Everything You Need to Know About a Company Director’s Liability in India
Confusing the company with the company’s director is a common mistake. A director is indeed responsible for the company, but the company and the director of the company are judicially two different entities. So, there are certain clauses related to a director’s liability that require understanding before a company hires the director who can be held completely liable for the company’s operation and growth. Notably, in the case of a partnership or shareholding business, the fiduciary nature of the relation between the company and the director gets even more pronounced.
Different Director’s Liability You Should Know About
To start the discussion, the director’s liability towards the company is of broad categories: – personal liability and criminal liability. With proper guidance from professionals, you can register your business safely and realize the true liabilities of a director. Let us have a look at the intricate sections of each of these:
1. Personal Liability
- Discrepancies regarding the conduction of business: To make any decision or act in a way that can endanger the company’s goodwill is a complete personal liability of the director. It is the director’s responsibility to not carry out any actions against company standards and interests.
- Debts or liabilities of the Company: The debts in the official name of the company are not the director’s liability. The director will be responsible only in cases where they have tampered with the debt money.
- Acquiring or liquefying shares of the company: Any liquidator can claim the money for shares from the director of the company indulges in the state of liquidation. This situation usually arises when the director fails to acquire the qualification shares.
- Taxation Process of the Company: The director of the company alone or all the directors in case of a partnership business are responsible for the due taxes of the previous years. This law is strictly enforced on all private companies through the Income Tax Act.
- Being responsible for fraudulent activities: A director cannot claim anything false or fake in the company prospectus. The director will be liable for duping the public.
- Monetary Transactions & Money Recovery: The director is liable for all the unpaid share money. In the case of business groups with multiple directors, all directors will be responsible for the repayment of share application money (usual or surplus). The whole activity has a time constraint.
2. Criminal Liability
- Abiding by Company’s Bylaws: Every company should strictly abide by the norms for the welfare and protection of labour rights. In this case, only the directors who are entirely in charge of the company, and policy implementation are responsible. However, those directors who are not in charge of the labour policies won’t be accountable for such actions.
- Signing forgery Cheques: Signing any false cheque is the most significant discrepancy any director can commit. If the judiciary can spot any dishonoured cheques signed by the director, there are entire premises to hold the director liable and guilty for the same. It is a grave criminal offence and can lead to severe consequences. Not only the director will have legal problems, but forgery cheques also become a dark stain for the goodwill and credibility of the company.
- Liability for losses of the company: Incorporating the corporate veil is a typical legal concept that assigns the company and the directorate two individual personalities. Since they become separate entities, the directors aren’t personally liable for the debts of the company. In case the company engages in fraudulent activities, this veil can be lifted. And thus, the real guilty people can be unveiled or exposed in front of people according to the state’s laws. This is an uncommon phenomenon, yet there are provisions that the judiciary can put into effect at any time.
- Labor Law Offense: The company’s directors are liable for any breach in the labour law as set by the state government. Since the company’s operation and management are directly under the control of the directors, they have complete power and control of the labour laws.
There are many tricky legal edges when it comes to the director’s liability in a company. To appreciate and realize the importance of each of them, you can opt for professional assistance for business registration. At 3E Accounting, we will help you overcome any barrier in appointing the company’s director. We have a team of professionals who are more than ready to help you in setting up your company, appointing a team, appointing directors, and taking care of financial and taxation services.