{"id":24092,"date":"2021-01-13T16:04:40","date_gmt":"2021-01-13T10:34:40","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=24092"},"modified":"2022-09-10T14:57:00","modified_gmt":"2022-09-10T09:27:00","slug":"directors-liability-in-the-privately-held-organization","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/directors-liability-in-the-privately-held-organization\/","title":{"rendered":"An Outlook on Director\u2019s Liability in the Privately Held Organization"},"content":{"rendered":"\n<p class=\"has-drop-cap\">The Director in the <a href=\"https:\/\/corpbiz.io\/company-registration\"><strong>Private Limited company<\/strong><\/a> primarily handles the internal and external matters that affect the entity in one way another. As per the legal framework, when an incorporation certificate is awarded to the company it transforms into a legal entity. It possesses a distinctive identity when compared to its owners, members, and shareholders.<\/p>\n\n\n\n<p>The same concept is applied to the Director of that company as well. The Director of the company possesses separate rights that he\/she can exercise during the tenure of employment. This means that the Director is not liable to perform any action that is beyond the scope of the right conferred by the law. It implies that Director\u2019s liability is confined around the predetermined rights cited in the existing bylaws. The following section explains the Director\u2019s liability in privately-held entities:-<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"1000\" height=\"837\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Outlook-on-Director\u2019s-Liability-in-the-Privately-Held-Organization-e1610531839840.png\" alt=\"Director\u2019s liability in privately-held entities\" class=\"wp-image-24093\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Outlook-on-Director\u2019s-Liability-in-the-Privately-Held-Organization-e1610531839840.png 1000w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Outlook-on-Director\u2019s-Liability-in-the-Privately-Held-Organization-e1610531839840-300x251.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/01\/An-Outlook-on-Director\u2019s-Liability-in-the-Privately-Held-Organization-e1610531839840-768x643.png 768w\" sizes=\"(max-width: 1000px) 100vw, 1000px\" \/><\/figure><\/div>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/directors-liability-in-the-privately-held-organization\/#Personal_Liability_of_a_Director_in_Privately_Held_Organization\" >Personal Liability of a Director in Privately Held Organization<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/directors-liability-in-the-privately-held-organization\/#Criminal_Liability_of_a_Director_in_Privately_Held_Organization\" >Criminal Liability of a Director in Privately Held Organization<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/directors-liability-in-the-privately-held-organization\/#A_Brief_Note_on_the_Piercing_of_Corporate_Veil\" >A Brief Note on the Piercing of Corporate Veil<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/directors-liability-in-the-privately-held-organization\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Personal_Liability_of_a_Director_in_Privately_Held_Organization\"><\/span>Personal Liability of a Director in Privately Held Organization <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Personal liability of a Director in Privately Held Organization serves different aspects of its role and responsibilities, which are as follows:-<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Tax Liability<\/strong><\/h3>\n\n\n\n<p>Income Tax Act clearly states that in case of pending income tax of the preceding year, the director of the company will be held accountable for such a flaw. In another word, it is the Director\u2019s liability to keep the track of all pending taxes and make sure the company is duly complying with the existing tax law.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Inaccurate Statement in\nthe Prospectus of the Company<\/strong><\/h3>\n\n\n\n<p>It&#8217;s the Director\u2019s liability to ensure that the prospectus of the company doesn&#8217;t consolidates any invalid information that incurs any adverse effect in future. Any contravention to this condition can enforce the director to face the penal provisions. However, there is an exception to that- Director will not be liable to face legal proceeding in the following scenarios: <\/p>\n\n\n\n<ul><li>If the Director took the prior approval for the issuance of the      prospectus;&nbsp;<\/li><li>If the Director was not intimated for such action before issuance, or he\/she approved such action.<\/li><li>If the Director didn\u2019t approve such action and conveyed the same with the public through the notification.&nbsp;<\/li><li>If the Director has a good reason to believe that the false statements might be legitimate.&nbsp;<\/li><li>If the statement has any connection with the personal debt of the      company.&nbsp;<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Company Debts<\/h3>\n\n\n\n<p>A Director will not be held personally accountable for any debts\navail by the company in the past unless the Director is found to be engaged\nwith criminal undertaking related to it.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Fraudulent Business Conduct<\/h3>\n\n\n\n<p>Director will have to encounter the consequences raised by\nhis\/her action against the company\u2019s interest.&nbsp;If the action of the\nDirector is found to be illegal then he\/she may be penalized as per the\nprovisions mentioned under the law.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Failure to Repay Share Application Money&nbsp;<\/h3>\n\n\n\n<p>On the off chance, if the Director of the company cannot pay the share application money due to any reason, he will be accountable along with the company for such a discrepancy. As per the <strong>Company Act, 2013<\/strong><sup><a href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/ebooks.html\"><strong>[1]<\/strong><\/a><\/sup><strong> <\/strong>, any violation in this regard would enforce the defaulter (Director(s)) to face the imprisonment\u00a0for a year or so. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Default in Obtaining Qualifications of Shares<\/h3>\n\n\n\n<ol><li>Directors will be responsible for paying money related to the qualification of shares.<\/li><li>Directors will be liable to pay for the qualification of shares if failure to do so within the given time and company goes into liquidation.<\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\">Share Application Money Payment<\/h3>\n\n\n\n<p>The company and the Director share the equal responsibility for\nrepaying the share application money received if it is yet to be repaid within\nthe prescribed timeline.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Accountability for Paying For Qualification Shares<\/h3>\n\n\n\n<p>In case the Director is yet to avail the qualification shares\nwithin the prescribed timeline, and such a company is already facing issues like\nasset liquidation. The official liquidator can raise the value payable against\nthe shares from the Director.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Criminal_Liability_of_a_Director_in_Privately_Held_Organization\"><\/span>Criminal Liability of a Director in Privately Held Organization <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Criminal liability of a Director in Privately Held Organization serves different aspects of its role and responsibilities, which are as follows:-<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Dishonoured Cheques<\/h3>\n\n\n\n<p>Stamping approval to the dishonored cheque is a criminal\noffense. If the Director is found to be engaged with such an act, he will be\nheld accountable for the same along with the company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Contravention of Labour Law&nbsp;<\/h3>\n\n\n\n<p>In the case of the contravention of the labor laws, the Director\nalong with the company will be liable for such mishaps and criminal liability\ncan be imposed on both of them for such an act. Directors who are not managing\nthe overall operation but handling a certain aspect of the company would stand\nunaccountable for such an action.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_Brief_Note_on_the_Piercing_of_Corporate_Veil\"><\/span>A Brief Note on the Piercing of Corporate Veil<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Directors have limited liability on the personal ground since\nthe company act as a legal person. However, the paradigm of lifting the\ncorporate veil transfers the liability. This typically is witnessed in the\nevent when the directors with a criminal intention endeavor to set off their\nunlawful acts under the company name. <\/p>\n\n\n\n<p>If the company is found to be guilty of defrauding the creditors\nthen the Director associated with this mishap will be stands liable and the\nnotion of lifting the corporate veil comes to the reality.&nbsp;Evidence of any\nillegal conduct with the Director\u2019s knowledge will be sufficient to shift the\nliability. This is primarily done in the public interest so that the Director\nof the company cannot use the Salomon principle* to avert the\nliability.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What is the Salomon Principal?&nbsp;<\/h3>\n\n\n\n<p>According to the Salomon principle, the incorporated entity will be treated as a separate legal entity and have a distinctive identity from its directors, shareholders, employees, and agents. In the cue of this, the company can face the legal proceedings in its name and assets independently from its shareholders.&nbsp; Therefore, Salomon principle renders the positive impact on the Director\u2019s liability as far as their accountability within an organization is concerned. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>From the liability viewpoint, the line that separates the\ndirectors or core member from the company is pretty gloomy. This inherently\nprepares the ground for the defaulters seeking to indulge in fraudulent\nactivities and shift the liability towards the company. Of course, there is a\ndefense mechanism in place to counter such a disparity. <\/p>\n\n\n\n<p>The Company Act, 2013 has drawn a line of distinction between the company and its directors on the liability part in the different events. Talk to <a href=\"https:\/\/corpbiz.io\/\"><strong>CorpBiz\u2019s<\/strong><\/a> expert if you intent to explore more dimension of Director\u2019s liability in the private limited company.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/what-are-the-requirements-before-choosing-company-name-in-india\/\">\nWhat are the Requirements Before Choosing Company Name in India?\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Director in the Private Limited company primarily handles the internal and external matters that affect the entity in one way another. As per the legal framework, when an incorporation certificate is awarded to the company it transforms into a legal entity. It possesses a distinctive identity when compared to its owners, members, and shareholders. [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":24099,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[1423],"acf":{"service_id":"1"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":5562,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24092"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=24092"}],"version-history":[{"count":21,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24092\/revisions"}],"predecessor-version":[{"id":48607,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/24092\/revisions\/48607"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/24099"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=24092"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=24092"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=24092"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}