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Personal Liability of Directors or Members - Indian Companies Act, 1956

Limited liability is one of the main attractions while forming a Private Limited or Public Limited Company. But the company law incorporates personal liability on the directors or members of a company in certain cases notwithstanding the cardinal principles of separated personality and limited liability. There are certain statutory provisions which make liable those who are behind the company.


Reduction in Membership -Section 45 of Indian Companies Act, 1956
If at any time the number of members falls below the statutory minimum i.e. seven in case of a public Company and two in the case of a Private Company and the company carries on business for more than six months while the number is so reduced, every person who is a member of that company during the company so carries on business after those six month and aware of the fact shall be severally liable for payment of company's debts contracted during that time. In such cases, the privilege of limited liability is denied to the shareholders. 

Mis description of  Name - Section 147 of Indian Companies Act, 956
If the name of the company is not properly mentioned in any contract, bill of exchange, Hundi, promissory note, change or an order for money goods, any officer signs on behalf of the company shall be liable.

Subsidiary Company - Section 212 and 214 of Indian Companies Act, 1956
As required by sections 212 and 214 of the Indian Companies Act, 1956 a holding company has to disclose its members, the accounts of the subsidiaries. As per the law subsidiary company is a separate legal entity, but in certain circumstances the court may not treat the subsidiary company as an independent entity. There are two situations when a subsidiary company may lose its independent identity to certain extent, namely:


a.   The law may brush aside the legal forms and require companies in a group to present a joint picture in order to give better information of the financial position of the group as a whole to the public, creditors and shareholder;

b.  Where the control and conduct of business of a subsidiary company rests solely in the nominees of the holding company, it may be inferred that the subsidiary company is merely a branch of holding company and has no separate identity of its own.

Fraudulent Conduct of Business -Section 542 of Indian Companies Act, 1956
Where at the time of winding up of a company appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person for fraudulent purpose, in such cases those who were knowingly parties to such conduct of business may at the discretion of the court be made personally liable without any limitation as to liability for all or any of the debts of the company.

Failure to Return Application Money - Section 69(5) of Indian Companies Act, 1956
Section 69 clause 5 of Indian Companies Act, 1956 makes the director of a public company personally liable to pay the money with interest if the application money is not repaid within 130 days in the event of minimum subscription not having been received or company not having obtained certificated of Commencement of Business.

Misrepresentation in Prospectus -Section 62 of Indian Companies Act, 1956
If the prospectus issued by the company contains any misrepresentation, every director, promoter and every other person who authorized for issue of such prospectus incurs liability towards those who subscribe for shares on the faith of untrue statement.


Ultra Vires Acts
The Directors of a Company shall be personally liable for those acts done by them on behalf of the company, if they ultra vires the company.

Non-Payment of Tax
In the event of winding up of a private company, if any tax assessed on the company whether before or in course of liquidation in respect of income of any previous year cannot be recovered, any person who was director of the company at any time, the relevant previous year shall be jointly and severally liable for payment of tax.

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