In this article, Navonil Datta pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Liabilities of directors after dissolution of a company.
Understanding the meaning of director of a company
The Companies Act, 2013 defines a director in section 2(34) as a director appointed to the board of a company. A company is a juristic person and therefore needs an agent to act on its behalf. A director of the company plays the role of an agent and acts a trustee for the assets of the company. The directors along with the board of directors, act as a face for the company and take decisions on behalf the company keeping its interests in mind.
Bad Corporate governance by companies in cases such as Satyam or Kingfisher, highlighted the need for more stringent provisions to ensure the good management of a company. The Companies Act, 2013 has introduced provisions for the same. Enhancing the roles and responsibilities of directors, clearly defining their duties and imposing stringent liabilities for the violation of such duty has improved the standards of corporate governance.
Duties of a director
The duties of a director are mentioned in section 166 of the act. The duties mentioned under the section provide a general guideline for the conduct of a director. The director is not supposed to act in a manner which is inconsistent with the articles of association of the company.[1] He shall exercise his duties with due and reasonable care[2] and act in good faith for the promotion of the object of the company for the benefits of its members and its interests.[3] He shall not be involved in a situation where his interests directly or indirectly are in conflict with the interests of the company[4] and shall not try to achieve any undue gain for himself or his relatives, partners and associates.[5] A director cannot assign his office to any other individual and such assignment would be invalid.[6]
Thus broadly, directors are supposed to act with diligence and care for promotion of the interests of the company and discharge a fiduciary duty towards the company. As a fiduciary, a director is supposed to put his personal interests after the interests of the company.
Civil and criminal liability of a director
A breach in discharging the duty, whether statutory or fiduciary, exposes directors to liability. The liability imposed on a director may be civil or criminal in nature. Certain examples of such liability imposed on directors by the act are:
- For misstatements in prospectus[7]
- For breach of solvency declaration[8]
- For fraudulent trading[9]
- For breach of directors’ duties [10]
Dissolution of a company means that the company ceases to exist legally. The dissolution of a corporation under the Companies Act, 2013 can be brought about in two steps. The two steps being winding up and striking off.
Winding up is the process that brings about the dissolution of the company. The assets of the company are collected and used for the payment of the company’s debt to its creditors. Chapter XX of the Companies Act, 2013 deals with winding up of a company. Under the act, the winding up of a company may be done voluntarily or by the order of the tribunal.[11] A petition for winding up may be instituted by the company, creditors, contributories, registrar or any person authorized by the central government.[12]
The tribunal has the authority to look into the merits of the petition and pass an order as it deems fit. It may dismiss the petitions, appoint a liquidator till a winding-up order is passed, pass a winding-up order or pass an interim order as it thinks fit.[13] If a company liquidator has been appointed, then he can make an application to the tribunal for dissolution under section 302. If the tribunal is convinced, then it may pass an order for dissolution of the company. An application may be made to the tribunal or the central government. On order of the tribunal or the central government, the Registrar shall strike off the name of the company.[14]
During the winding up process, the directors can be held liable for certain actions. If in the process of winding up, it is discovered that a director has misapplied or retained or become liable for any money or property of the company or has been guilty of misfeasance or breach of trust in relation to the company, the liquidator can submit an application to the tribunal for looking into the conduct of the director. However, such an application has to be made within five years of the date of winding up order or the first appointment of liquidator.[15]
A similar application can be made by the official liquidator to the tribunal, if it found that the business of the company was carried out in a manner to defraud the creditor or any other person for fraudulent reasons.[16] The liability in such a case extends to the director.[17]
Another way of dissolving a company is the striking off the name of the company by the Registrar under section 248. If the Registrar is of the opinion that the company has not commenced its business within one year of its incorporation, or the subscribers to its memorandum have not paid their subscription within 180 days or the company is not carrying on business for a period of two immediately preceding financial years, then he shall send a notice to the company conveying his intention to strike off the name of the company from the register of companies and ask them to make their submissions.
Sub-section 7 of the section talks about the liability that can be imposed upon directors and other officers of the company. It states that the liability, if any, of every director, manager or other officers who was exercising any power of management in the company dissolved, shall continue and can be enforced as if the company had not been dissolved.
A bare reading of this provision points out that the continuance of existing liability of a director, member or an officer of a company which was subsequently dissolved seems to have been the legislative intent. The dissolution of a company cannot be used an excuse to escape liability the rests on a director. A director, member or an officer are not usually held liable for the acts of the company. Directors of a company owe no fiduciary or contractual duties or any duty of care to third parties who deal with the company.[18] The dissolution of the company cannot be seen as a reason to escape personal civil or criminal liability. The effect of section 248(7) is only to continue the liability of a director which existed before the dissolution. It does not enhance the liability such as making them personally liable, when they were not so liable before.[19]
In the case, Re: U.N. Mandal’s Estate Private Ltd.,[20] the High Court of Calcutta observed:
“Section 560(5) of the Companies Act, 1956 provides that when the name is struck off the register, and the notice thereof published in the official Gazette, then the Company stands dissolved on the publication in such official Gazette. But such dissolution of the company does not affect the liability, if any, of any director, managing agent, secretaries and treasurers or manager or even any other officer who was exercising any power of management or of any member of the company & it is expressly provided by proviso (a) of that sub-section that for enforcement of such liability it will be deemed in law to continue and may be enforced as if the company had not been dissolved. The special statutory provisions of Section 560(5) of the Companies Act 1956 appear to indicate that the dissolution of the Company thereunder does not mean a total and complete extinction of the Company for all purposes but that it exists for the special purpose expressly mentioned in proviso (a) of Section 560(5) of the Act as if the company had not been dissolved.”[21]
Section 560 of the Companies Act, 1956 dealt with the striking off the name of a company from the register of companies. The section is analogous to section 248 of the new act. Even though they are two separate acts, the court’s interpretation of section 560(5) of the old act could be considered to be providing some insight towards the interpretation of section 248(7)
In the United States, section 105 of the Model Business Corporation Act states :
The dissolution of a corporation shall not take away or impair any remedy available to or against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceedings thereon is commenced within two years after the date of such dissolution.
The existing jurisprudence regarding the interpretation of the section offers varying views. In the case of Bishop v. Schield Bantam Co.,[22] the defendant had been dissolved as a corporation in 1964. In 1965, a post dissolution crane manufactured by the defendants injured the claimant in 1965. The claim was brought before the court against the corporation and its directors in 1967. The court observed that the claim was barred by law. While barring the claimant’s action, the court observed that it did not bar the action initiated by the claimant because it was post dissolution but only because it was after the statutory period of two years.
In a different case of Stone v. Gibson Refrigerator Sales Corp.,[23] the court interpreted the section to include shareholders and directors but to exclude corporations. The court held that post dissolution claims could give rise to a cause of action against shareholders and directors but not against corporations.
In another case of Chadwick v. Air Reduction Company[24], the court refused to entertain post dissolution cases. It observed that “it is, therefore, quite clear that under the Model
Business Corporation Act and those state statutes patterned after it, a corporation may be sued for pre-dissolution torts only.”[25]
References
[1] Companies Act 2013, Section 166(1)
[2] Id., Section 166(3)
[3] Id., Section 166(2)
[4] Id., Section 166(4)
[5] Id., Section 166(5)
[6] Id., Section 166(6)
[7] Id., Section 34
[8] Id., Section 68
[9] Id., Section 339
[10] Id., Section 166(8)
[11] Id., Section 270
[12] Id., Section 272
[13] Id., Section 273
[14] Id., Section 365
[15] Id., Section 339
[16] Id., Section 340
[17] Id., Section 341
[18] Tristar Consultants vs. M/s. VCustomer Services India Pvt. Ltd. & Another, AIR 2007 Delhi 157.
[19] A RAMAIYA, Guide to the Companies Act, Vol 3, 18th edn.
[20] AIR 1959 Cal 493
[21] Id., Para 32
[22] 293 F. Supp. 94
[23] 366 F. Supp. 733
[24] 239 F. Supp. 247
[25] D. Gilbert Friedlander; P. Anthony Lannie, Post-Dissoulution Liabilities of Shareholders and
Directors for Claims against Dissolved Corporations, 31 Vand. L. Rev. 1363, 1422 (1978)
