Income Tax Act, 1961
Under Section 179 of the Income Tax Act 1961, when any private company is wound up and the tax assessed cannot be recovered, then every person who was a director of the private company shall be jointly and severely be liable for the payment of such tax. Where the bank account of a Director was frozen for recovering income tax dues of the Company, it was held in Gurudas Hazra v. P.K.Chowdhury that it was for the Director to show that the default on the part of the company was not attributable to any breach of duty on his part.
The section lays down that where any tax due from a private company cannot be recovered, then every person who was a director at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
This provision is not applicable to a company which is treated as public company under Section 43A of the Companies Act, 1956 in relation to tax pertaining to the period subsequent to its becoming a public company. This position was settled by Supreme Court itself.
Civil Liability to the Company- Director’s liability to the Company may arise where:
(1) the directors are guilty of negligence,
(2) the directors committed breach of trust,
(3) there has been misfeasance and
(4) the director has acted ultra vires and the funds of the company have been applied for such an act.
- Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and act with such care as is reasonably expected from him, having regard to his knowledge and experience.
In R.K. Dalmia and others v. The Delhi Administration it was held that “A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company.”
Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word “limited” or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr a bill was addressed to a company and omitted the word “Limited” in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber.
Pre- Incorporation Liability-:
A Company cannot make a contract before it is incorporated because, before incorporation, it has no legal existence. Therefore, a Company after incorporation cannot ratify a contract previously made. It must make a fresh contract. But, those who act on behalf of the unincorporated company may find themselves personally liable. In Kelner v. Baxter the Court of Common Pleas held that where a person purports to sign a contract as agent, but has no principle in existence at the time, he is personally responsible.
Liability for not maintaining Books of Accounts in accordance with sec 128 of Companies Act, 2013:
If the managing director, the whole-time director in charge of finance, the Chief
Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.
Misstatement in prospectus:
A statement included in a prospectus shall be deemed to be untrue if the statement is misleading in the form and context in which it is included. Where there is any omission of a matter from the prospectus and this is made to mislead, the prospectus is deemed to be called as a prospectus in which an untrue statement is included. Not only in prospectus, but a statement can be said to mislead even if it is present in any report or memorandum by reference incorporated therein or issued therewith.
As per Section 447 of Companies Act, 2013 a person guilty of fraud shall be punishable with imprisonment for a term ranging from six months to 10 years.
He is also liable to a fine, which can extend to three times the amount involved in the fraud. In cases where the fraud involves public interest, the term of imprisonment shall not be less than three years.
Penalties under SEBI Act for Insider Trading, Non disclosure of Acquisition of Shares and Take Over and Unfair Trade Practices:
15G.Penalty for insider trading.-If any insider who,-
- either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or
- communicates any unpublished price- sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
- counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information,
shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
(Note: The Act also prescribes that insider trading is punishable with a prison term of up to 10 years)
15H.Penalty for non-disclosure of acquisition of shares and take-overs.–If any person, who is required under this Act or any rules or regulations made there under, fails to,-
- disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or
- make a public announcement to acquire shares at a minimum price;
- make a public offer by sending letter of offer to the shareholders of the concerned company; or
- make payment of consideration to the shareholders who sold their shares pursuant to letter of offer.
he shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.
15HA.Penalty for fraudulent and unfair trade practices.– If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.