Tuesday, January 18, 2011

Whether the Whole Time Director can be held personally liable for the defualts done by him or if he is the known party to the defaults?

The whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

If you are talking about the violations under the Companies Act, unless otherwise is proved the WTD being officer in default will be personally liable for all violations.

Each section of the Companies Act defining the liability, provides for the persons who would be personally liable for the violations.

 WTD is the officer in default under Section 5(g) of the companies Act, 1956 and for any willful default he will be personally liable and corporate veil can be lifted to see who is behind the scene.
he whole -time directors are like the employees of the company and if they commit any violations , they will be held responsible.

For instance , Section 372A of the Companies Act, Sub-section 1 of Section 372A stipulates that no company can acquire shares in any other “body corporate” through “subscription purchase or otherwise” for an amount exceeding 60 per cent of the acquiring company’s share capital and free reserves or 100 per cent of its free reserves, whichever is higher, as loans, guarantees and investments.

If company wants to invest more than the above limit , it would require shareholder authorization through a special resolution passed in a general meeting. The law also states that such a resolution has to be passed only through a postal ballot and with advance intimation to the RoC.

For instance , Satyam Board under Mr.Raju chairmanship ,approved a proposal to invest Rs 7,920 crore in the Maytas firms ( a subsidiary of Satyam group) whereas under section 372 A, it can invest only to the maximum level of Rs 2,136.37 crores without shareholders approval. Without Shareholders approval , Satyam invested Rs 7920 crores in Maytas.

Satyam board at that time consisted ts like prominent personalities as former cabinet secretary T R Prasad, Harvard Business School’s Krishna Paleppu, designer of the Pentium chip Vinod Dham etc.

Please note that Violating Section 372A would make the officers-in-default (which include the managing director, company secretary and whole time director) liable for punishment, which includes a fine of Rs 50,000 or imprisonment up to two years.

Thus , whole-time directors can be held liable for the violation or infringement of section 372A

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