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Legal Article

Liability of Directors and Shareholders in West Bengal

Introduction:

Meaning of Director:

A Director is one who deals with the affairs of the company. He is one of the members of the governing board of the company or corporation. He is the head of the company or corporation who is elected or appointed by other competent members of the organization. Directors have powers and duties relating to the management or administration of the organization or company. A company has directors which are composed of a group of people and they make necessary important policy decisions for the company.

Types of Directors:

  1. Executive Director
  2. Non-Executive Director
  3. Managing director
  4. Independent Directors
  5. Residential directors
  6. Small Shareholder Directors
  7. Women Directors
  8. Additional Directors

Rights of Directors:

  1. The director has the right to take a decision to increase the capital of the company by the issue of further shares.
  2. The directors have the right to call an extra general meeting at any time.
  3. The director has the right to preside as chairman of every general meeting of the company.
  4. The directors have the right to determine the remuneration of a director for performing extra service.
  5. The directors have the right to obtain a loan from the company to fulfil his requirements.

Meaning of Shareholder:

In simple words an owner of shares in a company. A shareholder is also known as a stockholder.  An individual is not a stockholder or shareholder until their name and other information or details are registered in the company’s register of shareholders. A shareholder gets importance or has an influence on the business is determined by their share percentage owned by them in the company.

Types of Shareholders:

Primarily there are two types of shareholders. They are –

  1. Common Shareholders
  2. Preferred Shareholders

Some Rights of Shareholders:

  1. They have the right to sell their share of stock.
  2. They have the right to vote on the directors nominated by the board of directors.
  3. They have the right to access certain information.
  4. They have the right to sue the company for violation of fiduciary duty.
  5. They have the right to purchase new shares issued by the company or organization.

Liabilities of Directors under Companies Act, 1956:

  1. Misstatement in the prospectus of the company binds the director liable for the damages towards the third party.
  2. Section 62 deals civil liability of the director and section 63 deals with criminal liability of the director.
  3. When a director commits fraudulent trading during the course of the business, he or she is held liable for the damages under section 542 and section 542(3).

Liabilities of the Director under Companies Act, 2013:

  1. Section 35 explains civil liability of the director and it further says that if any individual subscribed to securities acting on misleading statements in the prospectus then they are held liable for the same.
  2. Section 34 explains criminal liability which further says that if any prospectus is issued and it has untrue facts or statements they the director is held liable under section 447.
  3. Section 40 of the act provides that the company before making any public offer, they should get a permission for the securities on application to the stock exchange and the amount obtained by them on application should be kept in a separate account otherwise any default arising out of this transaction will make the company or the director liable for the default.
  4. Section 339 provides that if any fraudulent trading is done in the business then the director will be held liable for the damages under section 447.

Liabilities of Shareholders:

 Liabilities of Shareholders are limited.

  1. A shareholder is liable for the unpaid capital on the shares held by him.
  2. A Shareholder is liable in the company’s shareholders agreement.
  3. They are also liable for breach of director’s duties if they are considered to be the directors. For example, the shareholder is provided with the powers of directors which are originally exercised by the directors.

Case Analysis:

“Deepakk Kumar vs Phoenix Arc Pvt. Ltd. & Anr on 5 March, 2020 National Company Law Appellate Tribunal”

 “On a careful consideration of respective contentions and also this Tribunal taking note of the facts and circumstances of the instant case in an encircling manner comes to an irresistible conclusion that the ‘Assigned Debt’ and the ‘New/ Fresh Loan’ for additional funding were not in dispute, and further that on 9.6.2016, the letter of acceptance was entered into between the parties in regard to the restructuring, settling, outstanding amount, in respect of the Assigned Debt as well as the New Loan, etc., in spite of this fact, the ‘Corporate Debtor’ was given an adequate opportunity to pay the outstanding balance amount, had not made the payments (some part payments were made by the Appellant as mentioned earlier in this judgment at paragraph 31), defaulted and also stopped making payments to the 1st Respondent after 31.05.2017. Hence, the impugned order dated 16th July, 2019 passed by the Adjudicating Authority (NCLT), Bengaluru Bench admitting Section 7 Application is free from any legal error. Also, the plea of the Appellant that Application under Section 7 of the IBC is barred by limitation is also negatived by this Tribunal because of the fact that the said Application was filed before the Adjudicating Authority (National Company Law Tribunal), Bengaluru Bench on 05.09.2018, well within time, from the date of defaulted and stopped payment from 31.5.2017. Consequently, looking at from any angle, the present Appeal is bereft of any merits and the same is dismissed without costs. I.A. 2579/2019 and I.A. 3512/2019 are closed.”

The above case says that the appellant, in this case, is referred to as developer and shareholder who took a loan from a bank. The appellant was unable to repay the loan and their loan was considered as Non-performing asset and the judgement was delivered accordingly.

“Chanda Deepak Kochhar vs Icici Bank Limited on 5 March, 2020 Bombay High Court”

“The Petitioner was working as a Managing Director with the ICICI Bank. The Petitioner was terminated from service. The Reserve Bank India communicated its approval to the termination. The Petitioner has challenged the termination order and has prayed for consequential reliefs. The Petitioner has also challenged the communication issued by the Reserve Bank. The Petitioner joined the ICICI Bank on 17 April 1984 as a Management Trainee. The Petitioner was appointed as Executive Director of the ICICI with effect from 1 April 2001 to 3 March 2006. The Petitioner was reappointed as Executive Director from 1 April 2006 to 31 March 2009. In April 2006 the Petitioner was promoted as a Deputy Managing Director. The Petitioner was then promoted as Joint Managing Director in October 2007. The Petitioner was appointed as Joint Managing Director and Chief Financial Officer from 1 April 2009 to 30 April 2009. After that, as a Managing Director and Chief Executive Officer from 1 May 2009 3 WP(Lodg.) 3315.2019..doc to 31 March 2014. The Petitioner was re-appointed as a Managing Director and Chief Executive Officer for five years from 1 April 2014 to 31 March 2019. Approval for these appointments were communicated b y Reserve Bank. We refer to the Petitioner as Managing Director. ICICI is a private body. It is not an instrumentality of the State. It receives no public funding. Service conditions of the 10 (1992) Mh.L.J. – WP 1538/89 dtd. 15/16-10-1991(Bom.) 11 (2019) SCC OnLine SC 501 17 WP(Lodg.) 3315.2019..doc Petitioner are not governed by any statute. The dispute raised in this Petition arises from a contract of personal service. The termination of the Petitioner is in the realm of contractual relationship. Since Section 35B(1)(b) does not regulate service conditions , approval for termination under it does not adjudicate the rights of the Petitioner as an employee. Though Section 35B(1)(b) postulates that the termination would not come into effect if there is no prior approval of the Reserve Bank, the cause of action for the Petitioner is the termination by ICICI. For the Petitioner, the legal implications of the grant of approval, non-grant of approval or post-facto approval, as the case may be, would be grounds and arguments in the contractual dispute. Thus merely because the approval under section 35B(1)(b) is questioned, that cannot infuse a public law element in this dispute, which remains a contractual dispute. For the contractual remedies, the Petitioner will have to approach the appropriate forum and not writ jurisdiction. As a result, we uphold the preliminary objection raised by the Respondents. The Writ Petition is dismissed as not maintainable.”

The above case says that the director was terminated from his service and so he challenged the respondent that is ICICI Bank for the termination of his service and also challenged the communication of RBI and judgement was accordingly delivered by the court and also asked the petitioner to file the case in the proper forum for the contractual remedies.

Conclusion:

The above discusses liabilities of directors and shareholders along with case laws. It is important for companies to appoint directors to run their business smoothly and directors must administer the company for the goodwill and betterment of the company. There are many shareholders who own shares or stocks in a company and they also have duties towards the company. This article provides full knowledge about their liabilities, rights and so on.

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