Bombay HC ruling absolves directors of firms' debts

The recent Bombay High Court ruling that directors of a company cannot be held liable for the debts of the company can have major ramifications for corporates and their directors.

This ruling, passed in late March 2005, says that as corporates are entities on their own, action cannot be taken against its directors.

Justice S U Kamdar ofthe Bombay High Court observed, "The company is a separate legal entity and a decree passed against the company cannot be executed against the directors of the company."

The order was issued in an appeal filed by a company called Manolata Investments (P) Ltd. A stock broker, R C Goenka, had obtained an order against the company which directed Manolata to pay up Rs 15.32 lakh to the broker. The order for the payment of money by the company had attained finality since the order was not challenged by Manolata.

The broker tried to execute the order asking for the arrest of the directors of the company. He alleged that the directors had siphoned off the funds of the company to defraud the broker.

The High Court, dismissing the broker's by the broker, held that since the order for the payment of the money is only against the company, which is a legal entity and cannot be arrested and does not include the directors, the latter cannot be arrested.