Liabilities of Directors and KMPs Under Different Laws

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Liabilities of Directors and KMPs Under Different Laws

In general words, liability means the responsibility of the person. In the company, there are the directors and KMPS (Key Managerial Personnel) as they have decision-making power as the company is an artificial person. So, the decision making power is in the hands of the directors and KMPs as they act as an agent of the company. Every decision which is taken by the directors and KMPs will be held liable for the act done on behalf of company. In this article, we will explain you the liabilities of Directors and KMPs under different laws.

Table of contents:

Who is Director?

The definition of a director is provided under section 2(34) and its appointment under section 149 of The Companies Act, 2013.

Generally, directors are someone who is elected or appoint as an agent to act on the behalf of the company. The company is an artificial person so the director has the power to make decisions for the company. Any act which is done by which is harmful to the company they will be personally liable. Various types of Directors are as following:

  • Executive and Non-executive Directors
  • Residential Director
  • Small shareholder Director
  • Women Director
  • Additional Director
  • Alternate Director
  • Nominee Director

Who are Key Managerial Personnel (KMPs)?

The definition of KMPs is provided under section 2(51) and its appointment under section 203 of The Companies Act, 2013.

Generally, KMPs is the group of persons who are in charge of maintaining the operation of the company. It is mandatory for every company that is listed and every public company whose paid-up capital is 10crore rupees or more to appoint these KMPs. Various types of KMPs are as following:

  • Chief executive officer/ Managing Director
  • Company secretary
  • Whole-time director
  • Chief financial officer

Generally, a director and KMPs are equally responsible for running the business and if any offence is done, that their hand are in that offence both will be equally liable for their malice act done to harm a company. So the Liabilities of directors and KMPs are the same.

Liabilities of directors and KMPs

  • Liability to a company: This liability arises when the act was done by the director/KMPs is ultra vires. Liability may arise:
    • From breach of fiduciary duty: If the director works dishonestly to the benefit of the company then he would be held liable for the breach of fiduciary duty. As most of the powers are in the hands of directors/KMPs. Therefore, they should not work for their or for benefit of other members, but for companies benefit.
    • Ultra Vires Act: Every person in the company should work according to the provision of the law and Article of Association of the company. AOA provides the limits to the activity of the members and directors/KMPs of the company if they go beyond such limit the act will be ultra vires and they will be personally liable.
    • Negligence: When directors/KMPs act with reasonable care, diligence, skill they will not be liable. If they were negligent then for performing the act they will be held liable for loss caused due to negligence.
    • Malafide act: As the directors are the trustee of the company including money, assets, property they have the power to use them. If the act done is malafide and beyond their duties and due to which loss has been causing to the company then the director/ KMPS will be held liable for the loss and damages caused to the assets of the company.
  • Liability to the third party: Generally, the directors/KMPs are not liable to the third party as they are the agents and working on the behalf of the company. They will be held liable when they contract in a personal capacity and it is disclosed by the third party.
    • Section 35 of Companies Act,2013: According to this section if any individual has subscribed for the security by acting on the behalf of the misleading prospectus, the director/KMPs will be liable for all the losses and damage incurred from that misleading prospectus.
    • Section 34 of the Companies Act,2013: According to this section if any prospectus is issued, circulated or distributed which have a misleading statement will be punished under section447.
      Penal provision of section 447: Imprisonment: not less than 6 months extend to 10years.
      Fine: amount involved in fraud or which may extend to 3 times the amount.
    • Section 40 of the Companies Act,2013: According to this section the company has to make an application to the stock exchange to obtain permission for securities before dealing with the public. Money received should be kept in a separate bank account. Default in compliance leads to company liability.
      The director/KMPs shall be punished with imprisonment which may extend up to 1year and fine not less than fifty thousand and which may extend up to 3lakh or both.
    • Section 399 of the Companies Act,2013: according to this section if any fraudulent conduct is done in business then every person who is knowing the part of that conduct would be liable under section 447 of the act. If any fraud is conducted in a business then directors/KMPs will be liable for fraud.
  • Some offence where director/KMPs will be liable for Fine or Imprisonment under Companies Act,2013:
    • Providing any false or incorrect information at the time of registration of the company. (Section7 (6))
    • Fraudulently ask any person to invest money. (Section36)
    • Defraud in transfer or transmission of shares. (Section 56)
    • Reduction of share capital. (Section 66)
    • Prohibit to issue share on discount. ( Section 53)
    • Fails in filing an annual return. (Section 9 (5))
    • If they tempers the minutes of any meeting or any resolution passed in a postal ballot. ( Section 118 (12))
    • If they fails to keep books of accounts. (Section 128(6))
    • Loans and investments of the company. ( Section 186(13))
    • Investments did in its name. (Section 187(4))
    • Power of the company to purchase its own security. ( Section 678(11)
      These are some of the provisions in which the directors/KMPs will be held liable with a fine or imprisonment.
  • Criminal liabilities: Generally, this liability arises when the company is engaged in any offence which is punishable under IPC. All the criminal punishments which are prescribed by any law would impose on the directors/KMPs.
  • Liable under section 141 of Negotiable Instrument Act, 1881: Generally, says that the person who is at the place when the offence is committed was in charge or responsible to the company for the conduct of business would have vicarious liability and will be punished. Therefore, the directors/KMPs is present or part of the decision making of the company then they will be held liable for any loss caused and get punishment accordingly.
  • Liable under section 42 of Foreign Exchange Management,1999: According to this section, any rules, directions, orders or any provision which are made under this act every person will be held liable for the contravention of the act and shall be punished accordingly. Therefore, the directors/KMPs will be liable for the contraventions of the provision under this act.
  • If the director or any KMPs has given resignation from his post but the act which has caused harm or loss to the company then also they would be personally liable for loss occurred to the company.

Conclusion

Basically, the directors/KMPs play a very important role in the decision making of the company and they are responsible for the day to day affairs of the company. If by chance they fail to follow the provision of company law or any other law which are applicable to the company, they have to bear the penalties and liabilities on the behalf of the company. Further, if there is any criminal offence then also the directors and KMPs will be personally liable for the act done on the behalf of the company. To know more about liabilities of directors and KMPs, contact Legal Window now.

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