The role of a director in any business, be it a startup, SME, or large corporation, is not merely a symbolic one. In India’s changing regulatory environment, directors are required to provide service characterized by transparency, accountability, and diligence. Due to the increased scrutiny by regulators, investors, and even customers, knowledge about director’s liabilities and directors duties has become indispensable for business leaders.
This blog explains what directors are legally required to do, how they can be held liable, the relevant provisions related to the Companies Act, 2013, and why businesses should take D&O Insurance seriously to protect themselves and their leadership. This guide will help you enhance your governance capabilities and lower unnecessary legal and financial risks
Who Is a ‘Director’ Under the Companies Act,2013?
A director is a person appointed to a company’s board to supervise its workings, make decisions about policies, and ensure that the organisation is run in a socially responsible manner. As per the Act, directors are in a fiduciary position and are required to act in the best interests of the company and its stakeholders.
The Companies Act recognises several types of directors:
- Executive Directors
- Non-Executive Directors
- Independent Directors
- Nominee Directors
- Additional or Alternate Directors
Although their titles may differ, directors duties apply uniformly. Each type of director can face director’s liabilities if they fail to uphold the responsibilities outlined in the Companies Act,2013.
Understanding Directors Duties Under the Companies Act,2013
Directors are expected to maintain high standards of responsibility and ethical conduct. Their obligations go beyond attendance at board meetings—they must take informed decisions and ensure that the company follows the law.
Key directors duties include:
- Acting in accordance with the company’s articles
- Exercising independent judgment
- Acting with reasonable care, skill, and diligence
- Avoiding conflict of interest
- Not achieving personal benefit at the expense of the company
These duties & liabilities are a central part of good corporate governance. When directors ignore these important aspects, it can have drastic effects such as loss of money, loss of trust by investors, court actions, and intervention by regulatory authorities.
Directors Duties Under Section 166
Section 166 of the Companies Act, 2013 specifies in detail the legal foundation for director responsibilities. These provisions relating to company directors form the cornerstone of accountability.
Section 166 mandates that company directors must:
- Act in good faith to promote the objectives and interests of the company
- Exercise their designated duties with utmost care, skill, and due diligence
- Avoid situations where there is a conflict between personal interest and company interest
- Not assign their office to another person
- Not misuse company information
If a person violates Section 166 in any respect, he/she may be punished under the law. This is one of the most crucial sections that defines duties & liabilities of directors. For businesses, it is extremely important to comply with this section , in order to avoid regulatory trouble and protect leadership from potential lawsuits.
Different Types of Director’s Liabilities
A director’s role invites both authority and accountability. director’s liabilities may be of civil, criminal or financial nature, depending on the particular case of violation.
A) Civil Liabilities
Civil liabilities arise when a director breaches fiduciary duties or neglects responsibilities that cause financial damage to the company or its stakeholders. Some common instances include:
- Failure to maintain statutory records
- Negligence during decision-making
- Mismanagement of funds
- Wrongful trading during insolvency
Civil liabilities often lead to lawsuits, shareholder claims, and compensation payouts.
B) Criminal Liabilities
Some violations under the Companies Act,2013 are treated as criminal offences, including:
- Providing false statements
- Fraudulent activity
- Non-compliance with regulatory filings
- Violations involving public money
Criminal liabilities may include fines, prosecution, and imprisonment under the Act, depending on the severity of the offence.
C) Personal Liabilities
In certain cases, the corporate veil can be lifted. This means directors may become personally responsible. This can occur when:
- Fraud or wilful misconduct is proven
- Directors knowingly violate statutory duties
- Directors approve transactions that are illegal or harmful
- There is misrepresentation during fundraising
Personal liability is one of the strongest reasons directors should understand their duties & liabilities and take appropriate risk-management measures, including insurance.
Key Act Provisions Relating to Director’s Liabilities
Several sections of the Companies Act,2013 impose penalties on directors for non-compliance. Some of the most significant sections include:
- Section 34 & 35: Penalties for issuing a prospectus with misstatements
- Section 166: Directors Duties
- Section 178: Nomination and remuneration committees
- Section 184: Disclosure of interest and related-party transactions
- Section 447: Fraud
- Section 448: False statements
- Section 449: False evidence
Each of these provisions can trigger director’s liabilities if breached. For businesses, it is very important to comply with these sections in order not to get into trouble with the law or the finances.
Activities or Situations That Increase Director’s Liabilities
Certain business activities put directors at a higher risk or increase their liabilities. These include:
- Mergers, Acquisitions & Restructuring
Misrepresentation, valuation disagreements, and taking unfair advantage of M&A practices may cause filing of suits and claims against you.
- CSR Non-Compliance
The CSR clause under the Act specifies that the company must spend a minimum of 2% of its profits on social causes. The failure to comply with this requirement may cause the imposition of fines and increased director scrutiny.
- Cybersecurity and Data Protection
The significant rise in cybercrimes in India over recent years has led to many questions about oversight. If a data breach is the result of poor governance, directors will be subject to a regulatory investigation.
- Environmental or Safety Violations
Manufacturing companies face legal action if they violate pollution norms or fail to maintain workplace safety.
Factors That Can Increase Director’s Liabilities
Directors tend to face higher risk if:
- Board decisions are poorly documented
- The internal controls are not strong enough
- Directors have no other option but to rely on others for judgment
- Compliance procedures have not been updated
- Conflict-of-interest are not disclosed, or, disclosed, but are ignored
These operational gaps frequently serve as the grounds for legal cases brought against directors.
What is the effect of Director’s Liabilities on Businesses?
Ignoring directors duties can harm not only the leadership but the entire organisation. How? Here are some pointers:
- Financial Losses
Costs associated with legal defense, compensation payments, and penalties consume company resources.
- Decline of Investor Trust
Investors require and expect the leadership to be responsible. When directors fail to comply with their duties, it discourages investors.
- Reputation Damage
Regulatory action against directors heavily impacts brand credibility.
- Operational Interruptions
Legal disputes take up a lot of management time, and as a result, the business priorities are derailed.
- Inability to Attract Talent
Skilled professionals may be reluctant to work in companies where directors face frequent legal challenges.
How D&O Insurance Helps in Managing Directors’ Liabilities
Indian businesses are becoming more aware of the necessity for D&O Insurance (Directors and Officers Insurance) amid the escalating governance requirements. This insurance keeps directors safe in case of a financial loss resulting from a claim related to their decisions or actions.
Why D&O Insurance Matters for Businesses
- Protects directors’ personal wealth from lawsuits
- Covers defence costs, settlements, and compensation
- Strengthens investor and board confidence
- Essential for startups, SMEs, and large enterprises alike
In a world where leadership decisions are constantly under scrutiny, D&O Insurance acts as a protective shield.
What a Good D&O Policy Covers
A comprehensive D&O policy generally covers:
- Breach of trust
- Breach of duty
- Misstatements or errors
- Employment-related claims
- Wrongful acts done in managerial capacity
- Legal defence costs
This coverage ensures that both the company and the directors have financial support when facing claims arising under the Act.
What D&O Insurance Does Not Cover
Exclusions may include:
- Fraud or intentional criminal acts
- Bodily injury or property damage
- Penalties that cannot be legally insured
- Claims between directors in certain cases
Businesses should always choose policies tailored to their risk profile.
Best Practices to Reduce Directors Duties and Liabilities
Directors can significantly reduce their risk exposure by adopting strong governance practices:
- Maintain well-structured and detailed board meeting records
- Seek legal review for major decisions
- Ensure conflict-of-interest disclosures are made accurately
- Align decisions with long-term business goals
- Implement internal audits and compliance monitoring
- Encourage a transparent organisational culture
These steps help directors carry out their directors duties efficiently, while minimising the director’s liabilities.
Why Indian Businesses Should Invest in D&O Insurance
Several real-world scenarios highlight how D&O Insurance becomes essential:
- Startups dealing with investor allegations
- SMEs facing compliance lapses
- Companies undergoing rapid expansion
- Family businesses professionalising their management
- Firms planning IPOs or raising private capital
In all these situations, the leadership team remains vulnerable to claims, investigations, and lawsuits. In the absence of D&O insurance, the expenses related to the defence of such claims can be devastating to the organisation.
Final Thoughts:
With India’s regulatory environment becoming more stringent, the question arises whether the directors are acquainted with their duties and liabilities under the Companies Act, 2013. Every decision made by directors impacts the company’s future. By ensuring good governance, statutory compliance under the Act and investing in the right risk-management tools—especially D&O Insurance—businesses stand a great chance of reducing their exposure and protecting their management from financial damages.
It is said that a company that protects its directors ultimately protects itself. Do remember, good governance cannot be treated as an optional feature. Rather, it is a strategic leverage.
Looking for the right protection for your leadership team? BimaKavach helps Indian businesses secure comprehensive D&O Insurance that shields directors from legal, financial, and regulatory risks. With expert guidance, customised coverage, and a fast, transparent process, BimaKavach ensures your company and its decision-makers stay protected where it matters most. Safeguard your business confidence with BimaKavach today.
