Section 286: Obligation of Directors and Managers

This article focuses on the concept of the duty of director and manager to not be able to evade their unlimited liability in a limited liability company during the winding up procedure of the company under section 286 of the companies act, 2013.
Estimated Reading Time: 3 minutes

Introduction

Section 286 of the Companies act, 2013 lays down the provision regarding the obligations of directors and managers. The obligations for both current and past directors are implicitly mentioned, only creating liability if a company winds up within a year of director or manager ceasing his/her office. This is an important section that comes into play during the winding up procedure of the company and ensures that a director and manager cannot evade their unlimited liability in a limited liability company. Limited company is one in which the liability of the members is limited. A member is said to have unlimited liability when his liability is not limited to his share or amount of his guarantee.

Directors and managers are key personnel of a company and are involved in day to day operation of the company and thus play a very important role in the company. This section interestingly also craves out exemptions to the section itself and makes sure that unnecessarily advantage is not taken of directors and managers. But at the same time makes sure that directors and managers fulfill their obligation towards the company especially during critical time like winding up. This analysis will try to gauze a better understanding of this section and its application in real life situations.

Purpose of Section 286

This section very briefly lays down the obligation of directors and managers of a limited company. The section states the following:

  • Certain companies have directors whose liability is unlimited. This section mandates that such directors in addition to adhering to their liability as ordinary members also have to meet their obligations and contribute at the commencement of winding up of an unlimited company.
  • Following are the exceptions carved out in the section:
  • Director or manager who ceased to hold the office for a year or upward before commencement of the winding up.
  • Director or manager will not be liable for any debt or liability contracted after they cease to hold their office.
  • Director and manager of a company will not be held liable unless the tribunal finds it necessary to require their contribution in order to satisfy the debts and liabilities of the company.

Situation Before the Enactment of Section 286

Section 286 of Companies act, 2013 corresponds to section 427 of the Companies Act, 1956– which laid down the obligation of directors and managers whose liability is unlimited. The sections are the same in their context and application. There are no changes between 1956 act and 2013 act in this respect. The companies’ act of 1882, and 1913 does not contain a provision similar to section 286 of companies act, 2013.

Application of Section 286

This particular section has application during the process of winding up, when the members are called on to fulfil their liabilities to the company, so that company is able to repay its liabilities and debts. This section is used to make sure that directors and managers of a company cannot evade their responsibility and obligation towards the company. And it also protects directors and managers by limiting their liability and putting a time frame on the same. 

Cases at a Glance

  • Garden View Estates Private Limited Company & ors. v. Vishwanath Namdeo Patil & ors: In this case the question for consideration was with respect to the date from which workers dues was to be calculated. Will it be from the date of actual winding up of the company given by the company court or from the date of appointment of the provisional liquidator with full power to sell the assets or from the state from which there is cessation of work on account of various legal reasons. The part important for this section is where the court while deciding matter and calculating the dues and making a list of settlements observed that once the winding order is passed the shareholders as well as the ex-directors and managers as per section 427 (section similar to 286 in 1956 act) will be considered as contributors and thus have to fulfil their liabilities and dues on notice.

Concluding Summary

As soon as possible after passing an order of winding up, the tribunal has to make a list of contributories for settlement of debts. Then the tribunal has to cause the assets of the company to be applied to discharge the liabilities of the company. In the settling list, the tribunal has to distinguish between those who are contributories and those who are representatives of and liable for debts of others. Every person is included in this, that is past or present member who is liable to contribute assets for requisite payments. This is where the section 286 comes into play, and those directors and managers who are liable to fulfill their obligation are called by notice to pay their dues for settlement of the dues. This is done to protect the interest of the company and leads to smooth winding up of the company. One of the biggest perks of this section is that it ensures that interest of both the company and director are safeguarded.

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