Companies Act Section 378T

Companies Act, Section 378T: Liability of Directors of a Producer Company

Section 378T of the Companies Act, 2013, establishes the legal liability of directors of a Producer Company when they act in violation of the provisions of the Act, any applicable law, or the company’s Articles of Association. This section emphasizes accountability, responsibility, and legal consequences for misconduct or negligence by directors in the discharge of their duties.

The provision serves to protect the interests of the Producer Company and its members by ensuring that directors do not abuse their powers or engage in unlawful acts that result in harm or unjust enrichment. It provides for both civil remedies and financial restitution.

1. Joint and Several Liability for Contravention

This sub-section states that if the directors of a Producer Company vote for a resolution, or otherwise approve any action, which results in a contravention of:

The provisions of the Companies Act, or any other law that is in force at the relevant time, or the Articles of Association of the Producer Company, then all such directors who participated in that decision shall be held jointly and severally liable for any loss or damage suffered by the Producer Company as a result.

Key Concepts:

“Jointly and severally liable” means that:
Each director involved can be held individually responsible for the entire amount of the loss, and the company may recover the full loss from one or more of them, leaving them to settle contributions among themselves if necessary.
The contravention may involve unlawful decisions, negligent acts, or actions taken in bad faith, whether formal (e.g., resolutions) or informal (e.g., other modes of approval).
This provision ensures that directors cannot hide behind collective decision-making when knowingly violating laws or internal governance rules.
2. Right of the Company to Recover Profit or Loss from Directors 

This sub-section provides for financial recovery by the Producer Company from its directors in two specific scenarios, in addition to the general liability mentioned above.

(a) Recovery of Undue Profit Made by Director

If a director has personally made a profit as a result of any act or decision that falls under the contravention specified in sub-section (1), the Producer Company has the legal right to recover from that director an amount equal to the profit so made.

This prevents unjust enrichment and discourages directors from using their position for personal gain at the expense of the company.
(b) Recovery of Loss Suffered by the Company

If the Producer Company has incurred a loss or damage as a direct result of the contravention, it may recover an amount equal to such loss or damage from the director responsible.

This provision reinforces the concept of restitution, ensuring the company is compensated for harm caused by a director's misconduct or negligent actions.
3. Additional Liability Not in Derogation of Other Laws

This sub-section clarifies that the liability imposed on directors under Section 378T is:

In addition to any other liability that may be imposed on directors under:
The Companies Act, or any other law currently in force. It does not override, dilute, or replace other legal consequences or penalties.
Implication: Directors may face multiple forms of liability (civil, regulatory, or criminal) depending on the nature and seriousness of the contravention.
For example, if a contravention also amounts to fraud under the Act or under other applicable laws (such as the Indian Penal Code or Prevention of Corruption Act), the director may face both financial penalties and criminal prosecution.