Legal Articles

How does director liability work in Pakistan? How can companies protect their directors?

Written by Anahita Kukreja

A company is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. A company is an artificial person created by law, which can sue and be sued, except that it cannot be jailed or hanged, which gives way for irresponsible decisions to be taken by the company. The Companies Act 2017, significantly enhances SECP authority in relation to the general administrative functions of a company.

Under Section 180 of the Act, a director will be liable for any negligence, default, breach of duty or breach of trust, of which he may be guilty in relation to the company. Any provision exempting the director or indemnifying him against any liability will be void, except in the following cases-

  1. provisions of insurance undertaken by a company on behalf of such officers of the company; or
  2. qualifying third party indemnity provisions undertaken by a company on behalf of such officers of the company.

Section 204 of the Act, provides the duties of the director. Any breach of duty, default or negligence by a director also exposes the liability of the director. According to the Act, an independent director and a non-executive director shall be held liable, only in respect of such acts of omission or commission by a listed company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. A limited company may also have directors with unlimited liability provided that provisions in section 98 and 99 of the Act are followed.

In order to protect their director, a company must ensure that he does not meet any of the grounds for vacation of office as specified in Section 171. Further a company must also ensure that no circumstance given in Section 172 arises, that will lead to disqualification of the director.  A company must also ensure that an undischarged insolvent does not act as a director in the company as such an offence will make him liable to two years of imprisonment as stated in Section 177 of the Act. The company must keep a contract of employment with directors, following the provisions given in Section 210. A company should share a copy of their financial statements with the director before forwarding them to the registrar, since any improper issue, circulation or publication of the same holds the director liable according to Section 236 of the Act.

 

About the author

Anahita Kukreja

Anahita Kukreja is a Grade 11 student studying at Vasant Valley School, New Delhi. She is keen on pursuing law and is currently interning at SAARC Law under President, Mr. Mehmood Mandviwalla. She is a keen writer and a member of her school Editorial Board. She regularly writes for her school newsletter and is currently working on a compilation of her short stories and poems. She has successfully completed an online course on law offered by Yale University.

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