Directors' Duties and Liabilities Under the Companies Act 2013

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Under Section 166 of the Companies Act, 2013, every director must act in good faith, use due and reasonable care, skill and diligence, exercise independent judgment, avoid conflicts of interest and not make undue gain. Breach carries a fine of Rs. 1 lakh to Rs. 5 lakh, and other provisions add penalties, disqualification and, for fraud, imprisonment. Independent and non-executive directors get a narrower liability test under Section 149(12).

Many people accept a board seat as a favour to a founder or a mentor and treat it as a title. The Act treats it as a personal legal duty. A director's name sits on the company's records, and when something goes wrong it is the directors, not just the company, who answer for it. This guide sets out the duties, the penalties and the defences in plain language, and flags a pending 2026 Bill that could change parts of it.

Who Counts as a Director, and Who Is Liable?

Types of Directors

Executive directors, such as the managing director and whole-time directors, run the business day to day
Non-executive directors sit on the board but do not manage operations
Independent directors bring an outside view and follow the code of conduct in Schedule IV
Nominee directors are appointed by an investor or lender, yet they still owe their duties to the company

The Officer in Default

Penalties for company defaults usually fall on the company and on every "officer in default" under Section 2(60). In practice that means the managing director, whole-time directors and key managerial personnel, and, where there are none, specified directors. Which director is exposed depends on the facts and on the section that was breached.

The Statutory Duties of a Director Under Section 166

Before 2013, a director's duties came mostly from case law. Section 166 wrote them into the statute. These duties apply to every director whatever the title, and they are not exhaustive because older fiduciary principles continue to apply where the Act is silent.

Duties Towards the Company

Section 166(1): act in accordance with the articles of association
Section 166(2): act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, shareholders, the community and the environment
Section 166(6): do not assign your office to anyone else, because any such assignment is void

Care, Skill, Diligence and Independent Judgment

Section 166(3) requires due and reasonable care, skill and diligence and independent judgment. In practice that means reading board papers before the meeting, asking questions about numbers that look wrong, and not simply deferring to a dominant promoter. Nominee directors face the sharpest version of this test, because they must put the company's interests above the instructions of the investor who appointed them.

Conflicts of Interest and Undue Gain

Section 166(4) bars a director from having, or being able to have, a direct or indirect interest that conflicts, or may conflict, with the company's interest. Section 166(5) bars the director from achieving or trying to achieve undue gain or advantage for himself or herself, relatives, partners or associates. A director found guilty of undue gain must pay an amount equal to that gain to the company.

A Quick Self-Test Before You Vote

Ask three questions: Do I have a personal or family interest in this decision? Have I read and understood what I am approving? Could I explain, from the board papers, why this is good for the company? If the answer to any of them is uncertain, say so and have it recorded in the minutes.

Other Duties Spread Across the Act

Directors' responsibility statement (Section 134(5)): the board's report must confirm that accounting standards were followed, policies applied consistently, adequate accounting records kept, accounts prepared on a going concern basis, and, for listed companies, that internal financial controls are in place. It must also confirm that proper systems exist to ensure compliance with applicable laws
Disclosure of interest (Section 184): every director must disclose interests in other entities at the first board meeting and then every year, and disclose interest in any contract at the time it arises, in Form MBP-1. A contract entered into without proper disclosure is voidable at the company's option, and a director who breaches the section is liable to a penalty of Rs. 1 lakh
Related party transactions (Section 188) and loans to directors (Section 185): these need board or shareholder approval in the prescribed cases and are regular sources of director liability
Board process: attending meetings, signing accounts and keeping statutory registers and returns in order, which links directly to ROC annual filing of AOC-4 and MGT-7

Penalties and Consequences of Breach

Fine Under Section 166(7)

A director who contravenes Section 166 is punishable with a fine of not less than Rs. 1 lakh and up to Rs. 5 lakh. Commentators note that this penalty by itself does not make the director vacate office under Section 167, unless the director also becomes disqualified.

Fraud Under Section 447

Fraud in relation to the affairs of a company is punishable under Section 447 with imprisonment of not less than six months and up to ten years, and a fine of not less than the amount involved in the fraud. Where the fraud involves public interest, the minimum imprisonment is three years. Smaller frauds that do not involve public interest fall in a lower tier, so check the current text of the section. Section 448 treats a false statement in a return, financial statement or prospectus as punishable under Section 447.

Civil Liability to the Company and Shareholders

A breach of fiduciary duty can lead to claims to restore the company's loss or to hand over personal gain. Misstatements in a prospectus attract separate civil and criminal exposure for the directors responsible.

Liability of Independent and Non-Executive Directors

Section 149(12) limits the liability of independent and non-executive directors to acts or omissions of the company that occurred with their knowledge, attributable through board processes, and with their consent or connivance, or where they had not acted diligently. The MCA, in a circular of March 2020 as reported by commentators, said these directors should not be brought into proceedings unless the conditions of the section are met and there is sufficient evidence against them.

What "Knowledge Through Board Processes" Means

A director is generally treated as knowing what was discussed at a board meeting or recorded in board papers and minutes
Consent or connivance needs a higher mental state, where the director acted together with others or approved the act
Diligence is a separate limb, so a director who ignores red flags cannot rely only on the knowledge limb
Receiving minutes of a meeting that passed a non-compliant resolution and staying silent can be enough to show knowledge

Liability Under Other Laws

Directors' exposure extends beyond the Companies Act to cheque dishonour under Section 141 of the Negotiable Instruments Act, tax, labour and securities laws. Courts have quashed proceedings against non-executive directors where the complaint did not say how they were in charge of, or responsible for, the company's business. In Pooja Ravinder Devidasani v. State of Maharashtra (2014), the Supreme Court held that being a director is not enough, and a complaint must show the director was in charge of and responsible for the conduct of the business at the time.

Disqualification and Vacation of Office

Section 164(1): personal grounds such as unsound mind, insolvency, certain convictions and not holding a valid DIN
Section 164(2): if a company fails to file financial statements or annual returns for three consecutive financial years, its directors are disqualified from being directors of any company for five years
Section 167: a director vacates office on disqualification and on other grounds, including absence from all board meetings for twelve months

The Section 164(2) bar is the one founders miss most often, because it follows from simple non-filing. A dormant company that stops filing can end up costing its directors their seats in every other company.

The Corporate Laws (Amendment) Bill, 2026: What May Change

The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 March 2026, and a Joint Parliamentary Committee presented its report on 3 August 2026. Reports describe proposals to replace imprisonment for many procedural defaults with civil penalties decided through in-house adjudication, to add a "fit and proper person" requirement for directors, to widen the grounds of disqualification, including penalties for related party transaction defaults under Section 188, and to require directors to keep their DIN active throughout their tenure. Sources we checked describe the Bill as awaiting passage, so treat these as proposals, not law, and check the current status before relying on them.

How Directors Can Protect Themselves

Read the board papers in advance and ask for missing information in writing
Record dissent, abstention and conflicts in the minutes, and check the minutes after the meeting
File MBP-1 and keep the disclosures of interest up to date
Track the annual filings, because three years of non-filing triggers disqualification
Check that the company has a proper compliance calendar and keeps its statutory registers
Ask whether directors and officers insurance and indemnity are in place, and resign formally if you can no longer discharge the role, remembering that resignation does not erase liability for your time in office

Investor-nominated directors should also read our guide to shareholders' agreements in India, where board seats and reserved matters are negotiated.

How Corporate Law & M&A in Practice Helps You Advise Boards and Directors

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Conclusion

A directorship is a personal fiduciary role. Know the Section 166 duties, keep your disclosures and filings in order, put your questions and objections on record, and use the Section 149(12) safeguards for independent and non-executive directors without relying on them as a shield for inattention. To build the skills to advise boards and directors, explore the Corporate Law & M&A in Practice course at Into Legal World.

Frequently Asked Questions

What are the duties of a director under the Companies Act 2013?

Section 166 requires a director to act within the articles, act in good faith for the company and its stakeholders, use due and reasonable care, skill and diligence, exercise independent judgment, avoid conflicts of interest, not make undue gain and not assign the office.

What is the penalty for breach of directors' duties?

Section 166(7) provides a fine of not less than Rs. 1 lakh and up to Rs. 5 lakh, and a director who makes undue gain must pay an equal amount to the company. Other sections add their own penalties, and fraud under Section 447 attracts imprisonment.

Is an independent director liable for the company's defaults?

Only in a limited way. Under Section 149(12) an independent director is liable for acts that occurred with their knowledge attributable through board processes and with their consent or connivance, or where they did not act diligently.

Can a director be disqualified if the company does not file returns?

Yes. If a company does not file its financial statements or annual returns for three consecutive financial years, its directors are disqualified for five years under Section 164(2).

Does resigning end a director's liability?

No. Resignation ends your future duties but not liability for acts or omissions during your time in office, so record concerns before you leave.

Sources

Keywords: directors duties under Companies Act 2013, Section 166 Companies Act, liability of directors, independent director liability, Section 149(12), director disqualification Section 164, officer in default, penalty for breach of directors duties.