Richa Bhandari, Associate
Praneet Kaur, Associate
|Date | Version||October 17, 2022| 1.0|
|Keywords||‘Director’, ‘Fiduciary duty’, ‘Doctrine of Corporate Opportunity’,|
|List of Legislation Referred.||
Abstract- This write-up examines the applicability of the doctrine of corporate opportunity in light of the provisions of Section 166 of the Companies Act, 2013
The doctrine of corporate opportunity flows from the fiduciary duty of the directors towards the company and its shareholders and aims to ensure that there is no conflict between this duty and the director’s individual interests arising from corporate opportunities known to him because of his office.
The doctrine has been recognized in various jurisdictions, most notably by U.K. and U.S. courts. However, Indian courts lack clarity in this regard, with Vaishnav Shorilal Puri1, being the only available jurisprudence which truly deals with the doctrine of corporate opportunity.
Duties of the Director under the Companies Act, 2013
The director’s duties have been laid down under Section 166 of the Companies Act 2013 (“Act”). The origin of this section can be attributed to the recommendations of the J.J. Irani Committee. The Committee recommended that it is necessary to spell out the directors’ duties as they hold a fiduciary position with respect to the company and should be aware of their duties under the law.
Section 1662 of the Act imposes the following duties upon the director of a company:
(1) To act in accordance with the articles of the company.
(2) To act in good faith, with an aim to promote the objects of the company for the benefit of its members and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment. This is also referred to as a ‘triple bottom-line’ approach with concern for the shareholders, people and society, and the environment.
(3) To exercise his duties with due and reasonable care, skill, and diligence and to exercise independent judgment.
(4) To not involve in a situation wherein he may have a direct or indirect interest that either conflicts or may potentially conflict with the company’s interest. For instance, a director is prohibited from running an independent business for monetary purposes that competes with his company’s business, as the same violates his fiduciary duties under Section 166 of the Act.3
(5) To not achieve or attempt to achieve any undue gain or advantage, either to himself or to his relatives, partners, or associates. This sub-section (5) is an extension of the director’s fiduciary duties and prohibits the director from earning a profit at the company’s cost.
(6) To not assign his office.
In the case of Globe Motors Ltd. v. Mehta Teja Singh and Co., the Delhi High Court observed that “it cannot be disputed that the fiduciary duties of directors are the same as those of other trustees and they are expected to display the utmost good faith towards the company whether their dealings are with the company or on behalf of the company.”4
It is, therefore, important for a director to ensure that the company’s business opportunities, which come to his knowledge while holding the office of a director, are not acquired for his benefit in a way that puts him in a position where his interest and duty conflict. Along with this, understanding the intricacies of the business environment and law is essential to navigate legal challenges and ensure sustainable growth.
Applicability of the Doctrine of Corporate Opportunity in Companies Act, 2013
Corporate opportunity refers to any opportunity to engage in business activity of which a senior executive becomes aware and knows closely related to a business in which the corporation is engaged or expects to engage.5
The doctrine of corporate opportunity may further be explained as follows:
i. Misappropriation of corporate opportunity to earn profits:
As a general rule, since the director holds a position of trust in the company and is bound by his fiduciary duties, he cannot appropriate for his benefit such corporate opportunity which is known to him by reason of his office and which the company is either pursuing or is capable of pursuing. In the case of Carlton v. Halestrap, it was observed that where a director misappropriates such opportunity, prima facie, he is liable to account for any profits that he makes as a result on constructive trust for the company.6
Similar to the view of the Court in the aforesaid case, under the Companies Act 2013, a director is under a duty to not achieve or attempt to achieve any undue gain or advantage and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.7
ii. Conflict of Interest:
The doctrine can further be explained by taking reference from the case of Guth v. Loft Inc8, wherein the Court observed that “if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation’s business and is of practical advantage to it, one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity to self-interest of the officer or director will brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.”9
An example of this would be a case where a company is engaged in business of trading and acquisition of property, and its director purchases a property without informing the company of the existence of such opportunity. Here, the director would not be permitted by law to do so.
The Companies Act, 2013, also prohibits a director from getting involved in a situation wherein he may have a direct or indirect interest that either conflicts or may potentially conflict, with the interest of the company.10 The rule of conflict of interest, therefore, is universal and inflexible.
Striking a balance between the doctrine and director’s individual interest
Although the doctrine adopts a strict and absolute approach towards the fiduciary duty of a director, in certain cases, where the director has fulfilled his fiduciary duty towards the company, he may serve his individual interests.
i. Incapacity of the company to pursue the opportunity:
As a general rule, a director is held liable in cases where he misappropriates a corporate opportunity which the company is ‘capable of pursuing’. However, in a scenario where the company is not in the capacity of pursuing the corporate opportunity or where, the company has refused to pursue the corporate opportunity, it may be reasonable of a director to appropriate such opportunity for his entrepreneurial interests.
In the case of Queensland Mines Ltd. v. Hudson, where the managing director had entered into negotiations on its behalf for a mining license, and due to financial difficulties faced by the company, had taken the license in its own name, resigned and made substantial profits, the Privacy Council refused to impose liability on the managing director as he had fully disclosed the situation to the company and the company had resolved not to proceed further.11
A similar view was taken by the Bombay High Court in the case of Vaishnav Shorilal Puri and v. Kishor Kundan Sippy12. In this case, the Puri and Sippy Group had equal shares and equal number of directorships in two shipping companies, SSCO and SSTS. SSTS was having principally two types of businesses, i.e., agency business with an international shipping company by name Contship Containers Lines Ltd. (“Contship”) and charter business.
The agency business was looked after by the Puri’s, whereas the charter business was looked after by the Sippy’s. It was the grievance of the Sippy Group that Puri Group diverted the agency business with Contship to another company floated by them and named Seaworld Shipping & Logistics Pvt. Ltd. (“Seaworld”). It was alleged by the Sippy Group that this diverting of business by Puri’s was in breach of their fiduciary obligation as directors and amounted to its oppression in SSTS.
The Bombay High Court, recognizing the concept of corporate opportunity and taking reference from the case of C.G. Chetty v. C.S. Chetty13, overturned the decision of the Company Law Board and observed that since the agency agreement with SSTS had been terminated by Contship, no business opportunity was any longer available to SSTS. Therefore, the diversion of Contship agency from SSTS to Seaworld cannot amount to breach of fiduciary duty on the part of Puris.
Contrary to this approach, it has been observed that mere lack of inability to pursue the corporate opportunity is not sufficient to prove that the director has not acted contrary to its duty. In this regard, reference may be taken from the case of Irving Trust v. Deutsch14, wherein it was held that “If directors are permitted to justify their conduct on such a theory [that the corporation is unable to undertake the venture] there will be a temptation to refrain from exerting their strongest efforts on behalf of the corporation since, if it does not meet the obligations, an opportunity for profit will be open to them personally.”15
Thus, it must be judged, based on the facts of each case, as to whether or not the director has acted contrary to its duty towards the company.
ii. Cessation as a director:
Contrasting views have been adopted by the courts in various cases when it comes to determining the liability of the director after he vacates the office of a director. The two contrasting approaches may further be explained as follows:
a. Rigid Approach: The approach is based on the premise that a director has certain duties and liabilities even after he ceases to be a director. For instance, a director continues to be under an obligation not to disclose or use the company’s confidential information for his own or another’s benefit till he is released by the company, even after he resigns from his office.
b. Pragmatic Approach: The approach attempts to balance the interest of the company and the director. This approach was primarily adopted by the Court in the case of Island Export Finance Ltd. v. Um Umma, where the company had ceased to operate in its erstwhile line of business after the resignation of the director, and the director had made profits out of such line of business. The Court had observed that “directors, no less than employees, acquire a general fund of knowledge and expertise in the course of their work, and it is plainly in the public interest that they should be free to exploit it in a new position.”16
Section 166 undoubtedly poses challenges in interpretation since subjective language is used in respect of the obligations cast on the director. Words like ‘in good faith’, ‘undue gain or advantage’ are subjective and applying the rules of interpretation, such words are required to be interpreted in a manner:
i. To best harmonize the subject of the Act, and
ii. To best harmonize the object which the legislature has in view.
Under the circumstance, it would be very helpful for the company as well as the directors to have in place a code of ethics. Such code of ethics may be prepared in an illustrative manner so that the parameters and standards expected to be adhered to by the director are clear.
It would be desirable for the code of ethics to provide for parameters in respect of the entrepreneurial opportunities that a director may explore without compromising its fiduciary responsibility to the company.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.
1 Vaishnav Shorilal Puri and Ors. v. Kishor Kundan Sippy and Ors., 2006 SCC OnLine Bom 361.
2 The Companies Act, 2013 (Act 18 of 2013), s.166
3Rajeev Saumitra v. Neetu Singh, (134 CLA 450)(2016).
5 (American Law Institute’s Principles of Corporate Governance) Analysis & Recommendations 5.05 (1992).
6 (1988) 4 BCC 538.
7 The Companies Act, 2013 (Act 18 of 2013), s.166(5).
8 Guth v. Loft Inc, 5. A. 2d 503 (Del) (1939).
9 Ibid, 511.
10 The Companies Act, 2013 (Act 18 of 2013), s.166(4).
11 (1978) 18 ALRI.
12 2006 SCC OnLine Bom 361.
13 AIR 1959 SC 190.
14 73 F.2d 121 (2d Cir. 1934).
15 Id. at 124.
16 1986 BCLC 460 (QBD).