Personal Liability of Directors to Third Parties under Companies Act, 2013

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The directors are generally not personally liable to third parties for transactions they enter into on behalf of the company. However, they may be held liable to third parties in the following cases: –

  • When the directors have expressly contracted in their own name without disclosing that they were acting on behalf of the company.
  • Where they have acted fraudulently or guilty of fraudulent transactions with their parties.
  • When the directors have issued a prospectus that does not comply with legal requirements.
  • In cases where personal liability is expressly imposed on directors by the Companies Act 2013, for example, for improper allocation of shares or failure of returning application money under the provisions of Section 39 of said law.
  • For acts which are outside their (director’s) authority, but which they have impliedly warranted that they have authority to do. However, if the third party has actual or constructive notice of the lack of authority, the directors shall not be liable in that case.
  • For acts which are beyond their authority (of the director), but which they have implicitly warranted that they have the power to do. However, if the third party has a actual or construction notice of the absence of authority, the directors will not be liable in this case.
  • Directors may incur tort liability against third parties for damages caused to them. Liability may be added to the liability of the company towards third parties. Directors are only liable for offenses committed by the company if they have expressly ordered, directed or perpetuated their commission. But they are not liable for the tortuous acts committed by the inferior employees of the company, although these employees are appointed and controlled by them.
  • Directors, who use the seal or sign a commercial document or negotiable instrument without the name of the company being mentioned therein, will be personally liable to the holder of the obligation document if the company fails to meet the obligation. Therefore, in Penrose vs. Martyr, the signatories were held personally liable for the omission of the words “Limited” or Ltd. on an instrument. But if the error in the name is caused by the holder of the instrument himself, he cannot personally enforce this instrument against the director who signed it.

When the directors are liable for any of the reasons mentioned above, the company or the parties, as the case may be, may assert liability by claiming damages. The amount of damages would, however, be determined on the basis of the loss suffered by the company or the profit made by the directors.