Duties and Liabilities of Company Directors in India

Becoming a director is easy. You need a DIN and a board resolution. But the role carries real legal duties, and in some situations personal liability. Every founder, and anyone asked to "just sign as a director", should know these rules.

The seven duties under Section 166

Section 166 of the Companies Act, 2013 codifies directors' duties. A director must:

1. Act according to the Articles of Association.
2. Act in good faith to promote the company's objects for the benefit of its members as a whole, and in the best interests of the company, its employees, shareholders, the community and the environment.
3. Exercise due and reasonable care, skill and diligence, and use independent judgment.
4. Avoid conflicts of interest: no direct or indirect interest that conflicts, or may conflict, with the company's interest.
5. Not make undue gain or advantage, for themselves or relatives, partners or associates. A director found guilty must pay the company an amount equal to the gain.
6. Not assign their office to anyone else. Any such assignment is void.
7. Comply with the other duties set out in the Act.

Breaching these duties attracts monetary penalties, and the company or shareholders can also sue.

Disclosures every director must make

• MBP-1: disclose interests in other companies, firms and bodies corporate at the first board meeting each year and whenever they change (Section 184).
• DIR-8: declare that you are not disqualified (Section 164).
• Related-party transactions: an interested director must disclose the interest and stay out of the discussion and vote (Sections 184 and 188).

When is a director disqualified?

Section 164(1) lists personal disqualifications: being of unsound mind, an undischarged insolvent, or convicted and sentenced to six months or more (within the last five years).

Section 164(2) is the one that catches most people. If a company hasn't filed financial statements or annual returns for three continuous financial years, or has failed to repay deposits or pay dividends, every director becomes disqualified for five years. During that time they can't be reappointed to that company or appointed to any other company. Their DIN may also be deactivated, which effectively removes them from all their boards. Keep your filings current with our compliance checklist.

Limits on directorships

A person can be a director of at most 20 companies, of which no more than 10 can be public companies (Section 165).

Personal liability: when the corporate veil doesn't protect you

• "Officer in default": many penalties in the Companies Act apply personally to officers in default, which can include directors who knew of or consented to the default (Section 2(60)).
• Independent and non-executive directors are liable only for acts done with their knowledge (through board processes), or with their consent or connivance, or where they didn't act diligently (Section 149(12)).
• Cheque bounce: when a company's cheque is dishonoured, every person who was in charge of and responsible for the business at the time can be prosecuted under Section 141 of the Negotiable Instruments Act.
• Tax dues: directors of a private company can be personally liable for unrecoverable GST dues, unless they prove the non-recovery wasn't due to their gross neglect or breach of duty (Section 89, CGST Act).
• Fraud: fraud carries serious penalties, including imprisonment (Section 447).

How to resign as a director

1. Give a written resignation notice to the company (Section 168).
2. The company must file DIR-12 with the ROC within 30 days.
3. You may also file DIR-11 yourself with the ROC, which is useful if the company doesn't cooperate.
4. Your resignation takes effect from the date the company receives the notice or the date in the notice, whichever is later. You remain liable for offences committed while you were a director.

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