Company Law: "Director's Liability for Debts of a Company

A typical question might look like this: "A director of XYZ Ltd., who has resigned, is being asked by the company to personally guarantee a loan of ₹50 lakhs. Can he do this?"

Most people would say, "No, because he has resigned. His liability ended when he left." But, there's a twist here. According to Section 141 of the Companies Act, a director is liable for the debts of a company when a contract is made with a third party, at a time when he is a director, and the debt is incurred by the company while he is still a director. So, even if he's resigned, he's still liable for this debt. Most people overlook the fact that he needs to have been a director at the time of incurring the debt, and not just when the contract was made.