JHS

Director’s
Liability
“Directors in the Spotlight: Navigating
Liability Minefields”
May, 2024

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 FOREWORD
➢ In the evolving landscape of corporate governance, the role of a director is both critical and challenging. In the
process of steering a company to achieve its objectives, the director must navigate through a complex maze of Nikhel Kochhar
responsibilities, obligations and legislative compliances; often under the public scrutiny of law and society.
FCA,CIA
➢ This relatively concise deck on Directors’ Liabilities is a commendable effort by the JHS Team to uncover the
multifaceted aspects of this topic under diverse legislations in India; whilst offering some comparisons with
key global environments. It brings out some of the key provisions in this area under The Companies’ Act, 2013,
SEBI Act 1992 (& LODR), GST Act, 2017 and Income Tax Act 1961, FEMA, 1992, IBC Act 2016, Labour Laws,
amongst others.
➢ This presentation will help readers gain clarity on legal obligations of directors in India; and the potential
repercussions of their actions and inactions. It provides a structured overview, elucidating key provisions and
precedents to help mitigate risks associated with directorial roles. It offers pragmatic guidance on identifying
and addressing potential liabilities. Some relevant case studies from India and abroad have also been included
to shed more practical light on this complex subject.
➢ I do hope that this publication serves as a beacon of knowledge for current and aspiring directors as well as
other corporate stakeholders; fostering a culture of accountability, ethical conduct and corporate excellence.
INDEX
Page.no Page.no
Sr.no Topic Sr.no Topic
. .

1 Definition of Director 5 7 Consequences of Director misconduct 17

Risk mitigation measures to protect director

2 Types of Director 6 8 25
from liability

Learnings from Domestic & International case

3 Duties of Director 7 9 30
laws

Schedule IV: Code for

4 9 10 Content Contributors and Disclaimer 43
Independent Directors

Director Liability under different

5 13 11 JHS Knowledge publications 44
laws

Comparative Analysis (India, US,

6 15 12 Contact Us 47
Japan)

03
"In the kingdom of corporate governance, directors
are the knights sworn to defend shareholders' wealth
with unwavering loyalty.“

Anonymous

04
 Definition of Director

Companies Act,
SEBI (LODR),
2013
2015

Section 2 (34) of Exercise due diligence and

the Act prescribed Duty of care and skill As per Regulation
independent judgment 16(1)(b)
that “director”
means a director “Independent
appointed to the Director” means a
Board of a non-executive
company. A director, other
director is a person Comply with applicable laws than a nominee
Duty to avoid conflicts of director of the
appointed to and regulations
interest listed entity. Who,
perform the duties
and functions of in the opinion of
director of a the board of
company in directors, is a
accordance with person of
Fiduciary Duty: Serving the Act in the best interests of integrity and
the provisions of the company and its
Company in Good Faith possesses
the Companies Act, stakeholders
2013. relevant expertise
and experience.

05
 Alternative Director
As per Section 161 (2) the Board, with
company authorization, to appoint an
Types of Directors First Director
Section 152 of the GST Act states that in
alternate director for a director absent a One Person Company, if the Articles of
from India for at least three months, Association are silent, the sole member
provided the appointee doesn't hold any is automatically deemed the first director
alternate or concurrent directorships. until others are duly appointed according
to the Act.
Resident Director Nominee Director
Section 149(3) mandates every As per Section 161(3) Nominee
company to have at least one
director residing in India. For newly Types of directors can be appointed by specific
shareholders, banks, third parties via

Directors
incorporated companies, this contracts, or by the Union Government
requirement applies proportionately. in cases of oppression or
mismanagement.
Independent Director Women Director
As per Section 149 (6) An independent
As per Section 149(1) Companies, public
director is a board member with no material
or private, meeting certain criteria must
ties to the company, not part of the executive
appoint at least one woman director.
team, and not involved in daily operations.
This includes listed companies and
Small Shareholders Director Additional Directors private firms with a paid-up capital over
As per Section Section 161(1) Additional Rs.100 crore and a turnover above
As per Section 151 Listed companies may have a Rs.300 crores.
directors are appointed via board
director elected by small shareholders, with a minimum
resolution or circulation resolution and
notice from either 1000 small shareholders or 10% of
serve until the company’s next Annual
the total, whichever is lower.
General Meeting (AGM).
Sources: Companies Act, 2013
06
 Duties of Director
Subject to the provisions of this Act, a director of a company shall act in accordance
with the articles of the company.

A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole.

A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
Section 166 of
Companies Act, A director of a company shall not involve in a situation in which he may have a direct
2013 or indirect interest that conflicts with the interest of the company.

A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates.

A director of a company shall not assign his office and any assignment so made shall
be void.

Sources: Companies Act, 2013

07
"A director's role is akin to that of a captain, steering the
ship of the company through the ever-changing seas of
industry, with a steadfast commitment to excellence and
responsibility.
Anonymous

08
 Schedule IV: Code for Independent Directors
The Code is a guide to professional conduct for independent Directors. Adherence
to these standards by independent Directors and fulfilment of their
responsibilities in a professional and faithful manner will promote confidence of
the investment community, particularly minority shareholders, regulators and
companies in the institution of independent Directors.
The following are the Guidelines of professional conduct as per Schedule IV:
The Director
Shall uphold The Director
ethical Shall assist the
standards of company in
integrity and implementing
The Director Shall The Director Shall The Director Shall The Director
probity. the best
act objectively exercise his devote sufficient time Shall refrain
corporate
and constructively responsibilities in a and attention to his from any action
governance
while exercising bona fide manner in professional that would lead
practices.
his duties. the interest of the obligations for to loss of his
company. informed and balanced independence.
decision making.

09
 Duties of Independent Director
An independent director shall
(1) undertake appropriate induction and regularly update and
refresh their skills, knowledge and familiarity with the company; (6) where they have concerns about the running of the company
or a proposed action, ensure that these are addressed by the
Board and, to the extent that they are not resolved, insist that
their concerns are recorded in the minutes of the Board meeting;
(2) seek appropriate clarification or amplification of information and,
where necessary, take and follow appropriate professional advice and
(7) keep themselves well informed about the company and the
opinion of outside experts at the expense of the company;
external environment in which it operates;

(3) strive to attend all meetings of the Board of Directors and of

the Board committees of which he is a member;
(8) not to unfairly obstruct the functioning of an otherwise proper
Board or committee of the Board;
(4) participate constructively and actively in the committees of
the Board in which they are chairpersons or members;
(9) pay sufficient attention and ensure that adequate
deliberations are held before approving related party transactions
(5) strive to attend the general meetings of the company; and assure themselves that the same are in the interest of the
company;

10
Manner of appointment:
An independent director shall
(d) provision for Directors and Officers (D and O) insurance, if any;
(1) Appointment process of independent Directors shall be independent (e) the Code of Business Ethics that the company expects its
of the company management; while selecting independent Directors and employees to follow;
Directors the Board shall ensure that there is appropriate balance of (f) the list of actions that a director should not do while
skills, experience and knowledge in the Board so as to enable the functioning as such in the company; and
Board to discharge its functions and duties effectively. (g) the remuneration, mentioning periodic fees, reimbursement of
(2) The appointment of independent director(s) of the company shall be expenses for participation in the Boards and other meetings and
approved at the meeting of the shareholders. profit related commission, if any.

(3) The explanatory statement attached to the notice of the meeting Resignation/Removal:
for approving the appointment of independent director shall
(1) The resignation or removal of an
include a statement that in the opinion of the Board, the
independent director shall be in the same manner as is
independent director proposed to be appointed fulfils the conditions
provided in sections 168 and 169 of the Act.
specified in the Act and the rules made thereunder and that the
(2) An independent director who resigns or is removed
proposed director is independent of the management
from the Board of the company shall be replaced by a new
(4) The appointment of independent Directors shall be formalized independent director within [“three months”] from the date
through a letter of appointment, which shall set out : of such resignation or removal, as the case may be..
(a) the term of appointment; (3) Where the company fulfils the requirement
(b) the expectation of the Board from the appointed director; the of independent Directors in its Board even without filling
Board-level committee(s) in which the director is expected to serve and the vacancy created by such resignation or removal, as the
its tasks case may be, the requirement of replacement by a new
independent director shall not apply.

11
"Leadership is not about being in charge. It's about taking
care of those in your charge.“
Satya Nadella

12
 Director’s liabilities under different laws

Directors Liability & Directors' Personal

Liability of Directors Liability under Income
Responsibilities under Liability under GST Act,
under SEBI Act,1992 Tax Act, 1961
Companies Act, 2013 2017

Section 184:- Section : 12A, 15G Section 149 Section 179(1) ,179(2)
Liability: Directors can be held Fiduciary Duty: Directors must Joint & Several Liability: Joint and Several Liability:
liable for breaches or failure to act in the best interests of the Directors are jointly and Directors of a private company
disclose personal financial company. Breach of this duty can severally liable for tax defaults, during a relevant previous year
interests, leading to losses. lead to liability. including interest and penalties, are jointly and severally liable
Specific Contraventions: Ultra Vires Acts: Directors must by the company. for unpaid taxes if the
Directors may be liable for operate within the limits set by Corporate Veil: The concept of company is wound up and
specific contraventions if they law and the company's the company's separate legal taxes cannot be recovered.
consented or assisted in them. governing documents. entity is overridden, emphasizing Scope of Liability: Directors
Knowledge or Participation: Malafide Acts: Directors must act directors' personal liability for not holding office during the
Directors aware of violations, with integrity and disclose any GST defaults. relevant year are exempt from
through knowledge or conflicts of interest. Dishonest or liability. However, they must
participation in board meetings malicious behavior can result in prove non-attribution of the
without objection, may face liability. non-recovery to gross neglect,
penalties. misfeasance, or breach of duty.

13
 Director’s liabilities under different laws

Director Liability under Director Vicarious

Director Liability under Director Liability under
Insolvency and Liability in Various
Indian Labour Laws FEMA, 1999
Bankruptcy Code(IBC) Indian Laws

Section: 12, 22 Section: 42(1) Section: 66 The board of Section: 138, 139
Accountability for Non- In-Charge Accountability: directors’ authority is suspended Indian economy presents myriad
Compliances: Directors are Directors deemed responsible for once the insolvency resolution and growing opportunities is
accountable for company failures company business during procedure authorised under IBC evident that vicarious liability of
to comply with labour laws on contraventions of foreign 2016 begins, and a third party is a director, even though not
key aspects like minimum wages, exchange laws face liability. chosen to manage the company’s absolute, is prevalent in a
gratuity, and disclosures. Personal Guilt: Directors may be business. Under IBC process, multitude of Indian laws such as
found guilty of contraventions directors are held accountable the Prevention of Money
Presumption of Responsibility: and subjected to penalties and for undoing the transaction or Laundering Act, Prohibition of
Directors are presumed liable legal actions. making a reasonable Benami Property Transactions
unless they prove non- contribution to the company’s Act, and Negotiable Instruments
involvement or lack of consent assets in order to protect the Act, etc.
in the violation. interests of the creditors.

❖ Gilford Motor Co Ltd v Horne (UK), Director breached a non-compete by creating a new company to poach customers. The court disregarded the new company's
separate identity, calling it a sham, and stopped both Horne and the new company from soliciting Gilford's customers.

14
 COMPARATIVE ANALYSIS
CRITERIA
DEFINITION LIABILITY PENATLY

The liabilities of director are mentioned in

Director refers to an individual serving as a Every director and KMP of the company
various sections of The Companies Act,
member of a corporation's board and who is in default shall be liable to a
INDIA 2013 which contains criminal liability,
fulfilling duties in any organization, penalty of Rs. 50,000 and Rs. 1000 per
liability on fraud, liability for breach of
regardless of its legal structure. day upto Rs. 5 Lakhs.
warranty, liabilities to the company.
Directors are primarily responsible for Director can be held liable to the
overseeing the company’s business. In corporation if he allows an actual or Failure to comply with duty shall render
UNITED
exercising these responsibilities, directors potential conflict between his personal the director liable to a fine of $50,000
STATES
must discharge their fiduciary duties of care interest and the best interest of the and any sum received by him shall be
and loyalty and their obligation to act in corporation to obscure his ability to make recoverable.
good faith decision objectively.
Directors owe a general duty of care of a If an Director of a company has
good manager and a fiduciary duty to the If a director has neglected his duties, he is
engaged in the prohibited behaviour
liable to compensate the company for any
JAPAN company. Japanese law does not distinguish described above, the company may be
damage incurred as a result of his neglect
between these duties as the laws of other fined up to ¥500m. Moreover, the Japan
(Japanese's Companies Act - Article 423).
countries do, and the terms are often used Fair Trade Commission can surcharge
interchangeably. the fine.

15
“You cannot escape the responsibility of
tomorrow by evading it today.”
Abhraham Lincoln

16
 Consequences of Misconduct (As per Companies Act, 2013)
Section Penalties & Imprisonment
Sec 8 – If a company makes any default in complying with any Min : INR 25,000 Max: INR 25,00,000
of the requirements laid down in this section.
Sec 42 – If the Company or director or promoter has not The amount involved or INR 2,00,00,000 which ever is higher
followed the provisions of Private Placement.
Sec 102 – Failure to comply with provisions related to Min: INR 50,000 or 5 times the benefit accruing to personsor
statement to be annexed to notice calling a meeting. any of their relatives Whichever is higher.
Sec 118 – Guilty of tampering with the minutes of the INR 25,000 Max: 1,00,000 and Imprisonment Up to 2 years
proceedings of the meeting.
Sec 127- Punishment for failure to distribute dividends. INR 1 thousand for every day of default & Interest @ 18% p.a.
during the period for default continues.
Sec 128 – Failure to comply with the provision relating to Min: INR 50,000 Max: INR 5,00,000
maintenance of books of accounts.
Sec 129 – Failure to comply with provisions relating to proper Min: INR 50,000 Max: INR 5,00,000 or Imprisonment Upto 1
disclosure of financial statements. Year or both
Sec 137 – Failure to file the copy of financial statements with INR 100 each day if failure continues,
the registrar. Max INR 50,000

17
 Consequences of Misconduct (As per Companies Act, 2013)
Section Penalties & Imprisonment
Sec 159 – Contravention of: Sec 152- appointment of INR 50,000 OR Further, a fine of 500 for every day of default
directors, Sec 155-Prohibition to obtain more than one DIN
and Sec 156-Director to intimate DIN.

Sec 165- Contravention of maximum no. of directorships. Min: INR 5,000 Max: INR 25,000 for every day during which the
contravention continues.
Sec 166 – Contravention of duties of directors. Min: INR 1,00,000 Max: INR 5,00,000

Sec 167 – Functioning as director after attaining Min: INR 1,00,000 Max: INR 5,00,000
disqualification.
Sec 184 – Failure to disclose interest held by directors. INR 1,00,000 or Imprisonment Up to 1 Years or both

Sec 185 – Loan to directors in whom the director is interested. Min: INR 5,00,000 Max: INR 25,00,000 Imprisonment Upto 6
month
Section 188 – Contract entered into/ authorised in Min: INR 25,000 Max: INR 5,00,000 Imprisonment Up to 1 Year
contravention with the provisions outlined under the section-
Related party transactions.

18
 Consequences of Misconduct (As per Companies Act, 2013)
Section Penalties & Imprisonment
Sec 189 – Failure to disclose the interest of the director in any INR 25,000
contract/arrangement.
Sec 190– Contravention of Sec. 190 (Contract of employment INR 25,000 Officer in default and INR 5,000 for each default
with managing of whole Time directors.
Sec 191 – Contravention of Sec. 191 (Payment to directors for Max: 1,00,000
loss of Office, etc. in connection with transfer of under- taking,
Property or shares).
Section 203 – If any company makes any default in complying INR 50,000 and INR 1,000 every day during which the
with the provisions of this section. contravention continues upto INR 5,00,000
Sec 207 – If a director or an officer of the company has been The director on and from the date on which he is so convicted,
convicted of an offence under this section. is deemed to have vacated his office as such and on such
vacation of office, shall be disqualified from holding an office in
any company.
Sec 217(6) – If any director or officer of the company disobeys Min: INR 25,000 and Max: INR 1,00,000 or Imprisonment Up to 1
the direction issued by the Registrar or the inspector under this years
section.

19
 Consequences of Misconduct (As per Companies Act, 2013)
Section Penalties & Imprisonment
Section 243 – Any person who knowingly acts as a INR 5 lakhs
managing director or other director or manager of a
company in contravention of clause (b) of sub-section (1) or
sub-section (1A).
Sec 441– If any officer or other employee of the company The maximum amount of fine for the offence proposed to be
who fails to comply with any order made by the Tribunal or compounded under this section shall be twice the amount
the Regional Director or any officer authorised by the provided in the corresponding section in which punishment
Central Government. for such offence is provided.
Sec 447 – Punishment of fraud in company matters. The INR 1 lakh rupees or an amount equivalent to 3 times the
offence of fraud is punishable, on conviction, with amount of fraud whichever is higher or imprisonment for
imprisonment, a fine or both. minimum 6 month but not exceeding 10 years or both.

Sec 448 - Punishment for false statements. INR 10 Lakhs or Imprisonment for 2 years or both

20
 Consequences of Misconduct (Other Laws)
Income Tax Act, 1961
The provisions of Section 179, provides that any tax due from a private company, in respect of any income of any previous year or from
any other company in respect of any income of any previous year during which such other company was a private company cannot be
recovered then, every person who was a director of the private company at any time during the relevant previous year shall be jointly
and severally liable for the payment of such tax.

Securities Exchange Board of India Act,

1992
As per Section 15HB of this Act, whoever fails to comply with any provision of this Act, the rules or the regulations made or directions
issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less
than INR 1 Lakhs but which may extend to INR 1 Crore.

Payment of Gratuity Act, 1972

As per the Act, whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other
person to avoid such payment, knowingly makes or causes to be made any false statement or false representation shall be
punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees
or with both.

21
 Consequences of Misconduct (Other Laws)
Foreign Exchange Management Act, 1999
As per Section 13 of this Act, If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification,
direction or order issued in exercise of the powers under this Act, he shall, upon adjudication, be liable to a penalty up to thrice the sum
involved in such contravention where such amount is quantifiable, or up to Rs. 2 Lakhs where the amount is not quantifiable, and where
such contravention is a continuing one, further penalty which may extend to Rs. 5,000 each day until the contravention continues.

Goods and Services Tax Act, 2017

Offences under GST by Companies, LLPs, HUFs and others For any offence committed by a company, both director, KMP as well as
the company will be held liable. As per Section Act, shall be liable to a penalty which may extend to twenty-five thousand
rupees.125 of the CGST Act, 2017, any person, who contravenes any of the provisions of this Act or any rules made thereunder for
which no penalty is separately provided for under this act.
Employees Provident Funds And
Miscellaneous Provisions Act, 1961
As per Section 14 of this Act, A scheme framed under this Act may provide that any person who contravenes or makes default in
complying with any of the provisions thereof, shall be punishable with imprisonment for a term which may extend to six months, or
with fine which may extend to one thousand rupees, or with both.

22
 EMPLOYEES’ STATE INSURANCE ACT, 1948
Section 85 Clause,
Section 85 Clause (a) If any person fails to pay any
contribution which under this Act. He is liable with (b) deducts or attempts to deduct from the wages of an
employee the whole or any part of the employer’s con-
tribution, or
(c) in contravention of section 72 reduces the wages or any
privileges or benefits admissible to an employee, or
Penalty: Imprisonment for a term Penalty: Imprisonment for a term (d) in contravention of section 73 or any regulation dis-
which may extend to 3 years but, which may extend to 3 years but, misses, discharges, reduces or otherwise punishes an
which shall not be less than 1 year, which shall not be less than 6 employee, or
in case of failure to pay the months, in any other case and (e) fails or refuses to submit any return required by the
employee’s contribution which has shall also be liable to fine of Rs. regulations or makes a false return, or
been deducted by him from the 5,000. (f) obstructs any Inspector or other official of the
employee’s wages and shall also
corporation in the discharge of his duties, or
be liable to fine of Rs. 10,000.
(g) is guilty of any contravention of or non-compliance with
any of the requirements of this Act or the rules.

Penalty: imprisonment for a term which may extend to 1 year

or with fine which may extend to Rs. 4,000, or with both.

23
"In today's interconnected world, directors must be proactive in
addressing emerging risks and opportunities, staying ahead of
the curve to safeguard the company's competitive position.“
Ginni Rometty

24
 Risk Mitigation measures to Protect Director from Liability
➢ At the time of appointment

Director and Officer (D&O) Insurance: Due Diligence and Disclosure: Understanding Responsibilities:
This insurance policy offers financial Before accepting the Both the company and the
protection to directors and officers in appointment, a director should director should have a clear
case of lawsuits arising from their conduct thorough due diligence understanding of the director's
decisions made while serving the on the company's financial duties and responsibilities
company, as long as the actions weren't health, operations, and potential outlined in the company's
intentional or fraudulent. legal issues. governing documents, such as the
Articles of Association and By-
Laws.

Relying on Expert Advice: Documenting Decisions: Conflict of Interest Policies:

Directors are encouraged to seek The company should maintain Ensure robust conflict of interest
professional advice from lawyers, accurate and detailed minutes of policies are in place.
accountants, and other experts when board meetings, discussions, Transparent management of
faced with complex situations or decisions made. This documentation personal interests conflicting
unfamiliar legal matters. can help demonstrate that directors with company's interests.
acted diligently and in accordance
with their fiduciary duties.

Source: https://www.nacdonline.org/, https://www.sec.gov/

25
 Risk Mitigation measures to Protect Director from Liability
➢ During Directorship
Fulfilling Fiduciary Duties: Maintaining Ethical Conduct: Continuing Education:
Duty of Care: Directors must exercise Directors should demonstrate Directors should stay updated
reasonable care and diligence in their high ethical standards in their on relevant laws, regulations,
decision-making processes. This decisions and actions. This and industry best practices by
involves staying informed about the involves avoiding any activities attending continuing
company's business, attending that could damage the company's education courses and
meetings, and actively participating in reputation or public trust. seminars.
discussions.

Maintaining Communication and

Whistleblowing:
Seeking Independent Legal Advice: Documentation:
Directors who become aware of any
When faced with complex situations or Directors should maintain open
illegal or unethical activities within the
unfamiliar legal matters, directors and transparent communication
company have a responsibility to report
should seek independent legal advice with other board members,
them to the appropriate authorities.
from qualified professionals. This helps management, and external
Internal reporting mechanisms should
them make informed decisions and stakeholders. This includes
be readily available and encourage good
avoid potential legal pitfalls. promptly disclosing any potential
faith reporting.
conflicts of interest

Source: https://www.nacdonline.org/, https://www.sec.gov/, https://www.gao.gov/

26
 Risk Mitigation measures to Protect Director from Liability
➢ During Directorship

Review of statutory records and Verify reliability of source Check an impact of adverse
documents that provide details of confirmation being remarks from statutory
of decision making such as presented at the board auditors, Tax auditors,
financial and Non-financials, meeting Internal Auditors, Secretarial
MIS, minutes of meetings and Auditors
resolutions

Check on Impact of adverse Check on Customer complains,

regulatory and tax authority vendor complains, whistle blower
notices, pending demands and complains that are potentially
assessment status capable of giving rise to reputational
risk and liabilities

27
 Risk Mitigation measures to Protect Director from Liability
➢ At the time of liquidation
Act Responsibly and Ethically: Cease Trading at the Right Time: Cooperate with the Liquidator:
Throughout the company's decline, Once it becomes clear that the Directors are expected to cooperate
directors should act in good faith and company is insolvent and unable to fully with the appointed liquidator by
make decisions that prioritize the best pay its debts, directors have a providing all necessary information
interests of all stakeholders, including responsibility to cease trading to and documentation regarding the
creditors. Avoid preferential treatment prevent further losses and potential company's financial affairs and
ensure all actions comply with legal claims of wrongful trading. This transactions. This helps ensure a
and ethical standards. involves seeking professional advice. smooth and transparent liquidation
process.

Maintain Accurate Records: Seek Professional Advice: Consider Indemnification:

It's crucial for directors to maintain In navigating the complexities of Some companies offer indemnification
accurate and complete financial liquidation, directors should seek to directors for legal costs and
records throughout the company's guidance from qualified legal and expenses incurred while defending
operation. This documentation financial professionals. This expert themselves against claims arising from
serves as vital evidence to advice can help them understand their their official duties. While not a
demonstrate responsible decision- legal obligations, make informed guarantee, it can provide some
making and compliance with legal decisions, and potentially minimize financial protection during liquidation.
requirements during liquidation. personal liability risks.
Source: https://www.nacdonline.org/, https://www.sec.gov/,
https://asic.gov.au/
28
"Your attitude is more important than your capabilities.
Similarly, your decision is more important than your
capabilities.“
Jack Ma

29
 PRAKASH B KAMAT Vs PR. COMMISSIONER OF INCOME TAX 12 June 2023

Domestic
Facts of The court examined the potential liability of directors for a company's tax
Case Law the case: debts under Section 179(1) of the Income Tax Act, 1961, focusing on Mr.
Sureshkumar's role. Despite his significant contributions to KAPL's
development, disagreements led to his removal as director in 2009, after
Case Summary which he had no involvement in the company. The revenue, represented by
Mr. Suresh Kumar, argued Mr. Sureshkumar's continued liability as a director
during the relevant years for KAPL's tax payments. However, the court
Kaizen Automation Pvt. Ltd. v. absolved him of responsibility, considering his lack of control post-removal
Sureshkumar: Court scrutinized if
directors can be liable for
and the absence of evidence proving negligence or breach of duty. This case
company tax debts under Income delved into the intricate issue of directorial accountability for a company's
Tax Act, 1961, Section 179(1). tax obligations.
Disputes arose after Mr.
Sureshkumar's forced removal; The Bombay High court examined Mr. Sureshkumar's liability for KAPL's tax
court absolved him due to lack of Court’s
debts under Section 179(1) of the Income Tax Act, 1961. Despite being a
involvement post-removal. Judgement: former director, his forced removal rendered him powerless over the
company's affairs, as he and his wife were denied access to vital
information. The court considered the joint venture agreement, which
granted significant control to another party. Consequently, the court
absolved Mr. Sureshkumar of liability, ruling that his lack of control after
removal exempted him from responsibility for KAPL's tax dues.
30
 Suborno Bose v. Enforcement Directorate 5th March 2020

Domestic
Facts of The Supreme Court addressed a case under the Foreign Exchange
Case Law the case: Management Act, 1999, where Suborno Bose, the managing director of a
company, faced penalties for the company's failure to file a Bill of Entry for
imported materials. Bose argued that as he became managing director after
Case Summary the importation, he shouldn't be held liable. However, the court held that
under Section 10(6) of FEMA, penalties are civil obligations and the breach
persists until rectified. Despite being aware of the default, Bose failed to
The Supreme Court held Suborno take prompt corrective action, leading to individual liability under FEMA
Bose, the managing director was regulations.
held accountable for his company's
failure to file a Bill of Entry for
imported goods, despite him not Court’s The Supreme Court upheld the decision that the appellant, who later
being in charge at the time. The
decision underscores that Judgement: became the managing director of the company, was rightfully held
responsible for the company's violation. This violation led to penalties
individuals in authority can be held
under Section 10(6), along with Sections 46 and 47 of the FEMA Act, and
responsible for organizational
violations preceding their tenure. paragraphs A10 and A11 of the Foreign Exchange Manual 2003-04. Both
the first appellate authority and the High Court agreed with this ruling. This
case sets an important precedent, indicating that individuals in positions of
authority can be held accountable for violations committed by the
organization before their tenure.

31
 THE REGISTRAR OF COMPANIES, WEST BENGAL V. KARAN KISHORE SAMTANI 24 June 2020
Domestic Facts of The respondent held directorship in more than 20 companies until March

Case Law the case:

31, 2015. Subsequently, on January 27, 2016, the Registrar of Companies,
West Bengal issued a show cause notice citing the breach. The respondent
admitted guilt and requested compounding under Section 441(1) of the
Companies Act, 2013. The Registrar forwarded the representation to the
Case Summary Tribunal. Following hearings, the NCLT Kolkata Bench granted
compounding with a fee of Rs. 50,000. The Registrar appealed, contending
The respondent, a director of over that the prescribed minimum fine exceeded this amount. The core issue
20 companies, admitted guilt revolved around whether the Tribunal had the authority to impose a
when served a notice by the compounding fee below the statutory minimum.
Registrar of Companies for this
violation. The NCLT Kolkata
Bench allowed compounding with Supreme Court, Judgement The Respondent has contravened the
a fee of Rs. 50,000. However, the Court’s
provisions of 165(1) of the Companies Act, 2013 which is punishable under
NCLAT held that this fee was Judgement: Section 165 of the Companies Act, 2013. The NCLAT held that the NCLT,
insufficient, imposing the
minimum fine of Rs. 13,60,000 for Kolkata Bench has failed to notice the minimum fine prescribed under
the contravention. Section 165 of the Companies Act, 2013 which was applicable at relevant
time. Accordingly, NCLAT imposed minimum fine at the rate of 5000 rupees
for every day for the period 01.04.2015 to 21.02.2016 i.e. 272 days, which
came to 13,60,000.

32
 ALIBABA NABIBASHA vs SMALL FARMERS AGRI-BUSINESS CONSORTIUM & ORS
23 September , 2020
Domestic Facts of Mr. Alibaba (Petitioner) was a director of a company. The company has issued

Case Law the case:

certain cheques to the Respondents, and the cheques have been dishonored
and hence the respondent company has filed case against Mr. Alibaba.
Mr. Alibaba has filed this petition against the cases filed contended that he
was not the Director when the underlying contract was executed, nor when
Case Summary the cheques were issued and when they were presented and that he has
resigned 8 years prior to the issuance of cheques, and the resignation has
been duly filed with ROC as well.
Mr. Alibaba, a former director,
faced cases over dishonored According to the Respondent company, the Petitioner was involved in the
cheques issued by the company. discussion before an agreement was executed. Further, the Petitioner had
Despite his involvement in pre- participated in meetings and assisted the officials of the Respondent who had
agreement discussions, his visited for verification of its financial and physical status.
resignation, duly filed with the
ROC, absolved him of
responsibility. The Delhi High Court’s The Delhi High Court held that if a director has resigned from a company
Court quashed the cases under Judgement: and the resignation is duly filed with the Registrar of Companies, they
Section 138 of the Negotiable cannot be considered in charge of the company's day-to-day affairs. Thus,
Instruments Act. the court quashed cases filed under Section 138 of the Negotiable
Instruments Act against the petitioner, who resigned before the issuance
and dishonor of the cheques.

33
 Rajesh Viren Shah Vs. Redington (India) Ltd 14 February 2024

Domestic Facts of The case involves directors who resigned, and their resignations were duly

Case Law the case:

recorded. They were accused under Section 138 of the Negotiable
Instruments Act for dishonored cheques issued by the company post-
resignation. The court emphasized the importance of clear averments in
complaints to establish liability and stated that directors could be held
Case Summary liable if their involvement or knowledge was proven. The court also
highlighted the necessity of unimpeachable evidence before initiating
The case involves directors resigned criminal proceedings and emphasized the significance of containing
and had it officially recorded, they necessary averments in complaints to subject a person to criminal process.
were accused under Section 138 of
the Negotiable Instruments Act for
dishonored cheques. The court said Court’s In this case, the Supreme court finds that the complainant failed to provide
directors can be held accountable if evidence of the directors' complicity in the alleged crime. Moreover, the
their involvement is proven under Judgement: resignations occurred before the issuance of the cheques in question,
Section 141. It quashed the cases absolving the directors of responsibility for the company's conduct at the
against the petitioner, who resigned
relevant time.
before the cheques were issued,
under Section 138.
As a result, the court quashes all criminal proceedings against the directors,
setting aside the judgments of the High Court. The directors are discharged
from prosecution, and the appeals are allowed accordingly.

34
 Mr. Amalendu Mukherjee vs SEBI 19 January, 2021

Domestic Facts of The Amalendu Mukhergee, traded Ricoh India Limited ("Ricoh") stocks
through Fourth Dimension Solutions Limited's ("FDSL") account while having
Case Law the case: access to undisclosed price-sensitive information (UPSI) between August 14,
2014, and November 17, 2015. During this time, Amalendu Mukhergee made
a profit of Rs.1,13,56,118/- and avoided a loss of Rs.1,16,77,892/- through
Case Summary FDSL's account. Amalendu Mukhergee is the Managing Director and Promoter
of FDSL, holding 73.23% shareholding and controlling its finances and
operations. The Noticee is the Managing Director in FDSL and have control
SEBI directed Amalendu
over its financials and operations. In involvement in insider trading and
Mukherjee, Managing Director of
Fourth Dimension Solutions manipulation of Ricoh's accounts in collaboration with FDSL and its
Limited (FDSL), to disgorge over Managing Director. The corporate veil of FDSL needs to be lifted in this case
INR 2,30,34,010/- for insider for the protection of investors' interests in Ricoh. Consequently, Amalendu
trading in Ricoh India Ltd.'s scrip. Mukhergee is personally responsible for the insider trading and its
He must pay this amount with consequences, resulting in a liability of INR 2,30,34,010/- along with
12% interest within 45 days and is applicable interest.
barred from accessing securities Court’s SEBI directed Fourth Dimension Solutions Limited (FDSL) Managing Director
markets for 7 years.
Judgement: Amalendu Mukherjee to disgorge an amount worth over INR 2,30,34,010/-
for insider trading in the scrip of Ricoh India Ltd. The amount has to be paid
along with 12 per cent interest within 45 days. In addition, Amalendu
Mukherjee has been restrained from accessing securities markets for a period
of 7 years.
35
"The role of a director is not just to oversee operations, but
to inspire and empower the entire organization to achieve
its highest potential.“
Howard Schultz

36
 Gilford Motor Co Ltd v Horne April 28, 1933 (UK)
INTERNATIONAL
CASE LAW Facts of Mr. Horne, the managing director of Gilford Motor. After resigning as
managing director of Gilford Motor Company, Mr. Horne initiated the
the case: establishment of a competing business, where his wife and a business
associate held ownership. Despite contractual restrictions solely applying to
Mr. Horne, Gilford Motor sought to hold both him and the new company
Case Summary accountable for breaching the non-compete agreement. The argument
centered on piercing the corporate veil to reveal Mr. Horne's involvement in
In Gilford Motor Co. vs. Horne, Horne the new venture. Ultimately, the court found both Mr. Horne and the new
violated a non-compete clause by company liable, issuing injunctive relief against them to prevent further
forming a new company to solicit solicitation of Gilford Motor's customers.
customers. Despite the new company
being separate, the court held both
Horne and the new company liable, Court’s In this particular case, he High Court of Justice in the United Kingdom found
considering it a sham to evade the that the company in question had been established with the sole or primary
Judgement: intention of evading the non-compete clause. It was willing to consider
agreement. Injunctive relief was
granted against both, stopping both Mr. Horne and the company to be legally obligated to comply with it. It
customer solicitation. was decided that the company that Horne started was nothing more than a
mere cloak or sham in order to provide him with the opportunity to violate
the terms of his agreement prohibiting solicitation. The Court granted
injunctive relief both against Mr. Horne and the new company. As a result,
the company was prohibited from attempting to take customers away from
Gilford Motor Company. 37
 Palmer Birch v Lloyd 19 May 2014 (UK)
INTERNATIONAL
CASE LAW
In the case involving Palmer Birch v Lloyd, a construction partnership,
Facts of Palmer Birch, was hired by a limited company to renovate a manor home.
the case: The limited company was run by two brothers, one as a director and the
other as a shadow director who made key decisions.
The shadow director stopped funding the limited company, causing it to
Case Summary be unable to pay Palmer Birch for completed work, leading to a significant
debt. Despite receiving funds later, the shadow director diverted them to
Shadow director diverted funds, another company instead of paying Palmer Birch.
causing the company to default on Even though the original limited company was liquidated, Palmer Birch
payments to a construction sued both the director and shadow director for inducing breach of
partnership. The court held the contract and other economic torts, alleging they intentionally caused
shadow director responsible for
harm.
breaching the contract and abusing
The High Court found Mr. Lloyd, acting as a shadow director, not
the company's identity. This Court’s obligated to fund the company personally. However, diverting funds
emphasizes the importance of
personal guarantees from directors Judgement: intended for contractors to another entity was deemed unfair. His decision
and accurately identifying decision- to liquidate the company while diverting funds breached the contract and
makers. abused the company's identity. Mr. Lloyd's brother, the named director,
wasn't held liable. Both brother were found guilty of causing losses to
contractors through unlawful conspiracy. This underscores the need for
director guarantees and accurately identifying decision-makers in a
company.
38
 Smith v. Van Gorkom January 29, 1985 (US)
INTERNATIONAL
Facts of The case involved a proposed merger where, a price of $55 per share was
CASE LAW the case: set without consulting outside financial experts. He only talked to the
company's CFO and didn't calculate the total value of the company. The
board approved the sale because TransUnion was facing financial issues.
However, critical information, like the flawed pricing method used by Van
Case Summary Gorkom, wasn't disclosed during the board meeting. The court criticized
this decision, stating that there was no evidence to support the $55 per
share price as the true value of the company.
In the case of Van Gorkom v.
TransUnion, directors approved a The corporate law in the United States found the directors negligent for
merger without due diligence,
Court’s
hastily approving the merger without proper inquiry or expert advice,
breaching their duty of care. This led Judgement: breaching their duty of care to shareholders. The ruling clarified that
to changes in corporate governance
laws. The defendants settled, paying directors must disclose all relevant facts to shareholders when voting on a
$23.5 million in damages. Jay transaction. This case led to the adoption of Delaware General
Pritzker contributed to the Corporation Law §102(b)(7), allowing companies to shield directors from
settlement. personal liability for breaches of duty of care, with certain exceptions.
Despite these legal protections, the case remains a cautionary tale,
emphasizing the importance of directors' due diligence before making
decisions. The defendants settled, with directors agreeing to pay $23.5
million in damages, partly covered by insurance. Jay Pritzker, though not a
defendant, contributed to the settlement as he disagreed with the court's
decision. 39
 Daiwa Bank’s Scam 26 September 1995 (US)
INTERNATIONAL
Facts of Daiwa Bank (Daiwa), Japan's 12th largest commercial bank, announced on
CASE LAW the case:
September 26, 1995 that its New York branch had lost more than $1
billion (bn) over a 11-year period. These losses were from the illegal
funding of U.S. Treasury bonds, forgery and fraud committed by Toshihide
Iguchi (Iguchi), the Executive Vice-President of Daiwa's New York branch.
Case Summary The New York branch was managing the custody of the US treasury bonds
that it had bought on its own account, and those that it had bought on
In 1995, Daiwa Bank's New York behalf of its customers, via a sub-custody account held at the Bankers
branch lost over $1 billion due to Trust New York Corporation. The scam was exposed soon after another
fraud by its Executive Vice- major banking scam4 involving Barings Bank was exposed on February 26,
President, Toshihide Iguchi. The 1995. These scams raised serious doubts about the risk management
scandal raised concerns about policies followed by the banks.
banking risk management. the
directors default was evident in their
failure to detect and prevent the Court’s In September 2000, a Japanese court handed down a decision in this
unauthorized trading activities Judgement: shareholders' representative action that ordered the defendants, twelve
Japanese court ordered 12 Daiwa directors of Daiwa Bank, to pay bank damages totaling $775 million
Bank directors to pay $775 million (approximately 82.9 billion yen). These damages ranged from $530
in damages. million (approximately 56.7 billion yen) to $70 million (approximately 7.5
billion yen) per person, and shocked the international society because of
the costly size of the penalties.

40
"The price of inaction is far greater than the cost of making
a mistake.“
Meg Whitman

41
 "Directors must exercise
"Directors owe fiduciary duties to reasonable care, skill, and "Directors may be personally liable
act in good faith and in the best diligence in carrying out their for breaches of their duties,
interests of the company." duties." including negligence, wrongful
trading, or fraud."

"Directors can be held liable for

"Directors have a duty to avoid mismanagement or misconduct
"Directors can be disqualified from conflicts of interest and to resulting in losses to creditors or
serving as directors for up to 15 declare any conflicts that arise." shareholders."
years for serious breaches of their
duties."

"Directors must ensure the

company complies with all
relevant laws and regulations."
"Directors may face civil lawsuits
or regulatory enforcement
actions for breaches of their
duties." "Directors have a duty to
promote the success of the "Directors may be personally liable for
company for the benefit of its unpaid taxes or employee-related
members as a whole." liabilities if the company becomes
insolvent."

42
Content Contributors & Disclaimer
Knowledge Executive Knowledge Executive

This overview of Director’s Liabilities under various laws

is provided to you based on your association with JHS. It
SHOAIB QURESHI SAHIL HALAI is not advice, but a well-researched summary from
publicly available sources. Individual circumstances may
Overall Co-ordinator & Reviewer for this
Strategic Guide vary, and specific legal advice is recommended for a
Activity
tailored remedy. The synopsis is presented in good faith
to highlight the significance of Liabilities of Directors for
informational purposes.

HUZEIFA UNWALA ZENAB TOPIWALA

This Publication is solely for education and awareness purposes.

43
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