Director’s Liabilities After Dissolution of Company: An Albatross Around The Neck 

  • Abhijeet Srivastava

     It may be alluring to become a director of a corporate entity however; one must keep in mind that if someday roof descends it is equally infelicitous. This is because with great power comes great responsibilities and liabilities. Such liabilities often arise, during the life of the corporate entity. With effect to this, the Companies Act, 2013 & IBC Code, 2016 has a certain provision which may decide directors’ liabilities at the time of liquidation or winding up. Although, theoretically this should settle all the claims against the directors, however, there are always some contingent liabilities which may not arise at the time of liquidation and may appear after the entity is dissolved completely. It is pertinent to note that, presently the Companies Act, 2013 lays down no such provision to make directors liable after the life of the company. Thus, here comes an intriguing question that, whether this silence means that directors are completely free from all the liabilities after the dissolution of the company or there are few provisions which may become albatross around the neck of the directors.

  The contractual liability of directors after the dissolution of the company:

      The foundational principle of corporate laws established in the case of Salomon v. Salomon[1],; very well establishes that a company is an artificial legal person and has its own separate legal entity. It is ubiquitous that it has the power to sue and get sued. However, it does not have the power to think and take decisions. Thus for assistance, its business affairs are conducted by its agents who are generally known as directors. They are the chief commanders of the entity and therefore, the fate of the company depends on the decisions of directors. Therefore, at the time of performing their duties and obligations towards the company, many a time they do enter into various contracts.[2] Although, we are aware of the consequences of breaching of these contracts during the life of the company, however, the question here is, what if contractual liabilities arises after the dissolution of the company. Can we make, directors liable even after the dissolution?   

      Indeed yes. Directors’ contractual liability could be imposed post-dissolution as well. But, we must keep in mind that it shall only extend where directors have provided their personal guarantee. This view could be supported by referring to the case of Tristar Consultants v. M/s. Vcustomer Services India Pvt. Ltd. & Anr[3].Here, the Hon’ble High Court came across the same issue. To ascertain the answer, it referred to section 230 of the Indian Contract Act, 1872 which says that the agent cannot personally enforce nor be bound by contracts on behalf of the principle. As the relationship of a company and a director is like agent and principle, therefore, directors cannot be personally liable on behalf of the company unless, director binds himself personally like by way of guarantee, indemnity etc. Similarly, in R.K. Dalmia and others v. The Delhi Administration[4], the Hon’ble Supreme Court held that director will be personally liable for a contract done on behalf of the company where he has given his personal liability either expressly or impliedly.

      Recovery of unpaid income tax amount from directors of the dissolved company:

     Non Payment of Income Tax dues is one of the biggest problems in India. There might be a situation where in order to escape from the huge income tax dues, commanders of the company may intentionally dissolve the company. Nevertheless, this situation does not arise because, at the time of liquidation, it is the duty of the liquidator to seek Non-Objection Certificate (NOC) from the tax authorities. If a tax of the corporate entity is due then liquidation proceedings are suspended until the repayment of the dues. However, there might be a situation where income tax authorities at the time of giving NOC may not discover dues and later discovers that the company has not paid taxes to the income tax authorities. 

     In such a situation, section 179 of the Income Tax Act, 1961 plays a prominent role. This provision says that, where any tax is due from a private company, then income tax authorities can recover it from the directors at any time. In the case of Smt. Bidya Devi v. CIT[5], the Calcutta High Court held that under section 179 of Act, income tax authorities can recover any tax due from a private company even after it is dissolved. Every person who was director of the private company shall be jointly and severally be liable for the payment of such tax. It is pertinent to note, that this section is only applicable over private companies. Does that mean that the directors of the public companies are exempted from this liability?

      The same argument was raised before the Gujarat High Court in the case of Pravinbhai M. Kheni v.  Assistant Commissioner of Income-tax[6],; where appellant who was director of a public company, argued that income tax authorities will not be able to recover the due tax under section 179 of the Act because this section is only applicable over the private companies. Although the High Court partially accepted the contention of the appellant and said that directors of a public company would not be liable for paying such unpaid taxes of the company, however the court held that corporate veil can be lifted against the appellant as he defrauded the income tax authorities and thus imposed the liability for the non-compliance.

     We must keep in the mind, that directors may get exempted under this provision on establishing that non-recovery of the tax was not because of his negligence, misfeasance or breach of duty.                 

      Voluntary Liquidation done to defraud the creditors:

After observing how provisions of SICA were potentially misused by the unscrupulous person, legislators in order to punish defrauders of the company, incorporated Section 65 of the IBC Code 2016. According to the Section 65(2) of the Code, if it proved that directors of the company have fraudulently initiated voluntary liquidation proceedings of the debtor, then in such case, NCLT shall impose penalty from 1 Lakh to 1 Crore on such person. Therefore, directors should always perform their duties and obligations with full trustworthiness.

      Way forward:     

     After the above analysis, it is crystal clear that Indian legislators have incorporated various provisions to impose liabilities on the directors’ wrongdoing. Those at the helm of decision making should not be left scott- free leaving behind government and the stakeholders’ remediless. This legislative intend could be also observed by a bare reading of section 248(7) of the Companies Act, 2013; which states that – “if any, of every director, manager or other officers who was exercising any power of management in the company dissolved, shall continue and can be enforced as if the company had not been dissolved.” However, this provision is only applicable over the companies which are dissolved by striking off its name from the Registrar of the Company. The position remains silent for the companies which are dissolved by winding up. Thus, the author here recommends to the policy framers to incorporate a stricter provision like section 105 of the Model Business Corporation Act, in the United States which states that – “The dissolution of a corporation shall not take away or impair any remedy available to or against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if an action or other proceedings thereon is commenced within two years after the date of such dissolution.” Therefore, incorporating such stringent provisions will definitely discourage commanders of the company is committing fraudulent activities and undoubtedly provide a remedy to the people who are at loss.

The author is a 4th Year Student at UPES, Dehradun

[1] Salomon v. Salomon , [1897] AC 22

[2] Anubhav Pandey, Liabilities of directors after dissolution of a company, ( 30 Apr. 2020; 12:54 PM) 

[3] Tristar Consultants v. M/s. Vcustomer Services India Pvt. Ltd. & Anr, AIR 2007 Delhi 157

[4] R.K. Dalmia and others v. The Delhi Administration 1962 AIR 1821 (SC).

[5] Smt. Bidya Devi v. CIT, AIR 2004 Cal 63.

[6] Pravinbhai M. Kheni v.  Assistant Commissioner of Income-tax, 353 ITR 585.