Topics Covered in this article
Equivalent citations: 2002 111 CompCas 826 Ker
Bench: S Sankarasubban, R Bhaskaran
The Companies Act, 2013, defines a director to mean ‘a director appointed to the Board of a company.’ It is a well-acknowledged fact that a company is a juristic and artificial person but since a company has to act through a living human being, decisions on behalf of the company, are taken by the board of directors (“Board”) of a company. The definition of Director is an inclusive definition. It includes any person who occupies the position of a Director is known as Director whether or not designated as Director. It is difficult to define the exact legal position of the Directors of a Company. The Companies Act does not define the actual position of Directors. The Director shall act as an agent or trustee or managing partner in the Company.
As per the general notion, a director is not personally liable for any debts of the company unless the director has been involved in some fraudulent activity regarding it. The directors of the company have a statutory duty to act in the best interests of the company’s creditors as a whole. If a director fails to meet his or her fundamental duties of acting in the interest of all the company’s credibility, they are likely to face severe personal liabilities. The Directors enjoy the vast power of management and act as a decision making body. But, the Director has no power to act beyond the power delegated to him by the Board, within the limits prescribed under the Companies Act or any other law or memorandum and articles of association of the Company. He must also display care in the performance of work assigned to him.
FACTS OF THE CASE
This is an appeal case against the interim orders passed by the Principal Sub. Judge. The brief facts of the case are the plaintiff filed suit for the realisation of the balance due amount from the defendant Jikku Chit Fund (Pvt) Ltd. A petition for attachment was filed on the ground that the property in the schedule belongs to Jikku Chit Fund. Jikku Chit Fund is a Company incorporated under the Indian Companies Act. In the objection to the attachment, inter alia, it was contended that the scheduled property belongs to the Managing Director Kuriakose and it cannot be attached for the debts of the company. The learned Sub Judge, who heard the matter, took the view that under Section 322 of the Indian Companies Act, the liability of the Director is unlimited and hence held that the property can be attached. Managing Director- Kuriakose filed an appeal in the High Court of Kerala against this order.
ISSUES OF THE CASE
- Whether the property of the appellant (Mr. Kuriakose) can be attached for debts of the Jikku Chit Fund?
RULE OF LAW
- Section 322 of the Companies Act, 1956.
322. Directors, etc., with unlimited liability in limited company.
(1) In a limited company, the liability of the directors or of any director or of the managing agent, secretaries and treasurers or manager may, if so provided by the memorandum be unlimited.
(2) In a limited company in which the liability of a director, managing agent, secretaries and treasurers or manager is unlimited, the directors, the managing agent, secretaries and treasurers and the manager of the company, and the member who proposes a person for appointment to the office of director, managing agent, secretaries and treasurers or manager, shall add to that proposal a statement that the liability of the person holding that office will be unlimited; and before the person accepts the office or acts therein, notice in writing that his liability will be unlimited, shall be given to him by the following or one of the following persons, namely, the promoters of the company, its directors, its managing agent, secretaries and treasurers or manager, if any, and its officers.
(3) If any director, managing agent, secretaries and treasurers, manager or proposer makes default in adding such a statement, or if any promoter, director, managing agent, secretaries and treasurers, manager or officer of the company makes default in giving such a notice, he shall be punishable with fine which may extend to one thousand rupees and shall also be liable for any damage which the person so appointed may sustain from the default; but the liability of the person appointed shall not be affected by the default.
Mr. Kuriakose filed the appeal against the claim that the property so attached is his personal property, not the company’s property. The Chit Fund was incorporated as a company under the Companies Act and the Certificate was issued by the Registrar of Companies, Delhi & Haryana. The said property was purchased personally by Kuriakose and a copy of the sale deed in favor of this statement was provided as evidence. The payment of tax of the disputed property was done in the name of Kuriakose, not in the company’s name. The certificate issued by the Federal Bank shows that the title deed is deposited in the Bank as security for the loan granted to the appellant. Hence it is lucrative that the property belongs to Kuriakose and the Chit Fund is a company incorporated under the Companies Act.
There is no dispute that the company is a separate legal entity and the liability of the Company cannot be imposed on its officers or Directors, since they are not personally liable. The lower Court went wrong in relying on Section 322 of the Companies Act. It is only with regard to the liability of the shareholders towards the Company and it is not for the outsiders
In Kundan Singh v. Moga Transport Co. (P) Ltd. and Ors, the question arose under the Industrial Disputes Act. The Punjab and Haryana High Court held that there is no provision either in the Companies Act or the Industrial Disputes Act making the Managing Director personally liable for recovery of dues against the company. In another case, H.S. Sidana v. Rajesh Enterprises, the same High Court has held that where there was a decree for recovery of sums due to a bank from a Company in a suit against the Company and its Managing Director, the liability to discharge the decretal amount was that of the Company and not of its Managing Director. The Executing Court could proceed against the Managing Director of the judgment debtor Company only if it concluded that the Managing Director was personally liable to discharge the decretal amount. As long as the defendant is the Company, it is the liability of the Company and not the person.
Even though, there are some exceptions to the said rule, i.e. commission of fraud or gross negligence is proved against director/directors in conducting business of the company at the relevant time.
Since the directors of a company are not personally liable for any debts the company has unless the director is involved in some fraudulent activity regarding it. Therefore, it was held that the Managing Director is not personally liable for the debts due of the company. By way of holding the position of a director, the said person won’t be liable for the debts of the company. The law in this regard is well settled and has been reiterated by courts in several judgments. Directors of the company are in a position of trustees, agents or representatives of the company and act in a fiduciary capacity. And hence it came into the conclusion the property of the Managing Director is not personally liable for the debts due of the company incorporated under the Companies Act, therefore the property not attached and the orders passed by the lower Court are set aside
The liability of shareholders in a company, unlike that of a sole proprietorship or partnership firm, is limited. The liability of the company is generally not transferred onto the directors. The personal property of the director will not be liable for the company’s debt as per the general rule. . The Delhi Court in Tristar Consultants vs. M/s. VCustomer Services India Pvt. Ltd. & Another, it was held that “Directors of companies have been described as agents, trustees or representatives of the company because of the fact vis-a-vis the company they act in a fiduciary capacity. They perform acts and duties for the benefit of the company. Thus, directors are agents of the company to the extent they have been authorized to perform certain acts on behalf of the company. But directors of a company owe no fiduciary or contractual duties or any duty of care to third parties who deal with the company…”
However, directors can be held personally liable for their acts under the Companies Act 2013, if there is a breach of fiduciary duty or an instance of fraud. In this above case, the property of the managing director is his sole property and that property has no relation to the company. There is no dispute that the company is a separate legal entity and the liability of the Company cannot be imposed on its Directors.
The identity of a director is distinct from that of the company. That is the very genesis of a company having an independent juristic personality. Accordingly, a director is not ordinarily held personally liable for debts of the company.