2007 (3) TMI 373 - HC - Companies Law

Directors' Personal Liability in Breach of Contract Actions Explained by Court

The Court dismissed the petition, emphasizing the legal distinction between a company's liability and the personal liability of its directors. It ... Powers of Directors Issues involved: The issue involves the liability of a director of a company in an action for recovery of damages alleging breach of contract by the company.Details of the Judgment:Issue 1: Liability of Director in Breach of Contract ActionThe petitioner filed a suit seeking recovery of damages for breach of contract by the company. The suit was against defendant No. 1, represented by its director, defendant No. 2. The contract involved identifying suitable candidates for defendant No. 1. After cancellation of the contract, correspondence was exchanged for payment, which was not honored. The total suit amount was Rs. 17.61 lacs. The Trial Judge struck off the name of defendant No. 2 from the suit, leaving the suit against defendant No. 1 only.Issue 2: Legal Standing of Sole Proprietary FirmThe Court noted doubts regarding the legal standing of a sole proprietary firm to maintain an action, as it is not a juristic entity. The correct description of the plaintiff should have been the individual carrying on business as the sole proprietor of the firm.Issue 3: Director's Liability and AgencyThe petitioner argued that a director acts as the agent of a company and would be personally liable if acting on behalf of the company. However, the Court clarified that a company is a juristic person and must act through its board of directors collectively. An individual director cannot act on behalf of the company without specific authorization.Issue 4: Director's Fiduciary DutiesDirectors of a company are described as agents, trustees, or representatives of the company due to their fiduciary duties. They owe no fiduciary or contractual duties to third parties dealing with the company. Directors are agents of the company to the extent they are authorized to act on its behalf.Issue 5: Director's Personal LiabilityDirectors can be personally liable to the company and its shareholders if they derive personal benefit while acting on behalf of the company. However, they cannot be treated as agents of the company in the conventional sense concerning third parties.Conclusion:The Court dismissed the petition, finding no merit in the argument that a director would be personally liable in a breach of contract action. The legal distinction between a company's liability and the personal liability of its directors was emphasized, highlighting the limited circumstances where directors may be personally liable, such as in cases of malfeasance or misfeasance.