Understand legal action against fraudulent directors in private companies, including civil remedies, criminal action, Companies Act provisions and corporate solutions.
Trust is the foundation of every private limited company. Directors, shareholders, investors, employees and business associates trust a company when they decide to become a part of the company. When a director bleeds the company dry by withholding information, cooking the books of accounts and acting in his personal interest, the damage done to the employees, creditors, investors and reputation of the company can be far worse than just financial loss.
Shareholders and business associates are often shocked when they discover dubious transactions or activities. They don’t know how to react or where to go as they aren’t sure if the matter is strictly a business dispute or if it constitutes fraud. Fraud may also involve civil liability as well as criminal liability depending on the facts involved, evidence and intent.
Civil remedies available in cases of fraud by directors in private limited companies include remedies under the Companies Act, 2013, civil recovery of property, criminal complaints, prosecution, action from regulators and any other remedy which may be just and equitable in the given situation. The type of fraud committed, the role of the fraudulent director, amount of financial damage done, evidence and the facts and circumstances of the company will play a key role in what remedies are available.
BK Singh Advocate will help you and your company determine all legal remedies available to you in case of fraud committed by directors. The books of accounts of the company, financial transactions along with underlying agreements and correspondences need to be carefully analysed before deciding upon what legal course should be taken.
Directors hold a position of trust as they manage the affairs of the company and are involved in important decision making. It is expected that a director will act bona fide and for the benefit of the company. When this trust is violated, resulting corporate litigation can be serious.
Some common examples of alleged fraud by directors are:
Small private companies, particularly SMEs are vulnerable as the management is often controlled by a few individuals. Any conflict between directors can have immediate impact on the operations of the business, employee relations and third party trade relationships.
BK Singh Advocate advises his clients on whether the problem arises from internal management disputes, breach of duty as a director, financial fraud or misconduct that can have civil and criminal consequences.
Director Fraud – Can be described broadly as any fraudulent activity committed by a director. It usually involves acting dishonestly, breaching trust or power you hold, deceive or by taking advantage of the position you hold in a company. For either wrongful gain or to cause wrongful loss to the company.
Section 447 Companies Act- Punishment in case of fraud.
Every rash and careless decision taken by directors and ventures which cause loss to the company cannot be classified as fraud. Intent is an important factor that helps determine liability as well as reliance on supporting documents/facts.
If somebody takes a business decision which turns out to be bad, he may lose money, but it’s not fraud. However concealing facts, misrepresenting documents/facts and gets caught can lead to fraud. Diversion of assets falls into the same category.
Unless specific exceptions apply, a company has a separate legal personality from its directors. However, this is not always the case and directors may find themselves personally liable for their own fraudulent or unlawful conduct or for breach of statutory duty.
Whether a person (director) is personally liable will be dependent on evidence of that director's participation, knowledge, intention and involvement in that misconduct.
Civil remedies may be sought where a director’ has caused financial loss to a private company, its shareholders or other persons. Civil actions are generally concerned with making good of losses, recouping company assets, preventing further losses or misappropriation and remedies for wrongful acts against the company.
Examples of civil remedies include:
Essentially, a company is considered a separate legal entity in its own right. The company is separate to its shareholders and directors. As such, directors are not automatically personally liable for any losses suffered by a company.
However, if a director is personally implicated in fraud or gains an unlawful advantage from the company assets, he can be sued for his actions depending on the specific facts and available evidence. Also, the framework of the Companies Act allows for those implicated in fraud to be held personally liable.
BK Singh Advocate can help companies and shareholders understand whether a dispute with a director can be enforced through a recovery suit, a corporate remedy or some other legal recourse.
Many business people delay instructing a lawyer hoping that things will fix themselves. But you should not delay too long as this may make matters worse, particularly if company assets, accounting records or business opportunities are concerned.
Here are some reasons why you should see a company lawyer:
The earlier a lawyer reviews the situation the better. Both sides will quickly know where they stand and stop things from happening that could affect any possible remedies.
BK Singh Advocate advises clients on disputes between directors/shareholders, business disputes and frauds committed in business transactions.
You explain your situation to us. We try to understand how your company is structured, review documents in your possession and familiarize ourselves with the allegations of fraud. We then explain to you what legal options you may have under the facts of your situation.
Business fraud by directors also involves business judgment as well as legal issues. Careful analysis of the issues is required as every corporate dispute is different and involves different facts, documents and potential remedies.
Ans. Director can be held personally liable for fraud if he himself was involved in any fraud wrongful gain or wrongful loss to another person or violation of any law or other wrongdoing.
Ans. No. If a business incurs losses or a director makes a wrong business decision, it does not amount to fraud. An element of dishonesty and deception is required such as concealment of information, abuse of position, or unlawful intent.
Ans. Depending on the circumstances, the Companies Act, 2013 and other laws would apply to fraud committed by a director. Both civil and criminal liability would arise based on the facts.
Ans. Specific relief against a director would depend on the rights afforded to shareholders under the facts and circumstances of the company and the specific wrongful acts.
Ans. A company can bring legal action to recover any losses. Additionally, a company would have remedies under both corporate law and criminal law if the elements of those offences are established.
Ans. The company would have remedies to remove the director and/or pursue other remedies against the director under the relevant statutes and the companies documents.
Ans. Evidence such as account books, company records, emails, contracts, invoices, transactions and any other proof of fraud would be relevant.
Ans. Adv. Singh would be able to advise you on the remedies available to you, review documents and advise you on the actions you can take.
Ans. Matters involving director fraud can constitute criminal matters if the necessary elements of criminal offences are made out. Examples of criminal offences include cheating, criminal breach of trust, forgery and other forms of dishonesty.
Ans. Businesses and shareholders can speak with Adv. BK Singh for assistance with any disputes involving fraudulent directors and other commercial legal matters.
Fraudulent acts committed by directors can cost your private company millions of dollars in lost profits, reputation and livelihood. Before taking any drastic action, it is best for company owners and shareholders to review any suspicious activity and documentation. Save copies of any evidence.
BK Singh Advocate has experienced legal representation in matters involving corporation disputes, shareholder disputes and fraud. Your company can learn what rights they have, any liabilities they may face and any possible legal recourse they may have with proper legal assessment.
Every commercial litigation case is different and depends on the specific facts and evidence of each case. This article is for informational purposes only.
Speak directly with Advocate BK Singh at LEGAL365.
Book Appointment Call NowFree first consultation. Honest legal advice.
