The sections, word for word
Every section on this subject, exactly as printed in the Official Gazette (Act No. 3 of 2020). The explanation follows beneath.
Section 314. Directors with unlimited liability in respect of a limited company
(1) In a limited company the liability of the directors, managers or managing director, may, if so provided by the memorandum, be unlimited.
(2) In a limited company in which the liability of a director, manager is unlimited, the directors and managers of the company and the member who proposes a person for election or appointment to the office of director or manager, shall add to that proposal a statement that the liability of the person holding that office is unlimited, and before the person accepts the office or acts therein, notice in writing that his liability are unlimited is given to him by the promoters of the company, the directors of the company, any managers of the company and the Secretary of the company.
(3) If any director, manager, or promoter makes default in adding such a statement, or if any promoter, director, manager or secretary makes default in giving such a notice, he shall is liable to a penalty in such amount as the Commission shall specify in its regulations and is also liable for any damage which the person so elected or appointed may sustain from the default.
Section 315. Special resolution making directors’ liability unlimited
(1) A limited company, if so authorised by its articles, may, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or managers, or of any managing director.
(2) Upon the passing of any such special resolution, the provisions of it are as valid as if they had been originally contained in the Memorandum.
Section 316. Personal liability of directors and officers
Where a company—
(a) receives money by way of loan for specific purpose ;
(b) receives money or other property by way of advance payment for the execution of a contract or project ; or
(c) with intent to defraud, fails to apply the money or other property for the purpose for which it was received, every director or other officer of the company who is in default is personally liable to the party from whom the money or property was received for a refund of the money or property so received and not applied for the purpose for which it was received and nothing in this section affects the liability of the company itself.
Section 317. Director’s contract of employment for more than five years
(1) The provisions of this section apply in respect of any term of an agreement where a director’s employment with the company of which he is a director or, where he is the director of a holding company, his employment within the group, is to continue or may be continued, than at the instance of the company (whether under the original agreement entered into in pursuance of it or not), for more than five years during which the employment—
(a) cannot be terminated by the company by notice ; or
(b) can be so terminated only in specified circumstances.
(2) References in subsection (1) to employment being continued (or its potential to be continued) are references to its being continued (or its potential to be continued) whether under the original agreement concerned or under a new agreement entered into in pursuance of the original agreement concerned prior to the expiration of the original agreement or within 6 months of the expiration of the original agreement.
(3) A company shall not incorporate, in an agreement, such a term as is mentioned in subsection (1) unless the term is first approved by a resolution of the company in general meeting and in the case of a director of a holding company, by a resolution of that company in general meeting.
(4) No approval is required to be given under this section by anybody corporate unless it is a company within the meaning of this Act, or if it is a wholly-owned subsidiary of any body corporate.
(5) A resolution of a company approving such a term as is mentioned in subsection (1), shall not be passed at a general meeting of the company unless a written memorandum setting out the proposed agreement incorporating the term is available for inspection by members of the company both—
(a) at the company’s registered office for at least 15 days ending with the date of the meeting ; and
(b) at the meeting itself.
(6) A term incorporated in an agreement in contravention of this section is to the extent that it contravenes the section, void, and that agreement and in a case where subsection (2) applies, the original agreements is deemed each to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
(7) In this section—
(a) “employment” includes employment under a contract for services ; and
(b) “group” in relation to a director of a holding company, means the group which consists of that company and its subsidiaries and for purposes of this section, a shadow director shall be treated as a director.
What this means
Short answer
A director’s liability can be made unlimited only if the memorandum so provides (section 314), and a director in default can be personally liable to refund money a company received for a stated purpose and applied otherwise with intent to defraud (section 316). A director’s contract that cannot be ended for more than five years needs prior member approval (section 317).
Directors with unlimited liability
In a limited company the liability of the directors, managers or managing director may be unlimited, if the memorandum provides for it (section 314(1)). The proposal to elect or appoint such a person must include a statement that the liability is unlimited, and before he accepts or acts, he must be given written notice that his liability is unlimited, by the promoters, directors, managers and secretary of the company. Anyone who defaults faces a penalty set by the Commission and is liable for damage the appointee suffers (section 314(2) and (3)). A company authorised by its articles can also pass a special resolution to alter its memorandum to make directors’ liability unlimited (section 315).
Personal liability of directors and officers
Section 316 applies where a company receives money by way of a loan for a specific purpose, or receives money or other property as an advance payment for a contract or project, and with intent to defraud does not apply it for that purpose. Every director or other officer in default is personally liable to the party who gave the money or property for a refund. The company itself remains liable too.
Director contracts of more than five years
Section 317 covers an agreement under which a director’s employment is to continue, or may be continued, for more than five years during which the company cannot terminate it by notice, or can do so only in specified circumstances. Such a term needs prior approval by a resolution of the company in general meeting, and for a director of a holding company, a resolution of that company too.
- A written memorandum of the proposed agreement must be available for inspection at the registered office for at least 15 days ending with the meeting date, and at the meeting itself (section 317(5)).
- A term included in breach of the section is void to that extent, and the agreement is treated as allowing the company to end it on reasonable notice (section 317(6)).
- Employment includes a contract for services, and a shadow director is treated as a director (section 317(7)).
Questions and answers
Can a director’s liability be unlimited in a limited company?
Yes, if the memorandum provides for it. The appointee must be told in writing before he accepts (section 314).
When is a director personally liable to refund money?
When the company received a loan for a specific purpose, or an advance payment for a contract or project, and with intent to defraud did not apply it for that purpose. Directors and officers in default are personally liable (section 316).
Does a long director contract need approval?
Yes. A term of more than five years that the company cannot end by notice needs a resolution of the company in general meeting beforehand (section 317(3)).
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