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Liabilities of Directors, Officers and Key Professionals associated with the Company 

Directors, through the board process and on their own as authorized, are responsible for carrying out the business and managing the affairs of the company. One important aspect of a limited liability of companies is that liabilities of a company are its own and the directors normally are not liable for the same.


However, apart from this general rule, numerous exceptions have been created by Companies Act and various other laws to hold the directors or other “officers-in-charge” responsible for various defaults of the company as directors are the one who are responsible for the company’s actions, omissions and decisions. In Indian law, this is a very important aspect of corporate governance.


From point of view of directors, including directors of startup companies (usually founders become directors in the company, funded companies may have investor directors as well) it is very important to know about various duties that they are required to perform under a large number of statutes as well as the consequences of failure to perform those duties. Besides, third parties having a dispute against the company may involve the directors in various proceedings. This chapter will assist in understanding these risk factors associated with directorship of a company in India.


A. Liabilities of Directors of a company


Liabilities of directors of an Indian company may arise under the Companies Act, 2013 or under other legislations that apply to the company due to the nature of its business. Responsibility for violations under the Companies Act is placed on the ‘officer in default’, as defined under the act. Liability of directors under other legislations applicable to the company is discussed later in this chapter.


Liability for violations of the the Companies Act


The Companies Act imposes liability for violation of its provisions on all persons who qualify as ‘officers-in-default’. An officer of a company includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board or any one or more directors is or are accustomed to act. The following persons are deemed to be liable for any non-compliance (in the same order as mentioned below) as ‘officers in default’, unless any of them can prove that he was not in-charge of the affairs of the company at the time when the offence occurred:

  • The managing director,
  • The whole-time directors,
  • The manager,
  • The secretary,
  • Any person in accordance with whose directions or instructions the board of directors ("Board") is accustomed to act, any person charged by the Board with the responsibility of complying with that provision of the Companies Act. However, this excludes persons who give advice in professional capacity – for example, a lawyer or an accountant, or another business consultant who is engaged by a company to provide advisory services.
  • Where there is no manager/managing director or where no person has been specifically charged with the responsibility for any compliance, all the directors on the Board are deemed to be officers in default.

The Companies Act 2013 adds additional categories of persons who can qualify as officers in default:

  • key managerial personnel,
  • Any person who has been authorized by the Board of Directors for specific functions such as filing or distribution of accounts or records – such a person must authorize, participate or fail to take active steps to prevent the default, in order to be liable.
  • every director who is aware of the violation, or with whose consent or connivance the violation has taken place is also liable as an officer in default, How can awareness or connivance in an action which leads to violation of a statutory provision be established? The Companies Act 2013 clarifies that directors who have received information about any proceedings of the Board of Directors from which a violation can be inferred, or have attended or participated in such proceedings without objecting to such a violation can be inferred. 
  • With respect to issue or transfer of shares of a company – share transfer agents, registrars and merchant bankers to the issue or transfer can also qualify as officers in default, even though they are not strictly speaking officers of the company, and are merely appointed by the company for performing very specific functions. This provision is largely relevant to public companies which are either listed on a stock exchange or immediately prior to theirs listing on the exchange.
Who qualifies as a key managerial personnel?

A Chief Executive Officer, managing director, manager, company secretary, whole-time director, chief financial officer qualify as key managerial personnel of the company. Apart from these persons, the government may prescribe other categories of officers who will qualify as key managerial personnel. 

At present the Ministry of Corporate Affairs have directed to the Registrars of Companies that there should be proper application of mind on the part of a in deciding whether a person to be implicated is an ‘officer in default’ by examining the Annual Return (i.e. FC.4), Form DIR-8 and DIR-12 database available in the


While most liabilities have monetary consequences, certain offences such as authorizing the issue of a misleading prospectus to an investor, are punishable with imprisonment and fine. Few other examples of offences that can lead to imprisonment are -

  • inducing or attempting to induce a person by a false or misleading statement to enter into any agreement to buy shares of the company.
  • default in maintaining proper books of accounts for 2 (two) years prior to commencement of winding up;
  • default in notifying that the company is in liquidation, on every invoice, order for goods or business letters issued by the company (any officer, manager);
  • for wrongfully obtaining possession of the property of the company or wrongfully withholding any property in their possession (any officer or employee of a company);
  • destruction, alteration, or falsification of books with intent to defraud or deceive any person;
  • making false representations to induce anyone to give credit to the company, and with intent to defraud creditors, conceal property of the company.

While imprisonment has been prescribed, it is relatively rare that a director is imprisoned for violation of Companies Act. Most offences under the Companies Act are non-cognisable (i.e. an arrest would require a warrant), except for certain offences by companies relating to acceptance of deposits from the public. A shareholder is generally not held responsible or liable for the acts of its nominee director.


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