Civil Liability of Directors under Companies Act, 2013

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The Directors can be held liable towards the company for ultra-vires acts, that is to say acts which escape the powers of the company as defined in the memo. For example, improper use of company funds can make a director liable for replacing those funds. Therefore, directors of a company are held personally responsible for replacing company funds in the following cases: –

  • buyback of company shares
  • pay dividends on capital.
  • pay a bonus to promoters
  • buying the property when the business did not have the power to buy.
  • return of capital without capital reduction.

If the directors act maliciously by abusing the powers conferred on them, they incur civil liability for breach of warranty like any other agent. Likewise, he will also be liable for negligence in the performance of his duties resulting in harm to the company. However, he will not be considered negligent if he does not inquire about matters handled by the managing director or the co-directors of other trusted executives of the company.

In D. Ovey v. Cory, the board declared the dividend on the basis of the profit and loss account presented to it by the managing director , but it was later found that it was in fact the paid out of capital of the company. The House of Lords held that the directors were not liable for the negligence on the basis of the profit and loss account submitted to them by the managing directer. A director also incurs civil liability to pay damages to the company for any personal gain that he might have obtained through the use of information or opportunities available to him in his capacity as a director. Liability for such cases arises from the principle of unjust enrichment, that is, the director unjustly enriches himself by abusing his fiduciary position.