Liabilities of Directors and KMPs Under Company Law

liabilities of directors and kmps under company law

Liabilities of directors and KMPs under Company Law

Liabilities of directors and kmps under company law- A company or corporation is an artificial entity which exists only according to law. In order to carry out operations a company has no mind or nobody of its own. All the business operations of a company are carried on by its agents called the board of directors and key managerial personnel, including Whole Time Director, Company Secretary, Chief Financial Officer, Managing Director, Chief Executive Officer.

DIRECTORS

The board of directors carries out the management of the company and it is their duty to act in good faith for the interest of the company and its shareholders. Directors are considered to be the mind of the company. According to Section 252 of the Act every public company shall have 3 directors and every private company shall have at least 2 directors. Section 253 of the Companies Act deals with the appointment of directors. Directors are termed as trustees or sometimes managing partners of the company.

LIABILITIES OF DIRECTORS

Liabilities of directors can be considered as:-

  1. Liability to the company
  2. Liability to third party
  3. Liability for breach of statutory duties
  4. Liability for the act of co-director
  5. Criminal liability

Liability of the director to the company may be from :-

  • BREACH OF FIDUCIARY DUTY -Whenever a director act intentionally in the harm of the interest of company and dishonestly, he will be held liable under which of fiduciary duty.
  • ULTRA WIRES ACT -Whenever a director does not act within the prescribed limits of the memorandum or articles of association of the companies are he is said to be liable under ultra vires act.
  • NEGLIGENCE– Whenever a director road does not act with due skill and care, intelligence is said to be liable under negligence.
  • MALAFIDE ACT- In a company, there are some directors who are the trustees of the assets of the company but if they exercise their powers dishonestly and does not act in good faith they will be considered to be liable under malafide acts.
  • Liability to third party-

If a director acts within the limits of the powers vested to them they will not be personally liable to the third parties and if they are made a contract on behalf of the company they will also not liable.

  • Liabilities for breach of statutory duties-

If there has been any statutory duty which is being imposed to the director and the director breaches those duties he will be held liable and consequently will be provided penal punishment.

  • Criminal liability –

The liability basically arises when a person hired by a company has done something which is punishable under Indian penal code. Criminal liability has to main elements -Actus Reus and MensRea. For any criminal offenses of the company it shall be held responsible. But company being an artificial person it cannot be said to have committed the offense itself. For the offences committed by the company, which specifies of punishment of imprisonment, the person behind the business that is the director shall be said to be responsible for the same offences provided he is proved to be somehow connected to the offense. Therefore this liability is the director in two ways:-

  • when the offense involves mens rea.
  • When there is the doctrine of vicarious liability present in the statute.

The directors of the company may also be held liable for criminal offences or civil offences under the Companies Act. Any such offences done by a company in which the director was somehow involved will make the director liable for such criminal offences under the Companies Act.

Apart from the above liabilities, there are various other duties or liabilities for which the directors of the company are held responsible.

KEY MANAGERIAL PERSONNEL

KMPs are the person which include chief executive officer, chief financial officer, company secretary, whole-time director. Section 203 of the Companies Act 2013 it is mandatory for every listed company and every public company having a paid-up share capital of rupees 10 crores or more to have these KMPs.

LIABILITIES OF KMPS

The liability of KMP is of any company is same as that of a director because both of them are the possible that describe the running of company and the for any offense that involves mens rea and actusreus by the company both the KMPs and the director will be held equally responsible if found that they have a hand in that offense.

Therefore it must be taken into consideration that the company are governed by Companies Act 2013 and according to any rules that have been amended, modified or substituted from time to time, key managerial personnel are responsible for and are to be held liable for any offense or wrongdoing done on the part of the company.

Conclusion

Thus it can be said that every director or officer in default or KMP who has any staying in the big decision of the company and who has the responsibility to run daily business affairs of the company if by any chance the fail to abide by the provisions of the Companies Act 2013 they have to bear the liabilities and penalties on behalf of the company in civil and criminal form. Any offence which is criminal in nature having mens rea involved in those cases, an officer in default or director or KMPs are held responsible because company being an artificial person cannot be said to have committed an offense which require mens rea.

Click here for- Considerations surrounding joint venture agreements in India

Comment

  • Article was really helpful. Came to know some new things

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