Director's Personal Liability - Hindrance To Business Decision?

Director’s Personal Liability – Hindrance to Business Decision?
In wake of the recent financial scams in the corporate sector, several legal proceedings have been
initiated against company directors. Hence, it becomes critical for directors to understand the duties and
subsequent liabilities of their positions in the board. Infact, this applies to independent directors as well,
in Indian corporate regulatory environment. Hence, it is essential to understand that, a person may be
appointed as a director under the Companies Act 2013, however, his / her liabilities as a director are not
just limited to the misdemeanour committed under the Companies Act. Infact, he is also liable for the
offences committed under the various other acts like the CGST 2017, Insolvency Act 1986, Labour Laws,
Income Tax act etc.
Hence, in order to have clarity over the various lialbilities that affects business decision making for the
directors, this document will primarily focus on 3 laws and hence summarize the legal liabilties that the
business director needs to be aware of before taking a decision in the best interest of the business.
1. CGST Act 2017

2. Companies Act 2013
3. Insolvency Act 1986
CGST Act 2017
Section 89 Summary: If any pending tax, interest or penalty due from a private company because of its
operations cannot be recovered then, the director of the company during the period will be liable for
the payment of the same, unless it can be proved that the non-recovery is not because of any gross
neglect, misfeasance or breach of corporate responsibilities on the director’s part in relation to the
affairs of the company.
However, if the private company is transformed into a public company and the pending tax, interest or
penalty during operation remain unrecovered before the conversion, the the director of the company
wont be responsible for the same and he has no obligation to prove his non-involvement in the matter.
However, if any personal penalty is imposed on the director in the form of loan defaults on personal
guarrantee; such liabilities won’t be waived off, onc ompany’s conversion from private to public.
Section 137 Summary: When a legal offence is being committed by a company under this act, every
person who was in charge of the situation, when the act was committed is deemed to be guilty. Infact, in
some specific situations, the company as an entity can be deemed liable for the misdemeanour and can
be proceeded against and punished legally.
However, under this subsection, if a legal offense has been commitetd by the business entity and it is
proved that the same was done with the consent of the director or, the act is attributable to any sort of
negligence or misfeasance on the part of the director, then legal action will be taken against the director
for the misdemeanour.
Companies Act 2013
The Companies Act, 2013 comprises of a set of liabilities for the key leadership positions of the
company. The Companies Act ensures that all kinds of fraudulent activities that a company may try to
execute thorugh its employees in the course of its economic life, is criminalized through a legal
structure.
Statutory Liabilities-Section 166: Statutory liabilities are the ones that can cause govt. authorities to
take legal action against the director or company. Examples of such cases can be non-filing of statutory
documents like delay in regsitering financial details of a year with ROC can impose penalty on directors
and company. Such liabilities and their scope are specifically addressed in the Companies Act 2013.
Section 166 also covers the provision of civil liability that requires a director to make payments of fine /
penalty or, even criminal liability leading to imprisonment for deliberate fraud. Section 447 of
Companies Act 2013 illustrates that fraud indicates any act or abuse of position committed with intent
of deceiving or gaining undue advantage from shareholders or creditors. Irrespective of whether the
gain was actually credited or not, the person in charge will be liable for lehgal action upto imprisonment.
Non-statutory Liabilities-Section 245: Claims for compensation can be made against director by a group
of shareholders holdng 10% share within the company. This claim can be made on behalf of all parties
affected due to fraudulent, unlawful or wrongful act commonly called as ‘Class Action Suit”.
Wrongful Trading-Section 214: This act refers to the legal offense committed by a company director, by
failing to put creditors’ interest first, despite knowing that the business is insolvent. It deals with the
misdemeanour conducted because of ignorance of due procedure and not offense committed
deliberately. Hence, legal implicatiuon of this act is not severe.
Fraudulent Trading-Section 213 : This is the more serious version of the crime demonstrated in Section
214. This deals with wilfull ignorance of creditor’s interest knowing that the company is insolvent. This
may lead to the director being perosnally liable to contribute to assets of business.
Misfeasance-Section 212: This act deals with breach of fiduciary duty. It effectively means the
unauthgoried usage of money as in the form of undue dividends or unfair remuneration to the
shareholders or directors.
Undervalue Transactions-Section 238: This act deals with the case where the director of a company sells
an asset at a value lower than market rate to a relative. This may result in harming the interest of the
creditors.
Preference Creditors-Section 239: This act refers to the act of a specific creditor getting preference over
others because of long-standing trusted relationship with the director. If such act is done by the director
despite knowing that the company is getting insolvent, then the director is personally liable for the
same.
•
• Deferred Tax Liabilities
• CGST 2017, Section 89, indicates that the director is personally liable to pay for any pending tax
or penaltly if the same cannot be recovered from the company. This can lead to a case where
director is over conservative about paying taxes and the company fails to take advantage of
adjusting cashflow through deferred tax liabilities. Specific cases may come up where penalty
due to deferred tax maybe an insignificant amount to pay for, as compared to the cashflow issue
that can be addressed by delaying the payment of taxes. In such situations, because of the
personal liability of the director, the best interest of the company may not be put at prioirty.
• CGST 2017 Section 89 can also lead to the director seeing long term loan as a personal liability.
This can reduce the risk appetite of the director and prevent potential business expansion into
newer domains. It can lead to hindrance in economic growth and failure to capitalize on the
right market opportunity.
• Section 212 of Insolvency Act 1986 can lead to conservative dividend distribution to the
stakeholders leading to undervalued stocks, in the long run.

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Director’s Personal Liability – Hindrance to Business Decision?

1. CGST Act 2017

CGST Act 2017

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