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Thursday, January 3, 2008

Discuss the liabilities of directors (a) to the company I and (b) to third parties,

Liability to the Company

The liability of a director to the company may arise from :

(i) breach of fiduciary duty,

(ii) ultra-vires acts,

(iii) negligence, and

(iv) breach of trust and misfeasance

(i) Breach of Fiduciary Duty. Where a director acts dishonestly in disregard to the interests of the company, he will be held liable for breach of fiduciary

duty. Most of the powers of directors are ‘powers in trust’ and, therefore, should be exercised in the interest of the company and not in the interest of the

directors or any section of members. Thus, where the directors, in order to forestall a takeover bid, transferred the unissued shares of the company to

trustees to be held for the benefit of the employees, and an interest free loan from the company was advanced to the trustees to enable them to pay for

the shares, it was held to be a wrongful exercise of the fiduciary powers of the directors [Hogg vs. Cramphom Ltd. (1966) 3 All ER 420].

(ii) Ultra-vires Acts. Directors are supposed to act within the parameters of the provisionf of the Companies Act, Memorandum and Articles of Association

since these lay down the limits to the activities of the company and accordingly to the powers of the Board of Directors. The directors shall be held

personally liable for acts beyond the aforesaid limits being ultra vires. Thus, where the directors pay dividends or interest out of capital, they will be liable to

indemnify the company for any loss or damage suffered due to such act.

(iii) Negligence. The directors shall be deemed to have acted negligently in discharge of their duties and consequently liable for any loss or damage

resulting therefrom where they fail to exercise reasonable care, skill and diligence. However, error of judgement will not be deemed as negligence. It may

be noted that the directors cannot be absolved of the liability for negligence by any provision in the Articles [Section 201]. The Court may,

however, award relief to directors against such liability under Section 633 of the Act.

(iv) Breach of Trust and Misfeasance. Directors are the trustees for the moneys and property of the company handled by them, as well as the exercise of

the powers vested in them. If they act dishonestly or malafide in the exercise of their powers and performance of their duties, they will be liable for breach

of trust and may be required to make good the loss or damage suffered by the company by reason of such malafide acts. They shall also be accountable

to the company for any secret profits they might have made in transactions on behalf of the company.

Directors can also be held liable for their acts of ‘misfeasance’, i.e., misconduct or wilful misuse of powers. However, misconduct which is not wilful shall

not amount to’misfeasance’.Where a director has misapplied or misappropriated money or property of the company or has been guilty of breach of trust or misfeasance, the Court

may order him to repay the money or restore the property or to pay compensation [P.K. Nedangadi vs. Malayalee Bank Ltd., AIR 1971 S.c. 829].

(b) Liability to Third Parties

The discussion on liability of directors towards third parties may be grouped as under:

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