Companies and their directors bear responsibility to their creditors, shareholders, and third-party associates as per the nature of their arrangements, and are also beholden to government authorities and regulators to strictly adhere to the law, both in letter and spirit.
An investor who has relied upon misleading information when making an investment, and has suffered a loss as a result, may bring a suit against the company’s directors who were serving at the time such information was provided. A lender may also sue the directors if the company has borrowed funds with the intent to defraud the lender, and fails to make interest payments or return the principal amount as per the agreed terms.
Directors of a company that is undergoing liquidation, who have been found not to have taken adequate measures to minimize any protentional losses to the company’s creditors, could be directed by the insolvency court to contribute to the repayment of the company’s unpaid debts.
Government authorities may initiate proceedings against managing directors for the offences committed by a company, or even non-executive directors who have conspired and assisted with the commission of a crime.
Tax authorities may initiate proceedings against directors if they are unable to recover the company’s tax liability due to insufficient funds or liquidatable assets. This would also apply if the company is liquidated and dissolved prior to recovery of deficit taxes due from the company, rendering it impossible for tax authorities to recover such dues.
A company may itself sue directors that have been involved in embezzlement, fraud, or have abused or exceeded their authority causing loss or harm to the company.