Q.(a) Mr. Raghu is appointed as a Director in a Company. Is he personally liable to third parties? If so, under what circumstances is he liable?

(a) A director is generally not personally liable to third parties (the company is a separate legal person), but is liable when he acts ultra vires, fraudulently, in his own name, mala fide, or gives a personal guarantee. (b) A new entrepreneur like Mrs. Cynthia faces challenges of finance, competition, technology, marketing and human-resource/legal issues.

(a) Is Mr. Raghu personally liable to third parties?

General rule – No. A company is a separate legal entity distinct from its members and directors. Directors act as agents of the company, so contracts they make on the company's behalf bind the company, not them personally. Hence, ordinarily Mr. Raghu is not personally liable to third parties.

Exceptions – when he IS personally liable:

1. Acting beyond authority (ultra vires): if he enters into contracts beyond the powers of the company or of the Board, he is personally liable.
2. Fraud or misrepresentation: if he is guilty of fraud, or of a misstatement in the prospectus that misleads third parties, he is personally liable for the loss caused.
3. Contracting in his own name: if he makes a contract in his personal name without disclosing that he acts for the company, he is personally bound.
4. Mala fide or negligent acts: if he acts dishonestly, negligently or in breach of trust causing loss to third parties.
5. Personal guarantee: if he has personally guaranteed a company's obligation, he is liable on that guarantee.

So Mr. Raghu is liable to third parties only under such circumstances, not in the ordinary course.

(b) Challenges Mrs. Cynthia will face (any five):

1. Arranging finance/capital: raising adequate funds for fixed and working capital is often the biggest hurdle for a new unit.
2. Competition: she must compete with established firms already holding the market.
3. Technology: selecting and affording the right, up-to-date technology and keeping pace with change. …