Authored by Barrister Md. Wazed Jamil, Senior Associate at Mahbub & Company and Advocate Somaiya Islam, Associate at Mahbub & Company.
The principle of limited liability is regarded as one of the keystones of corporate law, ensuring that directors and shareholders are only held liable for company debts according to the value of their investment in the business. However, as statutory advancements have occurred, many obligations have been imposed, and the scope of directors’ liability is extending beyond the traditional corporate shield. The evolving corporate governance landscape in our jurisdiction indicates increasing accountability for directors, making it momentous for them to be fully aware of their responsibilities.
This article provides a focused overview of significant legal obligations, risks and liabilities under relevant laws, including but not limited to the Bank Company Act 1991, the Company Act 1994, the Income Tax Act 2023, the Bangladesh Labour Act 2006, the Negotiable Instruments Act 1881, and the Artha Rin Adalat Act 2003.
The Bank Company Act 1991
The Bank Company 1991 has been amended in 2023, which sets requirement for any “debtor” company to obtain an approval from the lending bank or non-banking financial institution for resignation of any directors and/or transfer of any shares by any directors. The provision entails that unless the directors receive approval (No Objection Certificate or NOC) from the board of directors or superior authority of their lenders, their resignation from the BOD of their company will not be “effective”. Therefore, under this provision, unless express approval is secured from the lenders, the resignation of the directors from the company shall remain ineffective in the eye of the law. This effectively amplifies the personal risks directors face, as they may remain liable for the financial state of the company, even if they no longer have the ability to influence its operations or have tendered their resignation from the board.
The Income Tax Act 2023
The Income Tax Act 2023 has imposed substantial financial obligations on company directors. Section 257 of the act specifies that directors can be held jointly and severally liable for unpaid taxes during their tenure, even after their resignation or the winding up of the company. This provision challenges the traditional notion of limited liability, as directors are personally accountable for corporate tax debts unless they can prove that their actions or omissions did not contribute to the company’s failure to pay taxes.
Additionally, Section 315 stipulates criminal penalties for failing to deduct taxes at source, including up to one year of rigorous imprisonment, fines, or both. Similarly, Section 323 imposes fines and imprisonment which may extend six months to six years for any person responsible for managing the company during tax evasion or non-compliance with the tax compliances. Directors, managing directors, and CEOs are particularly vulnerable under this provision, focusing the heightened responsibility of those in senior management positions.
Liabilities under the Bangladesh Labour Act 2006
As per Section 312 of the Bangladesh Labour Act 2006 (BLA), directors, partners, managers, and other officers can be held liable for non-compliance or violations of labour laws, unless they can prove that the offense occurred outside their knowledge or that they took all reasonable measures to prevent it. This provision, akin to strict liability, places the onus on directors to actively ensure legal compliance across their company’s operations, or risk facing criminal penalties
Dishonor of Cheques under the Negotiable Instruments Act 1881
Liability for the dishonor of cheques under the Negotiable Instruments Act 1881 is a significant concern for directors, as the nature of the liability is criminal. Any director responsible for the company’s operations at the time the cheque was dishonored can be held personally liable. As with other forms of criminal liability, the fact that resignation of director or winding up does not absolve them of responsibility for offenses committed during their tenure. This long-lasting exposure to liability underscores the importance of maintaining proper internal controls over financial transactions.
Liabilities under the Money Loan Court Act (MLCA) 2003
The Money Loan Court Act, directors remain potentially liable for any unpaid loans or financial obligations incurred during their tenure, regardless of whether the company is dissolved.
Liabilities under the Environment Conservation Act (ECA) 1995
Directors also face criminal liabilities according to the Environment Conservation Act 1995 for any environmental offenses committed during their tenure. The law holds directors and managing officers personally responsible for ensuring that the company complies with environmental regulations. Like other criminal liabilities, these obligations survive even after the director resigns or the company winds up.
The key legislations explained earlier highlight the critical importance of diligence, oversight, and compliance in corporate governance. Directors cannot merely rely on their limited liability status; they must actively engage in ensuring that their companies comply with the law to avoid personal financial and criminal repercussions.
The applicable laws concerning corporate governance reveal that limited liability is not an impenetrable shield, rather sometimes it can expose the directors to significant legal and financial risks. From tax liabilities to environmental offenses, the responsibilities of directors extend far beyond their share contributions. The amendments in the Bank Company Act 2023, alongside provisions in the Income Tax Act 2023, Labour Act 2006, and other statutes, weave together a complex fabric of accountability that stretches across time, holding directors liable even after their tenure ends or the company dissolves. This evolving framework signals a clear departure from the traditionally insulated roles directors once held, placing corporate governance on a razor’s edge.
Although the principle of limited liability remains central to corporate governance, directors must be acutely aware of the various statutory provisions that may override this protection. Therefore, it is advisable for everyone holding such directorial position in any company to ensure compliance and follow up the statutory requirements applicable to their company from time to time. Taking Legal consultancy in necessary cases and seeking advice from professionals may reduce the risk of associated consequences of being non-compliant. Furthermore, directors should document their efforts to remain informed and involved in critical company decisions, providing a clear trail of due diligence. In the end, safeguarding one’s integrity as a director requires not just oversight but foresight, balancing on the edge of responsibility with both caution and clarity.