The Most Significant Liabilities for a Company Director

Under the company’s act 2013, a director is a person appointed by the Board members of the company. A director is responsible for the overall growth of the company. He is liable for the recruitment of employees. In addition, a director is accountable to the shareholders and investors of companies. The liabilities of directors in companies arise due to several factors.

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Liabilities of Directors in Companies

The liabilities of directors in companies are not limited to the organisation. It extends to the shareholders, along with the third parties who might be affected due to the act of the company. 

Let us discuss the liabilities of directors in companies.

Liability towards Company

  1. Breach of Duty

    A director is expected to work in the favor of the company. The company expects him to discharge his duties for the growth of the organisation. However, he shall be held liable if he works dishonestly. 

    Every duty discharged by him must be in the interest of the organisation. Nevertheless, if his duties sabotage an interest of the company, he shall undoubtedly be held liable for the breach of duty. A director has a wide range of powers which must be wielded for the benefit of the firm.

  2. Ultra Vires Act

    A magistrate or judge or an MP (Member of Parliament) is entrusted with powers to take important decisions for the country. However, if it is inconsistent with the fundamental rights, it shall be void. In addition, the power exercised shall be termed ultra vires. 

    Similarly, a director is also expected to exercise his authority as prescribed in the companies act. If he acts outside the limit prescribed in the act, he shall be held liable and the act shall be called ultra vires.

Third-Party Liability

Let us discuss the liabilities of directors in companies towards the third-party.

Directors might be held liable for the negligence caused to a third party. However, the act may not be directly relevant to the director and a third party. Nevertheless, as a director of a company, they can be held liable. For example, if they act ultra vires, a third party may sustain loss due to the act of the director. Hence, he may sue him for the loss caused.

Criminal Liability

Let us discuss the criminal liabilities of directors in companies.

  1. Vicarious Liability

    According to vicarious liability, an employer is held liable for the act of an employee during the course of his employment. Similarly, for the act of an employee, the directors shall be held liable.

  2. Fraud

    Under section 447 of the companies act, a director, who abuses his position and commits an act with the intent of gaining an undue advantage by deceiving the firm, shall be held liable for the fraud. In addition, if he sabotages the interest of shareholders, investors, or creditors of the company, he shall be punished with imprisonment. This may extend to ten years.

Safeguard against Liabilities

A director takes major decisions for the growth of the company. However, due to the apprehension of cases or lawsuits, he may not work efficiently. In addition, he may not exercise the power he is capable of. 

Under such circumstances, the companies must provide directors and officers liabilities insurance in order to safeguard the interest of the directors. It is further necessary to indemnify them against the decision taken by them.

Conclusion

D&O insurance or directors and officers liability insurance are essential for the top-level management of an organisation. It indemnifies the company’s directors against the claim of shareholders or investors. It further appoints an attorney to represent them in court. Hence, the companies must subscribe to the directors and officers liability insurance.

Written By: PolicyBazaar - Updated: 18 April 2023

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