Author: Abhyudaya Yadav, III year of B.A.,LL.B. from Dharmashastra National Law University, Jabalpur.
The separate legal entity is the cardinal principle of corporate law. It states that the legal existence of a body corporate is distinct from that of its members and employees. For all the purposes in law, a body corporate is a juristic and artificial person which means that it can sue and can be sued on its name. One of the primary characteristics of the company is limited liability, which is nothing but an offshoot of the separate legal personality principle.
Though in papers the body corporate has a separate legal existence, in reality, the business of the company is always carried by individuals and more specifically by the board of directors. Due to separate legal existence, it often becomes very difficult to fix the liability. Sometimes due to personal interest or any other interest, the directors of the company commit some acts which fall outside the scope of their authority, if the act is criminal in nature then it will always be dealt with by the penal laws of the country but what if the act results into the imposition of civil liabilities. The problems start arising when inter-mingling of different laws creates the complexity in fixing liability.
In the Companies act, 2013, a lot of provisions have been made in fixing the liabilities of directors. But the question arises as to what is the nature of these liabilities and also whether for a tortious act of the director of the company in the course of business. Can he be held personally liable under the tort laws of the country? The position in law is different with respect to the imposition of personal liability of the director in case of his tortious activity within the course of his employment.
Position in the United Kingdom - The separate legal personality of the company paves the way for fixing the liability of tortious action on the director of the company which means that all the time the liability is of the corporate entity not of the individual director. This legal position remained in the legal system for a considerable period of time. The decision of the court of appeal in the case of Williams v. Natural Life Health Food Ltd.[1], shifted the liability of individual tort action from the corporate entity to the individual director by evolving the principle of Assumed personal responsibility.
The court of appeal held that the purpose of limited liability is to protect shareholders of the company and not the directors and company from the tort and crimes committed by it. If the director of the company has assumed the personal responsibility in conducting affairs of the company, he stands liable if he breaches the duty of care even though he may not have stepped outside the scope of his power and authority.
Position in India- In India no case has been decided either by NCLT or by Supreme Court on the lines of the English court’s decision with respect to the tortious liability of the director of the company which means that the position regarding the imposition of personal liability in the tortious act by the director of the company is still grey. Though Indian law does not as such recognize the doctrine of assumed personal responsibility there are some statutory provisions with respect to the imposition of direct tortious liability on the director of a company under the Companies Act, 2013.
Firstly, Section 35 of the companies act talks about the civil liability of certain persons, including the director of the company, for causing any statement included or omitted which is misleading and the person who has subscribed on the basis of such misstatements, suffers any loss or damage. Then such directors and other officers must make losses good if the person relying on these misstatements suffered any loss or damage or in simple language has to pay compensation.
The civil liability in the aforementioned provision is of the nature of “tortious liability”. In the case of Pasley v. Freeman[2], it was held that it is the rule that A is liable in tort to B if he knowingly or recklessly makes a false statement to B with the intent that it shall be acted upon by him, who does act upon it and thereby suffers loss. Hence a connection can be drawn between a specific kind of tort, developed by common law court and express provision under Companies act, 2013. Statements may be made either dishonestly or negligently it doesn’t matter what matter is that any of such intention results under a specific tort i.e. Tort of deceit and Tort of negligence respectively. In the case of Edgington v. Fitzmaurice[3], it was held in very clear terms that the directors shall be held liable for deceit procuring the public to subscribe for securities for their company by making false statements in the prospectus.
Secondly, Under section 340 of the Companies Act, 2013 the NCLT has been empowered for assessing damages from the delinquent director, manager or official liquidator in case of any of them misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of misfeasance or breach of trust. The court/NCLT has the power to order for repayment or recovery of any loss or damage occurring out of such an act.
As per learned author Percy Henry Winfield and John Anthony Jolowicz, wrongs that are redressable inequity include breach of trust and breach of fiduciary duty. The aforesaid decisions, as well as various other decisions, indicate that the liability which is enforced under this section is a liability in the nature of tort or liability in the nature of quasi-criminality and is founded on the principle that the director who has caused loss to the company by an act which amounts to misappropriation, breach of trust, misapplication or retention should make good the loss. The liability which is enforced under Section 340 of the 2013 Act is a liability in the nature of a tort or a quasi-criminal responsibility.
Furthermore, The primary difference between tortious liability and criminal liability, in my opinion, lies in the level of deterrence intended. Generally, under criminal liability, the intention is to provide more deterrence than a tortious liability. The aim of imposing a tortious liability is to get remedy in the form of compensation which is in the nature of restoring the original position of a person victimized by such tort whereas under criminal liability mostly the monetary deterrence is in the form of fine which is collected by the government to be added as revenue. It is only in exceptional cases where under criminal liability the compensation is awarded eg. Section 326D of IPC. The duties of the director of a company have been provided under section 166 of the Companies act. In the breach of such duties fine can be imposed, the aim of this provision is to provide deterrence or imposing criminal liability whereas the provisions which we have mentioned in earlier chapter imposes civil liability means the amount collected under those provisions goes for restoring the position of victim unlike fine because the amount of fine goes to the government treasury. This paper does not suggest that there is no provision other than those mentioned under this blog.
In view of the above-mentioned discussion on the topic. It is clear that the position with regards to the imposition of personal liability of directors in India is not clear. The position in the United Kingdom is much more crystallized.
The author suggests the following suggestions with regards to the policy changes. Firstly, the Indian judiciary should start taking this matter seriously. Indian corporate law is in dire need of the English principle of “Assumed Personal Responsibility” which directly imposes tortious liability on the director of the company. Secondly, The Law commission should also take cognizance of the matter and submit their comprehensive study so that the legislature can take actions regarding the codification of this aspect. Thirdly, the legislature itself should take steps forwards in the form of amendments and companies act and rules, because as of now the legislature is only concerned about imposing criminal liability on the individuals. The current provisions in the companies act, 2013 regarding imposing the said liability is very limited in number as it covers only a certain aspect of tort law.
[1] (1997) 1 B.C.L.C. 131
[2] 100 Eng. Rep. 450 (K.B. 1789)
[3] (1885) 24 Ch D 459