The Board of Directors act as the trustees of the organization’s money and are also agents for those transactions into which they enter on behalf of the organization. In general, directors of an organization are provided with duties that require skill, care, diligence, and independent judgment.
An organization is a legal entity and directors of the organization will not be held personally liable for taking actions that are on behalf of the organization. Boards of Directors have a fiduciary association with the organization and the shareholders of the organization. But, in case of a director acting beyond his powers he can be personally liable for the consequences of his actions. This is where the Directors and Officers liability insurance plan comes handy.
The major liabilities for which the Board of Directors in an organization can be held personally liable are mentioned below:
1. Tax liabilities: As per the Income Tax Act, 1961 if any previous year’s income tax is due and its recovery has not been made then the board of directors is to be blamed.
2. Debts of the company: The board of directors is not liable personally for any company debts of the company unless and until the directors are a part of any fraudulent activity associated with it.
3. Fraudulent business conduct: Board of directors will always be considered as personally liable if they act against the interests of the organization. In case it is proved that a Director’s actions and conduct are malicious and fraudulent then he or she will be personally liable.
4. Any false statement in the prospectus of the business: Directors will be considered personally liable in case of writing any false statements in the prospectus. Further, the personal liabilities can be waived off only if any of the below-mentioned action is taken:
- If the director can prove that he was not consulted before this action and he did not authorize this action
- If the director withdraws his consent before the statement is issued in the prospectus
- If the director can be able to prove that he believed that these false statements would be true.
- In case the director withdraws his consent once he has knowledge about the false statement and also gives a public declaration about this action.
5. Repayment of the share application money: The board of directors is liable for repayment of the surplus share application money which has been received but not paid on time.
6. Acquisition of share qualification: The directors of an organization are responsible or liable for the payment of qualification of shares. If this is not done within the stipulated time then the organization would have to face liquidation.
Hence, the board of directors will be held personally liable in case of these circumstances where there is a certain wrongful act done or it is associated with the shares and debts of the organization. This is where the Directors and Officers liability insurance comes handy. This policy offers coverage against such liabilities arising out of managerial duties and protects the directors from the financial loss due to these claims.