The fiduciary position entices liabilities of directors for being the trustees of the company. Some of these liabilities are provided in the contract, tort, while some are under the criminal law and other statutes like the Companies Act, 2013. The approach of the courts of law has been all-embracing the status of a Director in deciding the case laws. Under Indian laws, a director is deemed to be an officer in default, which implies that he or she shall be held responsible for reneging, disobedience, failure, refusal, or infringement of any statutory obligation of the company. But, the Director has no personal liability on behalf of the company as both are separate entities.
Definition Of Director
As per Section 2(34) of the Companies Act 2013, a Director is defined as a ‘person appointed to the board of a company.’ He is authorised by Articles of Association to contract on behalf of the Company. He is entrusted with the charge of departmental affairs to understand the business of the company in the legal and financial dimensions ensuring transparency and credibility. Therefore, the Director is liable for every act which is under his control within the company.
However, there are certain circumstances under which a Director may be held liable as a representative of a company. Personal Liabilities of directors are imposed under the taxation laws (under income tax and Sales tax laws). The directors of a company become personally liable in case the tax from the company year becomes irrevocable, but this is applicable in case of the Private Limited Company only. In that case, a Director can defeat the liability if he proves that the non-recovery of such tax cannot be attributed to his neglect or breach of duty.
Other liabilities of directors arise under Section 179 of the Income Tax Act, 1961, where the tax assessed cannot be recovered when a private company is wound up. In such a scenario, every Director shall be held liable for payment of such taxes jointly/severally. Similarly, under Central as well as State sales tax laws, a Director can be held responsible in the situation of winding up of a company.
The Court in Gurudas Hazra v. P.K. Chowdhury (2002 109 Comp Cas 530 Cal) held that it is imperative for a Director to show that the default occurred was out of his reach of duty. In the same case, the income tax dues of a company were recovered after freezing the bank account of a director in Vandana Bidyut Chatterjee v. Union of India (2012-TMI-211650), the Bombay High Court held that the Excise dues could not be recovered from the directors and in Peter J. R. Prabhu v. Asstt. Commissioner of Commercial Taxes (ILR 2001 KAR 1045), the court stated that apart from any provisions of the taxing statute, arrears of the tax amount are not to be recovered.
It is not only their duty but endeavour to uplift the goodwill and trust of a company they are associated with. Directors cannot abdicate their responsibility to consider the critical points while performing their assigned duties. The role of Director in the affairs of a Company is essential. Directors have the fiduciary relationship with the Company, but the determination of responsibilities of a Non-Executive Director is not easy as he is not involved in day-to-day affairs of the company. However, the courts think that the non-executive director could not merely rely on the information provided by the management or executive director.
As a Board member, both independent and non-executive directors have the same legal duties and obligations as executive directors. The Directors must follow all provisions, rules and regulations diligently as part of their fiduciary duties towards stakeholders without relying on others or experts. In case of default, the liabilities of directors shall arise based on his position and also specific responsibilities.
The Board of Central Excise and Customs on 7th August 2012 had issued a notification (Notification No. 46/2012), stating that the company will be liable to pay service tax as a recipient of service on the remuneration paid to Non-Executive Directors. Therefore, now the companies are responsible to pay service tax on any compensation paid to their Non-Executive Directors in the form of money or otherwise. The Non-Executive Directors are not required to pay service tax henceforth.