Vicarious Liability of Company for the Acts of Directors

This article is written by Akshaya V, a student of CMR University, School of Legal Studies, Bangalore.

Synopsis

This article explains the meaning of vicarious liability, the relationship between directors and the Company and further explains the cases in which the Company is vicariously liable for the acts done by its directors.

INTRODUCTION

One of the main features of a Company is a separate legal entity, that is to say, the company and its members are distinct. Assets of the members are not assets of the company and vice versa. Notably, directors and members of a company are not one. Directors are appointed under the Companies Act, 2013 and entrusted with duties to run business. On the other hand, members are shareholders entitled to vote in meetings of the Company and elect competent directors. Section 166 of the Companies Act, 2013 identifies the duties of directors in a company. Directors shall exercise due diligence, care and act in good faith, not gain undue advantage over the company and not proceed with personal interests conflicting with interests of the company. One of the main powers of the Board of Directors is that they shall be entitled to exercise all such powers and do all such acts as the company. This can be apprehended that the powers of the board are co-extensive with the powers of the Company. Therefore, directors act for the company and its objectives, of course, limited by Memorandum of Association and Articles of Association charted out for the Company.

Concept of Vicarious Liability

Generally, a person becomes liable for his acts. However, in cases where a relationship exists in the form of employer and employee, who is entrusted with duties to be carried out on behalf of the employer. This concept finds its basis on the maxim “qui facit per alium facit per se” which means “he who acts through another, acts for himself”. This maxim always stands as a presumption in determining a master-servant relationship. The master is held liable for all acts done by his servant during the course of employment. The explanation for “during the course of employment” is that the act done should be exercised in the capacity of a servant on behalf of his master and as a matter of duty. Thus, if a boss authorizes his servant to deal with clients within his scope, violation of acting within scope leads to the liability of the master. The said act may be by fraud, negligence, mistake or misrepresentation. The reason for vicarious liability was held in the case of Barwick v English Joint Stock Bank – though the master has not authorized the acts of servant, however, he has appointed him to do that class of acts and hence answerable for how his servant has conducted himself in exercising duty.

Vicarious Liability Of The Company For The Acts Of Directors

When an act done by the directors of a company is wrongful and a third party files a suit, it is pertinent to determine who is liable for such acts, whether the directors or the company. The following questions are brought into light before determining liability –

Can the company be liable for the acts done by the directors?
Why is the company liable vicariously for the acts done by directors?
Under which cases the Company is not held liable?

Liability of the Company

As already discussed directors are executives responsible for running the company to achieve its objectives. Directors act as the representative of the Company in managing and transacting business and trustees of the Company’s assets. The Company which they are representing is held vicariously liable for the acts done by them during the course of employment. Similarly, the directors are liable for the acts in the names of the Company. For example, if a director’s decision was against the company which leads to loss of the company and if a debenture holder whose interest is not paid files a suit, it would be against the company for the acts of directors.

The legal position of the Company is that of a separate legal entity, it can sue and be sued and shall hold legal rights and duties. But despite such characteristics, the company is personified by its directors to carry out its affairs. Directors act in three capacities in their relation to the company – agents, trustees and employees. Hence, they are required to act like a man of prudence as he would deal with his personal affairs of course with reasonable care. He is required to apply his mind diligently and take up the due standard of care. Any misconduct, whether willful or not amounts to misfeasance and shall hold the company vicariously liable.

Reason for vicarious liability of the Company

Separate Legal Entity and Corporate veil – A company is a separate legal entity distinct from its member. It means the assets of the company are not assets of the members. However, the exception to this rule is the corporate veil of incorporation. The concept of corporate veil is like a shield that covers the directors from identification and makes the Company wholly liable and accountable. This is a legal concept that protects directors from being liable. For illustration, if taxes were not received from the Company and if the Tax Department files a suit, it shall be filed in the name of the Company as the directors are behind the corporate veil, even though it was their duty to settle the tax amount.

Company when not vicariously liable

Lifting of Corporate veil – This is an exception to separate legal entity. Both in provisions of Company Law and judicial pronouncements, there are incidents of a veil being lifted so that the identity of the members can be seen. It simply means that members, directors and certain persons shall also be personally held liable. The Court may order the directors to be liable when a fraudulent act is conducted in the name of the Company, when the creditors suffer losses due to non – repayment of loan or interest, the act of directors is ultra vires their powers and when the directors are negligently acting for personal gains. Most importantly, if directors do not fulfil their duties mentioned under Section 166 of the Companies Act, 2013 shall be personally held liable for punishment of fine which shall not be less than One Lakh rupees but which may extend to Five Lakh rupees.

Conclusion

Vicariously liability is akin to strict liability – no-fault liability. If the act done by the directors is bona fide in nature, the Company stands liable in case any liability arises from such bonafide transactions. The concept of the lifting of the corporate veil is only in the case of acts done by the directors which are malafide in nature. Otherwise, generally, the Company is liable for the tortious acts of its directors.

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