Fiduciary Duty of Director(s) of a Company

A company is an artificial person that exists only in contemplation of law and has a different legal personality from its members. Because the directors have fiduciary responsibility for the company and are entrusted with its governance and management, they have frequently been referred to as agents, trustees, or representatives of the corporate body. Section 291 of Companies Act, 1956 provided a basic description of director’s responsibilities. Due to the lack of a codified responsibility structure, legal matters involving director duties were handled using common law and equity principles, which created confusion and possible legal circumvention. Section 166, which clearly outlines the statutory obligations of a director, was included in the Companies Act of 2013 in response to the Dr. J.J. Irani Committee report on company law, 2005.¹ Nevertheless, Section 166 doesn’t specifically refer to what would constitute “fiduciary duty”, even if it describes broad director responsibilities.

Examining Section 166 of Companies Act, 2013

A director of a company is required by Section 166(2) of Companies Act, 2013 to act in good faith to further the company's goals for the benefit of all of its members. The director must also act in the company's best interests as well as those of its shareholders, workers, community, and the environment. Promoting the objectives of the company and defending the interests of its stakeholders are the two main obligations to act in good faith, according to a straight reading of the statute. The common law before codifications cast upon a duty of loyalty which included the duty to act in good faith in the best interest of the company. Directors in India are now required to actively prioritize the best interests of stakeholders and shareholders in the current scenario. This, however, raises questions about whether or not interested parties are entitled to bring legal action if the fiduciary duty that the clause ensures is violated. Section 166(4) of the Act codifies the common law principles of no conflict, no profit, as established in Regal (Hastings) v. Gulliver,² and the corporate opportunity rule, which was scrutinized in Bhullar v. Bhullar.³ The sole Indian case examining the Corporate Opportunity Principle is Vaishnav Shorůlal Puri v. Seaworld Shipping and Logistics Pvt. Ltd.⁵ in which the Court used Section 88 of the Indian Trusts Act, 1882 to determine the fiduciary's obligations, thereby representing a nebulous application of the UK and US positions on the principle.

Fiduciary Duty in India and Judicial Trend

The concept of fiduciary duty stems from the notion of acting in good faith. Between two persons one is bound to protect the interests of the other and if the former availing of that relationship makes an unjust enrichment or unjust benefit derived from another, it is against the ethos of fiduciary duty.⁶ The idea of behaving in good faith serves as the foundation for the concept of fiduciary duty. When two persons (natural or juristic) are in a relationship, one has to protect the other's interests. A fiduciary obligation is violated if the former takes use of this relationship to obtain an unfair benefit or unjust profit from the latter. A director's fiduciary duty is frequently compared to a trustee's duties to a beneficiary. Directors must act in the best interests of their beneficiary, which in this case is the firm or its stakeholders, in their capacity as trustees. This parallel dates back to the Percival v. Wright ⁷ case in England, where it was decided that directors had a dual role with the corporation, acting as trustees and agents. In the case of Globe Motors Ltd. v. Mehta Teja Singh⁸ the dual role of directors with the company i.e. as trustee and agent was reiterated. It is clear that, even though the term "fiduciary capacity" is not well defined, it denotes a relationship similar to that which exists between a trustee and the beneficiaries of a trust. The phrase covers a wider range of circumstances, including those in which parties are positioned in accordance with mutual trust, confidence, and good faith. In the case of the Central Board of Secondary Education and Anr. v. Adiya Bandopadhyay and Ors. the Supreme Court explained the terms ‘fiduciary’ and ‘fiduciary relationship’ in para 39 as when someone has an obligation to act in another person's best interests while exhibiting honesty and good faith, that person is referred to as a fiduciary. This is especially true when the other party places exceptional trust and confidence in the person performing the duty. A scenario or transaction in which one person (beneficiary) fully trusts another (fiduciary) with regard to his affairs, business, or transaction(s) is referred to as a "fiduciary relationship." A person who keeps something in trust for another (beneficiary) is also referred to by this name.

The Supreme Court in the judgment of Sangramsinh P. Gaekwad and Ors. Vs. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Ors⁹ in para 52 held that directors are not required by fiduciary law to advise current shareholders on how best to sell their shares. This is so because directors are not typically considered to be the agents of their shareholders and are not charged with managing their shares. However, the Court stressed that directors must behave in good faith and refrain from any deliberate or careless deception or fraud if they freely provide advice to current shareholders. Regarding the director's fiduciary duty to current shareholders as share sellers and their duty to protect the company's assets and finances, a clear division has been established. Protecting the company's interests is the priority when there is a conflict between the interests of the shareholders and the company.¹⁰

To Whom Duty of Fiduciary Owned

As a general rule, a fiduciary relationship only applies to the company and is not assumed between a director and a shareholder. The idea put forth in Percival v. Wright is still recognized as a good legal precedent today and has been reinforced in several English cases.¹¹ Although it is widely acknowledged in Indian doctrine that directors have no fiduciary duty to shareholders, under some unique and extraordinary situations, this obligation is triggered. The case of Sangramsing P. Gaekwad¹² is a landmark case on the fiduciary duties of the directors vis a vis the company and shareholders. The Court relied upon a variety of cases to conclude that under special circumstances, such as, directors placing the onus upon themselves to advice the shareholders, in case of takeover of bid, usage of powers for extraneous purposes, when tenets of agency such as trust, confidentiality and loyalty arise, when additional shares are acquired to benefit the company and in the process directors make a pecuniary gain with an ulterior motive, ¹³ a digression can be made from the settled position of law which recognizes fiduciary duty of a director only in context of the company. As a result, the court established a special circumstance/special arrangement exception to the Percival rule.

Conclusion

Therefore, it is abundantly clear from the aforementioned Common law rulings and precedents in Indian courts that directors do not have an ongoing absolute fiduciary duty to shareholders. However, there appears to be an exception to this rule in certain unique circumstances, but courts have not clearly defined the criteria to identify instances in which directors breach their fiduciary duty to shareholders. As a result, this obligation to shareholders is determined case-by-case and is dependent upon a careful analysis of the relevant facts and circumstances. The duties of directors are growing as the business environment gets more complex, and at the same time, the definition of fiduciary duty is changing.¹⁴ Before the implementation of Section 166, the Court made an effort to interpret the statute in a way that upheld good faith and equity. Similar ideas are included in Section 166 of the amended Act, which clearly defines “officers in default” as stated in Section 2(60). Section 2(60)'s inclusion highlights the statute's dedication to protecting parties who have been harmed and acts as a disincentive to commit wrongdoing because breaking the law is punishable by law. The main objection to section 166 is that it does not adequately protect the rights of stakeholders who are not shareholders, such as suppliers and customers. Section 166(2) appears to address this issue, but implementation issues make it ineffective and leave stakeholders without a way to hold directors accountable for duty breaches. To sum up, it is critical to understand the difference between directors' fiduciary duties to the company and shareholders. Although these responsibilities are not interchangeable, it is crucial to understand that fiduciary duties could nevertheless arise in particular circumstances that fit certain criteria and recognized types of fiduciary relationships, like agency, which includes duties of loyalty, trust, and confidence.¹⁵ Therefore, the idea of a fiduciary relationship between a director and the current shareholders would typically not be invoked in the absence of exceptional circumstances or reasons.

This article is authored by Vishal Kumar, a Delhi based lawyer.