Comparison between liability of a director and liability of a partner

INDEPENDENT DIRECTORS

The Act, 2013, restricts and limits the liability of ID’s to the matters which are directly relatable to them. Section 149 (12) limits the liability of an ID “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently”.

Nominee directors, despite not being considered as ‘independent’ under the new definition, would nevertheless be eligible for immunity, as long as they are non-executive.

CONCLUSION

The new concept of having ID is a welcome step for corporate governance in India. The Act, 2013 has conferred greater empowerment upon ID’s to ensure that the management & affairs of a company is being run fairly and smoothly. Hence, they would not do something unfair for which they would be held accountable.

LIABILITIES OF A PARTNER OF A FIRM

1. To carry on the business to the greatest common advantage (Section 9)
2. To render true accounts and full information of all the things affecting the firm (Section 9)
3. To indemnify the firm for loss caused by fraud (Section 10)
4. Attend diligently to his duties in the conduct of the business of the firm (Section 12-b)
5. Attend to the business of the firm diligently and is not entitled to receive remuneration (Section 13 1(a))
6. To indemnify the firm for loss caused by willful neglect (Section 13 (i))
7. Liability to share loss
8. To hold and use the property of the firm exclusively for the purposes of business of the firm (Section 15)
9. To account for profits of a competing business carried on by him (Section 16 (b))
10. To account for any losses ensuing from any act committed by him
11. Cannot assign or transfer his partnership interest (Section 29 sub section (1 and (2)

LIABILITIES OF A PARTNER TO THIRD PARTIES:

1. Liability of a partner for acts of the firm: Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Because of this liability, the creditor of the firm can sue all the partners jointly or individually.

2. Liability of the firm for wrongful act of a partner: If any loss or injury is caused to any third party or any penalty is imposed because of wrongful act or omission of a partner, the firm is liable to the same extent as the partner. However, the partner must act in the ordinary course of business of the firm or with authority of his partners.

3. Liability of the firm for misutilisation by partners: Where a partner acting within his apparent authority receives money or property from a third party and misutilises it or a firm receives money or property from a third party in the course of its business and any of the partners misutilises such money or property, then the firm is liable to make good the loss.

4. Liability of an incoming partner: An incoming partner is liable for the debts and acts of the firm from the date of his admission into the firm. However, the incoming partner may agree to be liable for debts prior to his admission. Such agreeing will not empower the prior creditor to sue the incoming partner. He will be liable only to the other co-partners.

5. Liability of a retiring partner: A retiring partner is liable for the acts of the firm done before his retirement. But a retiring partner may not be liable for the debts incurred before his retirement if an agreement is reached between the third parties and the remaining partners of the firm discharging the retiring partner from all liabilities. After retirement the retiring partner shall be liable unless a public notice of his retirement is given. No such notice is required in case of retirement of a sleeping or dormant partner.

Comparison between the liabilities of a director and a partner

1. TRUSTEE

DIRECTORS

The directors of a company are trustee for the company, and with reference to their power of applying funds of the company and for misuse of power they could be rendered liable as trustee and on their death, the cause of action survives against their legal representatives[25].Another reason why directors have been described as trustee is the peculiar nature of their office. Some of their duties to the company are of same nature as those of trustees. For example, they, like trustees, occupy a fiduciary capacity and position. Moreover, almost all the power of directors are powers held in trust, such as power to make calls, to forfeit shares, to issue further capitals, the general power of management and the power to accept or refuse a transfer of shares, are all the powers in trust which have to be exercised in good faith or the benefit of the company as a whole. Their position is that of a constructive trustee.[26]

PARTNERS

It can be drawn that as per Section 9 of the Indian Partnership Act, 1932, a partner must observe the utmost good faith in his dealings with the other partners. He is bound to render accounts of the partnership assets in his hands. But in the absence of special circumstances he cannot be regarded as a kind of trustee for the other partners or liable to render accounts to them in a fiduciary capacity. Further, Section 21 of the Act enumerates the fact that a partner must act in emergency as a normal prudent person would normally do for the benefit of the firm and such acts binds the firm.[27]Partnership itself does not create a fiduciary relation between the partners or make one of them a trustee for the other or for his representatives. The relation may, however, arise on the death of one of them or be created by other special circumstances.[28] A partner failing to pay moneys in his hands and received by him on account of the partnership was not liable to be imprisoned under s. 4(3) of the Debtors Act 1869 as a person “acting in a fiduciary capacity” within the meaning of that statute. Hence, the managing partner cannot held liable on acting in the capacity of fiduciary relationship between one of the partner.[29]

2. AGENT

DIRECTORS

It is clearly recognized as early as 1866 in Ferguson V Wilson542 that directors are in the eyes of law, agents of the company. The general principle of agency, therefore govern the relations of directors with the company and of persons dealing with the company through its directors. Where the directors contract in the name, and on behalf of the company, it is the company which is liable on it and not the directors.[30] The notice to a director will amount to notice to the company only if the director is, like an agent, bound in the course of his duty to receive the notice and to communicate it to the company[31] [32]. It should, however, be remembered that they are the  agents of an institution and not of its individual members except when that relationship arises due to the special facts of a case.[33]

PARTNERS

Partners like directors of a company, are agents of the firm[34]. However, unlike directors partners are agents of each other and are jointly and severally liable for the acts of the firm.[35] The partner has implied authority to bind for the act of the firm[36] and hence an attorney is legally authorized to institute a complaint on the part of the firm, notwithstanding the fact that it was employed by one of the partner with or without the consent of the other partners.[37] The partners, in a firm may, by contract between the partners, extend or restrict the implied authority of any partner[38]. However, there arise a difference between the statutory restrictions contained in section 19(2) and those imposed by the partnership deed is that while the former are binding upon every person contracting with the firm, whether he has knowledge of them or not, the latter are not effective against a party who has no knowledge of them[39]. The wrongful act committed by a partner despite no knowledge of the same to the other partner, binds the firm.[40] [41]

It is within the implied authority of the partner to borrow money on the credit of the firm.[42] Partner can bind the firm by a bill or note, upon which money may be obtained, by the everyday process of discounting; and pledge partnership goods .Thus, the misapplication of money borrowed by the partner acting within his apparent authority binds the firm as per Section 27(1) of the Indian Partnership Act, 1932.[43]

3. TORTS

DIRECTORS

If the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore to the company the funds used for such purpose[44]. Where the directors represent to the third party that the contract entered into by them on behalf of the company is within the powers of the company while in reality the company has not such powers under its memorandum, the directors will be personally liable to third party for his loss on account of the breach of warranty of authority[45]. The director can make a company liable for any tort, if he shows that - (1) That the activity in the course of which it has been committed falls within the scope of memorandum , and (2) That the servant committed the tort within the course of his employment.

PARTNERS

Partners are jointly and severally liable for the wrongful acts or omissions of any of them which causes loss or damage to third persons, if such acts are either done by a partner in the ordinary course of the firm’s business or with authority of his co-partners. They are jointly and severally liable where a partner receives and misapplies the money or property of a third person while acting within the scope of his apparent authority and when the firm receives, in the ordinary course of its business, money or property which is misapplied by one or more of the  partners while in the firm’s custody.  [46]

4. WINDING UP

DIRECTORS

It is a general rule that liability of directors is limited. However the claims may arise because all has not been well with the company and that certain decisions were taken by Director / Directors who need to be held accountable for that decision. Normally, such claims relate to the fraudulent conduct of business when a company is in the course of winding up. These claims will arise when the company continues to carry on business and incur debts at a time when there is, to the knowledge of the Directors, no reasonable prospect of the creditors ever receiving payment of those debts. The Directors are personally liable in such a case for such debts of the company.

PARTNERS

Liability of a partner is unlimited. Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.[47]

The partners cannot escape their liability to third parties for acts done even thereafter unless public notice of dissolution is given. These provision emphasis the necessity of giving a public notice before a partner could terminate his future liability whether it is a case of dissolution, retirement or expulsion.[48]

5. RETIREMENT

DIRECTORS

Directors are liable for acts done before the date of his retirement. The date he has been out of the Board of Directors he is not liable for the acts done after that.

PARTNERS

A retiring partner continues to be liable to the third parties for the acts of the firm done before his retirement and all transactions of the firm that had begun, but were unfinished at the time of his retirement. He can be released from the liability if other partners and creditor consents to it.

A retiring partner as well as the firm continues to be liable to the third parties for the acts of the firm done after his retirement until a public notice is given of his retirement.

A retiring partner is not liable to any third party who deals with the from without knowing that he was a partner, even if a public notice of his retirement has been given.

LIMITED LIABILITY PARTNERSHIP

Limited liability partnership is the hybrid of a company and a partnership. Although LLP Act has incorporated some provisions in tune with Partnership Act and Companies Act, but it differs in several aspects. Partnership Firm is not a legal entity like a company, it is a group of individual partners[49]. In Partnership, Firm name is only a compendious name given to the partnership and the partners are real owners of assets and partnership firm is not a distinct legal entity[50]. But, LLP per se is a body corporate formed and incorporated under the LLP Act and legal entity separate from that of its partners. Any change in the partners of a LLP shall not affect its existence, rights or liabilities. So, an LLP should have perpetual succession.

LIABILITY OF A PARTNER IN A LLP

The partners in an LLP have a limited liability. Unlike in Partnership, where a partner is also liable for the acts of other partners, in an LLP, a partner is not liable for another partner’s act. No partner would be liable for independent or unauthorised acts of the other partners or for their misconduct. Every partner of an LLP, for the purpose of business of the LLP is the agent of the LLP, but not of the other partners. The LLP is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority. An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership. A partner cannot be made liable for the obligations of the limited liability partnership. A partner is not personally liable, directly or indirectly for an obligation of LLP solely by reason of being a partner of the LLP. The liabilities of the LLP shall be met out of the property of the limited liability partnership. The partnership firm would be liable to the full extent of its assets, while the partner would be liable only to the extent of their agreed contribution. But these protections do not affect the personal liability of a partner for his own wrongful act or omission. An LLP is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the LLP in doing a particular act and the person knows that he has no authority or does not know or believe him to be a partner of the LLP.

LIABILITY IN CASES OF HOLDING OUT

Section 29 of the LLP Act, 2008 provides for the extent of liability of LLP in cases of holding out. It states that any person, who by words spoken or written or by conduct, represent himself, or knowingly permits himself to be represented to be a partner in an LLP is liable to any person who has on the faith of any such representation given credit to the limited liability partnership. In such situation, it doesn’t matter whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

FRAUD- AN EXCEPTION TO LIMITED LIABILITY

According to section 30, if LLP or any of its partners carry out an act, with intent to defraud creditors of the LLP or any other person or for any fraudulent purpose, the liability of the LLP and the partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.

FINE- Each person who was knowingly a party to the fraud business shall be punished with imprisonment for a term which may extend to two years and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

Maanvi Jain is a third year law student at ILS Law College, Pune. Her area of interests include Corporate Law, Maritime Law and Taxation.

CONCLUSION

The liability of a director is limited while the liability of a partner is unlimited. However, with the emergence of the concept of LLP even this difference between the two has reduced.

[1] . The act lays down the powers of the Board which are to be exercised within the parameters provided by the Articles.

[2] Good faith as defined under s.52 of IPC,1860 and s.2(h)of  Limitation Act,1963-“Nothing is said to be done or believed in good faith which is done or believed without due care and attention.”  N.Subramania Iyer v. Official Receiver,  AIR 1958 SC 1 – Good faith may exist in spite of negligence. Municipality of Bhiwandy and Nizampur v. Kailash Sizing Works, AIR 1975 SC 529. Not in good faith – When a person is aware of possible harm and acts in spite of it, his action is reckless and in the eyes of law, mala fide.

[3] This does not necessarily suggest that benefits should accrue to the stakeholders as a result of their action.

[4] A director is expected to exercise reasonable care in the performance of duties, making use of his experience and knowledge. What constitutes “reasonable care” would be measured by the care a reasonable man would take in the performance of his duties. It is not for the court to test as to what is reasonable. If in spite of the exercise of such reasonable care damages are occasioned by errors in his judgment, the director shall not be faulted as held in Brazilian Rubber Plantations &Estates Ltd, In re.

[5] In Union Bank of Allahabad, In re, it was held that where directors are required by the articles of association to control the management and when they blindly trusted dishonest manager, they were acting unreasonably if not dishonestly.

[6] Nanalal Zaver v. Bombay Assurance co. Ltd, 20 Comp Cas 179; D.C. Mehta, Official Liquidator of Gaya Sugar Mills Ltd. v. Jogeshwar Prasad ,1976 Comp Cas 671 (pat.).Held that while acting in the interest of the company if they promote their own interests, they cannot be considered as having committed any breach of duty.

[7] Fateh Chand Kad  v.  Hindsons(Patiala) Ltd, 27 Comp. Cas. 340. Held that a director stands in a fiduciary position to the company and is to guard the company’s interest and not enter into engagements which may conflict with such interests.

[8] Cape Breton, In re, 299 Ch.D 795(CA),  it was held that if a director sells his own property to the company without disclosing his interest , the company may repudiate the contract and return the property but if it adopts the contract, no claims lie against director.

[9] Regal (Hastings) Ltd. v. Gulliver,1 All ER 378; Boston Deep Fishing & Ice Co. v. Ansell, All ER 65 (CA). A director is not expected to retain the profit that he has made by reson of the opportunities that have arisen consequent upon the position held by him in the company even if he has acted in complete probity.

[10] In line with the principle of “Delegatus non potest delegare”, the director cannot delegate his office as he has been appointed by the members in exercise of their prerogative power.

[11]Oriental Metal Pressing (P) Ltd. v. Bhaskar Kashinath Thakoor. Nomination of successor does not amount to delegation

[12] Financial statements of all companies from the financial year 2014-15 onwards would be required to be prepared in the manner prescribed in schedule III.

[13] Companies (Accounting Standards) Amendment Rules, 2016. The Amendment grant reliefs to wholly-owned or partially owned companies if their ultimate or any intermediate holding company prepares a Consolidated Financial Statement.

[14] The 2013 Act does not distinguish between the fact that whether a default has been committed willfully or not, for the purpose of imprisonment as was the case under the 1956 Act.

[15] Sunil Mittal v. CBI where it was held that if the Company is an accused, vicarious liability is not automatically imputed in the absence of a statutory provision to that effect. For any offence involving mens rea, the intent and action of the individual who acts on behalf of the company is to be shown. Sufficient evidence of active role coupled with criminal intent must necessarily be shown for a director to be made accused along with the company.

[16] Gunmala Sales v. Anu Mehta that although there is no deemed liability of the directors in absence of statute, if the complainant makes out a case whereby the specific acts may be attributable to the director in question such that at the ‘relevant time’ the director was in charge or in actual control over the actions that took place, the director may be held accused and subsequently vicariously liable for the actions of the company.

[17] Sabitha Ramamurthy v. R.B.S Channabasavaradhya where the court said that for a director to be made an accused for actions of the company, specific allegations as to the part played by the director in the illegal transaction and also specific evidence in this regard needs to be brought out. Only when these conditions are satisfied can a director be validly made an accused in a criminal case.

[18] Section 24 of SEBI Act.

[19] If proved affairs of the company were conducted fraudulently, liable under s.447 of CA, 2013.

[20] Private company undertaking a private placement not in accordance with s-42 will deemed to be a public offer (contrary to s-23 of CA, 2013) and will be liable under s-447 as well as s-42(10).

[21] As the penalty prescribed under this section is a fine, the offence may be compounded under s.441 of the CA  2013.

[22] Compounding not permitted under s.441 as the punishment included was imprisonment. NCLT has been invested with power to compound offences. In re, Reliance Industries Ltd., (1997) 89 Comp.Cas.,67 (CLB) – Compounding was allowed by registrar of companies.

[23] Section 25(4) of CA, 2013 requires two directors or not less than one-half of the partners of the firm to sign the deemed prospectus authorizing its issue. Section 26(4) of CA, 2013 mandates every director or his duly authorized attorney to sign the prospectus before it is issued. Therefore, the directors could be directly held liable for misstatement or an untrue statement in the prospectus as held in I.B. Rao v. Registrar of Companies,(2007) 137 Comp.Cas.469(AP).

[24] As the section uses the word “knowingly” mens-rea is required to be proved.

[25] Sankaram Nambiar V kottayam Bank AIR 1946 Mad 304

[26] Singh Avtar on company Law 15th Ed. 2007 page 267

[27] Prem Ballabh Khube v. Mathura Datt, Bhatt, AIR 1967 SC 1342

[28] Halsbury, Hardinge Stanley Giffard, Sanagan and Gerald D., Halsbury’s Laws of England 822 (3d ed. 1954)

[29] Piddocke v. Burt ,(1894) 1 Ch. 343

[30] Kuriakos V PKV Group Industries, (2002) 111 Comp Case 826 Ker-Thus where the plaintiff supplied certain goods     to a company through its chairman, who promised to issue him a debenture for the price, but never did so and the company went into liquidation, he was held not liable to the plaintiff

[31] Section 229 of Indian Contract Act 1872

[32] in Hampshire Land Co., Re, (1896) 2 Ch. 743- Where one person is an officer of two companies, his personal knowledge is not necessarily the knowledge of both the companies unless he is under a duty to receive the notice and to communicate it to the other

[33][33]  Singh Avtar on company Law 5th Ed. Page 266 . Sarathi Leasing Finance Ltd. V B. Narayana Shetty, (2006) 107 Comp Case 606 - For a loan taken by a company, the directors, who had not given any personal guarantee to the creditor, could not be made liable merely because they were directors.

[34] Section 18 of Partnership Act,1932 (PA ACT,1932)

[35] Section 25 of PA,1932

[36] Section 19 of PA,1932

[37] Purushottam Umedbhai & Co. v. Manilal and Sons , AIR 1961 SC 325

[38] Section 20 of PA, 1932

[39] Motilal v. Unnao Commercial Bank, (1930) 32 Bom LR 1571- Firm held liable when one of the partners borrowed money by accepting a bill of exchange despite restrictions on borrowing contained in the partnership deed, the other party knowing nothing of the restriction

[40] Hurruck Chand v. Gobind Lal Khetry, (1906) 12 CWN 1053

[41] Section 26 of PA, 1932

[42] Earnect H. Scamell, Earnest H. Scamell 77 (12 ed 1962)

[43]   Kaicker Typewriter Exchange v. Ram Narain Mehra, (1970) ILR Delhi 384

[44] Jehangir R Modi V Shamji Ladha (1867-68) 4 Bom H.C.R. 185

[45] Weeks v. Propert (1873) L.R. 8 C.P. 427

[46] Law of Partnership in India, S.D. Singh and J. P. Gupta, 5th edition

[47] Section 49 of PA, 1932

[48] Section 45 of PA,1932

[49] Comptroller & auditor General v. Kamlesh Vadilal Mehta, (2003) 2 SCC 349

[50] N. Khadervali Saheb v. N. Gudu Saheb, (2003) 3 SCC 229, Malabar Fisheries Co. v. I.T. Commissioner, Kerala, AIR 1980 SC 176