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Unlimited Liability of Directors/Managers

Provisions under the Companies Act 2013 (Section 286)

In a limited company, where any person who is or has been a director or manager, whose liability is unlimited under the provisions of this Act, shall be liable to make (further) contribution as if he were at the commencement of winding up, a member of an unlimited company. This will be in addition to his liability, if any, to contribute as an ordinary member.

Provided that such person who has been a director or manager shall not be liable to make such further contribution, -
(a) if he has ceased to hold office for a year or upwards before the commencement of the winding up;
(b) in respect of any debt or liability of the company contracted after he ceased to hold office;
(c) unless the Tribunal deems it necessary to require the contribution in order to satisfy the debts and liabilities of the company, and the costs, charges and expenses of the winding up (
subject to the articles of the company).

Provisions under the Companies Act 1956

UNLIMITED LIABILITY OF DIRECTORS/MANAGERS IN A LIMITED COMPANY:

Sections 322 and 323 of the Companies Act, 1956 deals with the provisions of Directors of limited companies with unlimited liability.


As per the said Sections there are two(2) situations, where in the liability of the Directors can be Unlimited:


(1) Company having Directors/Managers with unlimited liability

(2) Power of a Company to make liability of Directors/Managers unlimited

Situation 1: Company having Directors/Managers with unlimited liability (Section 322)

In a limited company, the liability of the directors or of any director or manager may, if so provided by the memorandum, be unlimited.



In a limited company in which the liability of a director or manager is unlimited, the directors and the manager of the company, and the member who proposes a person for appointment to the office of director or manager, shall add to that proposal a statement that the liability of the person holding that office will be unlimited; and before the person accepts the office or acts therein, notice in writing that his liability will be unlimited, shall be given to him by the following or one of the following persons, namely, the promoters of the company, its directors, or manager, if any, and its officers.


If any director, manager or proposer makes default in adding such a statement, or if any promoter, director, manager or officer of the company makes default in giving such a notice, he shall be punishable with fine which may extend to Rs. 10,000/- and shall also be liable for any damage which the person so appointed may sustain from the default; but the liability of the person appointed shall not be affected by the default.


Situation 2: Power of a Company to make liability of Directors/Managers unlimited
(Section 323)


A limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or of any director or manager.


Upon the passing of any such special resolution, the provisions thereof shall be as valid as if they had been originally contained in the memorandum: Provided that no alteration of the memorandum making the liability of any of the officers referred to in sub-section (1) unlimited shall apply to such officer, if he was holding the office from before the date of the alteration, until the expiry of his then term, unless he has accorded his consent to his liability becoming unlimited.


Special Resolution for Unlimited liability of Directors:


“RESOLVED THAT subject to the provisions of Section 16, 323 of the Companies Act 1956 and any other applicable provisions thereof, the Clause IV of the Memorandum of Association of the Company be and is hereby substituted by the following clause:


'IV. The Liability of the Members is LIMITED subject, however, that the liability of a member who is also a Director of the company shall be unlimited'."
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