisonment for a period up to six months or with a fine which may range from fifty thousand rupees to five lakhs or win some cases with both.
Section 118- This section talks about the duty to preserve the minutes of the company’s meetings. The company should mandatorily preserve the minutes of the meetings, such as board meetings or general meetings, and any resolutions or decisions passed by a postal ballot are prepared and signed in the prescribed manner under this section. The said information must be preserved at least for thirty days.
Subclause 12 of this section talks about the liability if failed to comply with the section. The punishment for a person who is found guilty of tampering with the meeting minutes shall be punished with imprisonment up to two years or with a fine which may range from twenty-five thousand rupees to one lakh rupees or in some cases with both.
Section 128- This section talks about the maintenance of proper books of accounting by the company, in this section that every company must maintain a book of accounts that includes all the financial statements of the company for every year and are to be maintained in a prescribed form.
Suppose the managing director of the chief financial officer of the company or the officer in default fails to comply with this section. In that case, he shall be held liable and be punished with imprisonment for up to 1 year or with a fine which shall not be less than fifty thousand rupees and can be extended upto five lakh rupees or in some cases with both.
If you are in the United States and a facing similar charges, you may seek professional legal advice from Dedicated Arlington Criminal Attorney.