What Legal Action Can Be Taken Against Fraudulent Directors in Private Companies?

What Legal Action Can Be Taken Against Fraudulent Directors in Private Companies?

Trust is an essential foundation of every private limited company. Directors, shareholders, investors, employees, and business associates extend this trust to associate with a company. However, if a director is found siphoning off funds, withholding crucial information, manipulating the books of accounts, or acting in his own self-interest, the repercussions can be more damaging than monetary losses to employees, creditors, investors, and reputation of the organisation as a whole.

Often shareholders and business associates are taken aback when they stumble upon suspicious transactions or activity. They may be unsure about how to react or where to turn because they don't know whether the problem is strictly a business dispute or if it rises to the level of fraud. Fraudulent activity by a director could implicate civil liability as well as criminal liability depending on the circumstances involved, evidence, and intentions.

Civil remedies for fraud by directors in private limited companies could include action under the Companies Act, 2013, civil recovery of property, filing of criminal complaints, launching of prosecution, action from regulators, and any other legal action that may be just and proper in the particular circumstances. The nature of fraud, role of the erring director, financial damages incurred, evidence available and overall facts and circumstances of the company will be important to determine the remedy available.

Why Do Director Fraud Issues Become Serious for Private Companies?

Directors are entrusted with a position of responsibility as they run the company’s affairs and take part in key decision making. A director is expected to act bona fide and in the best interest of the company. If this trust is breached, the ensuing corporate disputes can be serious.

Typical examples of alleged fraud by directors include:

Smaller private companies, especially SMEs are susceptible as the management may continue to be held by a few persons. Any dispute between directors can have immediate ramifications on the conduct of business, employee morale and commercial relationships.

BK Singh Advocate guides his clients to understand if the issue stems from an internal management dispute, violation of duties as a director, financial fraud or wrongdoing that can have civil and criminal repercussions.

What Is Considered Fraud by a Director in a Private Company?

Director Fraud can be loosely defined as any fraudulent act committed by a director, typically involving dishonesty, violation of trust or power held, deception, or by taking advantage of the position you are in within a company for wrongful gain or to cause wrongful loss to the company.

Fraud clauses within the Companies Act, 2013 take into account acts that are done by way of deceit or concealment, or by abuse of position, or by any other means which dishonestly intends to conduct wrongfully gain from the affairs of the company.

Section 447 Companies Act – Punishment in case of fraud.

But every irresponsible business decision and loss making venture undertaken by the directors cannot be termed as fraud. Intent plays a key role in deciding the liability as well consideration to supporting documents/facts.

If a business decision goes sour the person may have lost money but it will not be fraud. Similarly hiding certain facts, misrepresenting documents and facts but if discovered can lead to fraud. Diversion of assets can also lead to a similar situation.

Quick Facts About Director Fraud in Private Companies

Can Directors Be Personally Liable for Company Fraud?

A company is normally considered to have a separate legal personality from its directors. But that is not always the case and directors could be personally liable for their own fraudulent or unlawful acts or breach of statutory duty.

For instance Section 458 of the Companies Act deals with fraudulent conduct of business. Any person who knowingly takes part in that conduct of business shall be personally liable.

Whether a person (director) is personally liable will depend on proof of that director’s participation, knowledge, intention and involvement in the misconduct.

What Civil Remedies Are Available Against Fraudulent Directors?

Civil remedies become relevant where a director has wrongfully caused financial loss to a private company, its shareholders or other persons. A civil claim is typically aimed at making good of losses, recovering company assets, preventing further losses or misappropriation, or providing remedy for wrongful acts against the company.

It is a fundamental principle of company law that a company has its own legal identity. Separate from its shareholders and directors. Therefore, directors will not automatically be held personally liable for every loss that a company experiences.

But if a director is personally involved in committing fraud or obtains an unlawful benefit from the company, he may be subject to legal action depending on the facts and evidence. Further, the Companies Act framework allows for persons involved in fraud to be held personally liable.

When Should Shareholders or Companies Consult a Corporate Lawyer?

A lot of business owners put off calling a lawyer in hopes that the problem will correct itself. However, you shouldn't wait too long as this can often cause further problems, especially if company assets, accounting records or business opportunities are at stake.

You should consider seeing a company lawyer if:

The sooner you have a lawyer review the situation, the sooner both sides can understand their position and prevent actions from being taken that can impact on potential remedies.

How Can BK Singh Advocate Help in Director Fraud Matters?

BK Singh Advocate helps clients deal with legal issues related to disputes between directors and shareholders, commercial disputes and frauds in business dealings.

Speak to us about your situation. We try to understand how your company is organized, review any documents you have and get familiar with the allegations of wrongdoing. Then we inform you of the legal remedies you may have under the circumstances.

Issues related to fraud by directors also raise business as well as legal issues. Proper analysis is necessary since every corporate dispute involves different facts, documents and potential results.

Frequently Asked Questions

Final Thoughts

Fraudulent behavior on the part of directors can severely impact the profitability, reputation, and livelihood of your private firm. Business owners and shareholders alike should assess any questionable behavior and documentation and retain any evidence prior to making any serious decision.

BK Singh Advocate offers skilled legal counsel when it comes to corporate litigation, disputes between directors and fraud related matters. With the right legal evaluation your business can determine their rights, liabilities and possible recourses afforded to them by law.

All commercial litigation is predicated upon the unique facts and proof of each individual case. This post is intended for informational purposes only.