Violation of breach of trust in order to generate secret profit from business. 1. Liability of the managing director when following shareholders’ instructions. The Income Tax Act, 1961 (“IT Act“), which deals with inter alia the income tax payable by any person in India defines ‘person’ as including a company. General Background on Position of Directors. Apart from playing a key role in the overall growth and administration of the company, the Companies Act 2013 contains elaborate provisions relating to their appointment, remuneration, duties and liabilities. Managing directors are also liable to the company for loss incurred for their late filing of the request to open insolvency proceedings. 20457 Hamburg. They are not absolved from the duty of reasonable supervision, nor are they permitted to be shielded from liability because of lack of knowledge or wrongdoing, if that ignorance is the result of gross inattention. While in some instances, the statute itself may be fairly clear as to what would form the basis of liability of an officer including a managing director of a company, in other cases the statue may be wanting clarity. (vii) In discharging their duties, directors must act honestly and must exercise such reasonable degree of skill and diligence as would amount to reasonable care which an ordinary man might be expected to take (Govind Narayan Karkade vs. Rangnath Gopal Rajopadhye, AIR 1930 Bom 572). This liability is imposed on anyone who has acted as the managing director or who has acted like the managing director for the future GmbH. Section 12 of the PoC Act provides for punishment for abetment of offences defined in Sections 7 or 11 and states that: “Whoever abets any offence punishable under Section 7 or Section 11 whether or not that offence is committed in consequence of that abetment, shall be punishable with imprisonment for a term which shall be not less than 6 months but which may extend to 5 years and shall also be liable to fine.”. If managing directors conduct themselves in an unlawful manner–for example they conceal something that they are actually obligated to disclose or they deceive their contracting partner–then they will be held personally liable if they took unfair advantage of the contracting partner’s trust or had a personal interest in concluding the contract. Where there is a managing or whole-time director or manager, it would be an abuse of the process of the court if proceedings are launched against ordinary directors without examining their role in the default (Ravindra Narayan v. ROC, Jaipur, (1994) 81 Com Cases 925 (Raj); G. Vijayalakshmi v. SEBI, (2000) 100 Com Cases 726 (AP)). 1. 1. I will be discussing this issue in the context of criminal liability in the later part of this post. Change ), You are commenting using your Google account. Duty to refrain from competing with the company while holding the office of managing director. The method of appointment and powers of alternate directors are usually set out in the constitution of the company. There are also other penal provisions in the Companies Act where the expression ‘officer who is in default’ does not appear. The law imposes a wide range of duties and liabilities on directors and officers because the scope of authority of the corporation's management is very broad. According to Section 166 of the Act, the following are the duties of director: The director of the company shall abide by the articles of the company; The director of the company shall always work in the best interest of the members, shareholders, … According to this principle, a (shareholder-) managing director who neglects another company in which he or she has a controlling interest must compensate for the loss occasioned by such course of action. The Court observed in this case that as a director of the company, he had no authority to use the company’s money to pay bribes and the fact that the company may have benefited from the payment of the bribes did not provide the director with any defence (Hannibal (E) & Co. vs. In the United Kingdom, for example, a company director has recently been sentenced to two years in prison, after being found guilty of price fixing and cartel offences under the Enterprise Act 2002. Although in principle managing directors are not themselves liable to these third parties, there are exceptions to this rule. Liability towards third parties for breaches of duties under insolvency law, 5. ( Log Out / An example of this is when they omit, during the three-week time period, to carry out potentially beneficial restructuring measures. For most of the aforesaid provisions to get triggered, there needs to be a positive action by the officer that is in contravention of the statutory provision. For ease of reference, the provision embodied in Section 5 of the Act is extracted here: Section 5. Jhaver v. State of Punjab, (1996) 87 Com Cases 236 (P&H)). The object of the proviso to Section 201(1) of the Act is to enable a company to indemnify any of its officer / auditor against liability incurred in defense by any of them only in the event of their having been found to be innocent or to have acted bona fide i.e. This includes the mutual and interdepartmental supervision of the managing directors among each other. It is often found in agreements to mutually terminate an employment contract. It has been held that the default of the managing director who is the ‘directing mind and will’ of his company, could be attributed to the company (Lennard’s Carrying Company vs. Asiatic Petroleum Ltd. 1915 AC 705 (HL)). (b) Ultra Vires acts Further, directors, as fiduciaries, are required not to put themselves in a position where there is conflict (actual or potential) between their personal interests and their duties to the company. If the managing director provides false information about the company when registering it, then he or she may be liable (jointly and severally with the shareholders) to the GmbH for what is referred to in German law as liability during the incorporating stage. Duty to remit taxes and social security contributions. mental element necessary for a particular crime whether by way of a guilty mind; a criminal intent; a guilty or wrongful purpose) will be relevant for such offences and it would have to be established that the offence was committed knowingly or willfully and prosecution is required to fix liability with respect to the particular officer. Managing Your Finances. 2. Adolphsplatz 1 This prohibits them from competing with the GmbH during the term of their employment. A company is insolvent from the moment in which it is no longer able to meet payment obligations that are due. Managing directors who are simultaneously shareholders are also liable under the general principles of shareholder liability for the pre-incorporated GmbH [legal form prior to notarization of articles of association] and for the pre-GmbH [legal form between the time the articles of association have been notarized and registration of the company in the Handelsregister]. For example, under the Factories Act, 1948 (“Factories Act“), in respect of factory of a company only a director can be “occupier” (i.e. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. (a) the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act; (f) any person charged by the Board with the responsibility of complying with that provision: provided that the person so charged has given his consent in this behalf to the Board; (g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors: Provided that where the Board exercises any powers under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.”. Shareholders cannot compel the directors to pay dividend. As regards the liability of directors, the Supreme Court of India has, while observing that it is a question of fact to be determined on the evidence in each case, said that a “director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of, but also liable for fraud in the conduct of the business of the company even though no specific act of dishonesty is proved against him personally. Article 162 of the CCL is the most common provision referenced when mentioning directors’ liabilities. The advance was granted on the strength of a specific undertaking or promise made by the respondents, who were the managing director and a director, to liquidate within one month the entire outstanding in the account including costs and expenses. 3. The said Section reads as follows: Section 201 (1) Save as provided in this section, any provision whether contained in the articles of the company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void: Provided that a company may, in pursuance of any such provision as aforesaid, indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or discharged or in connection with any application under Section 633 in which relief is granted to him by the court.”. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm. Before I make specific observations in the context of the Prevention of Corruption Act, 1988 (“PoC Act“) I’d like to note some of the statutory provisions of the PoC Act. 6. The Supreme Court relied upon the Lennard’s Carrying Company’s case as well as Tesco Supermarkets vs. Nattras (1972) AC 153 (HL), where the House of Lords held that “… the question: what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise or due diligence to avoid the commission of a criminal offence, is to be found by identifying those natural persons who by the Memorandum and Articles of Association or as a result of action taken by the directors, or by the company in general meeting pursuant to the Articles, are entrusted with the exercise of the powers of the company. 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