FIDUCIARY DUTIES OF A DIRECTOR:

INVESTIGATION THROUGH CASE ANALYSIS

SUBMITTED TO

Dr. DIPAK DAS,

Associate Professor,
FACULTY: CORPORATE LAW

SUBMITTED BY

Abhinav K Shukla
SEMESTER-VI; SECTION-A
ROLL.NO.-03

SUBMITTED ON- 7th April, 2015

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TABLE

OF

CONTENTS

ACKNOWLEDGEMENTS

INTRODUCTION

OBJECTIVES

RESEARCH METHODOLOGY

FIDUCIARY DUTIES

DUTY OF GOOD FAITH AND BONA FIDE ACTS DUTY OF CARE

DUTY NOT TO DELEGATE
DUTY TO DO LEGAL ACTS AND PROPER USE OF POWERS
UNFETTERED DISCRETION
LACK OF CONFLICTING INTERESTS

DIRECTORS AND BREACH OF TRUST

11

DIRECTORS KNOWLEDGE AS KNOWLEDGE OF THE COMPANY

12
CASE LAW ANALYSIS

14

Dale and Carrington Investment (P) Ltd v. P.K. Prathapan

And Ors
13
Regal (Hastings) Ltd. v. Gulliver and Ors

15
Alexander v. Automatic Telephone Co

16
Needle Industries (India) Ltd. v. Needle Industries Newey

(India) Holding 16
Piercy v. S. Mills & Co. Ltd.

17
The Tea Brokers (P) Ltd. and Ors. v. Hemendra Prosad
Barooah

18

FIDUCIARY DUTY AND INDIAN TRUSTS ACT

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18

CONCLUSION

21

BIBLIOGRAPHY

22

ACKNOWLEDGEMENTS
This project is a result of sheer hard work and dedication. I would like to pay my heartfelt
gratitude to my respected faculty Dr. Dipak Das Sir for providing such a challenging topic.
If he had not shown faith in me, I dont think this project would have been reality. He guided
me at every footstep and providing me wholesome help, wherever I required.
I would also like to say thanks to entire HNLU administration for allowing me to use
whatever the facilities available throughout the campus.
Lastly, from the very outset, I was encouraged by my friends and classmates in the right
direction, so that I can focus on the task.
Some printing errors might have crept in, which are deeply regretted. I would be grateful to
receive comments and suggestions to further improve this project report.

Abhinav K Shukla,
Roll No. 03,
Section A, Sem VI
Batch XII.

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INTRODUCTION
A living person has a mind which can have knowledge or intention and he has hands to
carry out his intention. A corporation has none of these; it must act through living persons.1
Human beings have their hands and also possess the mental faculty. They are thus, capable of
taking right decisions and actions. But a corporation, not being the natural person, is devoid
of these essential elements and hence, it cannot take an action or a judgment itself. Rather it
requires a channel through, which it can take actions and decisions. The directors of the
company thus serve as the required channel to accomplish the decision-making and actiontaking task of the corporation. A corporation is an artificial being, invisible, intangible and
existing only in contemplation of law.2 A corporation cannot have the intention. It is only
the intention of its agents, which make it liable for the wrongs in the nature of torts or
the criminal wrong.
A corporation has its separate identity than its shareholders and its agents. Dwelling upon the
necessity of the agents for carrying out its task, the role of the directors of a company
becomes of paramount essence.
A Director is an agent of the Company for the conduct of the business of the company. The
Directors of the subsidiary of a foreign company are not on any separate footing. As agents or
officers of the Company, directors have a fiduciary relation with the Company and its
shareholders. Directors are bound to use fair and reasonable diligence in discharging the
duties and to act honestly, and with such care as may be reasonably expected from, having
regard to their knowledge and experience. Express liability would usually arise only when a
director has personally guaranteed the performance of a contract. As far as fiduciary duties
are concerned, any breach by directors would make them liable. Directors would be liable for
1 HALDANE LC in Lennards Carrying Co. v. Asiatic Petroleum Co., 1915 AC 705 at p. 713.
2 MARSHALL J. in Trustees of Dartmouth College v. Woodward, (1819) 17 US 518, 636.
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negligence, breach of trust, misfeasance, and ultra vires actions and for applying the funds of
the company for such acts.
It is stated that in applying the general equitable principles to directors of a company, four
separate rules have emerged. These are: (1) that directors must act in good faith in what they
believe to be the best interests of the company; (2) that they must not exercise the powers
conferred upon them for purposes different from those which they were conferred; (3) that
they must not fetter their discretion as to how they shall act; and (4) that, without the
informed consent of the company, they must not place themselves in a position in which their
personal interests or duties to other persons are liable to conflict with their duties to the
company.3

RESEARCH METHODOLOGY

Research Methodology adopted in completion of this project is mainly Doctrinal in nature.

Secondary sources such as Books and journals have been used widely in completion of this
project

OBJECTIVES
To study the position of directors with respect to the fiduciary duties they are required
to perform

To analyze certain case-laws, Indian as well as British, to study the fiduciary position
of the directors with respect to the company

3 Gowers principles of Modern Company Law (6th Edition, 1997, page 601
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FIDUCIARY DUTIES
A Director owes fiduciary duties towards the company, and not to individual shareholders,
creditors (other than during winding up when their interest has to be taken care of) or fellow
Directors. These generally consist of the following:
Duty of Good faith and bona fide acts
Directors must act honestly, without negligence and in good faith in the bona fide best
interests of the company. Interest of the company implies the interest of the present and future
members of the company on the footing that the company would be continued as a going
concern.
While applying this rule, Directors are not expected to act purely for the economic
advantages of the company, disregarding the interests of the members, employees or
creditors. The presumption is that a Director, acting within his or her authority, has acted in
good faith, though the act may have been foolish or wrong, unless proved otherwise. The
Courts usually refuse to substitute their judgment for the commercial judgment of the
Director. The directors should not make any secret profits. He should also not exploit to his
own use the corporate opportunity.
In Coke v. Veeks4, it was observed that men who assume complete control of a
companys business must remember that they are not at liberty to sacrifice the interest which
they are bound to protect and while ostensibly acting for the company, direct in their own
favour business which should properly belong to the company they represent. In this case
there was an offer of a contract to the company. Directors who were the holders of the share
3/4th of the votes resolved that the company had no interest in the contract and later entered
into the contract by themselves. Held, the benefit of the contract belonged in equity to the
company. As regards the director selling his property to the company there would be breach
of faith and he would have to account for the profit to the company if the property was
acquired by him under circumstances which made it in equity the property of the company.
But if the property in equity as well as in law belonged to him, there is no breach of faith.5

4 [1916] AC 554
5 Burland v. Earle [1902] AC 83.
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In Regel (Hastings) Ltd. V. Gulliver case, the plaintiff was a director in one company
and a shareholder and creditor in another company. The second company was being wound
up and the plaintiff purchased the assets of the second company at a public auction in four
lots. One such lot he sold to the former company (in which he was a director) at almost the
tree times the price he had paid for it. The lower Court decided that should account for the
profit in resale to the company. But, the Privy Council overruled the decision. Again if the
property is acquired by a director by reason of the fact he is a director and in the course of the
exercise of the office of director, then the profit on resale of such property would belong to
the company.6
Duty of Care
A director must display care in performance of work assigned to him. He is, however,
not expected to display an extraordinary care but that much care only which a man of
ordinary prudence would take in his own case. Justice Romer In Re City Equitable Fire
Insurance Companys case observed:7
Directors duty will depend upon the nature of the companys business, the manner in which
the work of the company is distributed between the directors and other officials of the
company. In discharging these duties a director must exercise some degree of skill and
diligence. But he does not owe to his company the duty to take all possible care or to act with
the best care. Indeed, he need not exhibit in the performance of his duties a greater degree of
skills than may reasonably be expected from a person of his knowledge and experience. It is
therefore, perhaps another way of stating the same proposition that directors are not liable for
mere error of judgment.
Similar view was expressed in Lagunas Nitrate Co. Ltd v. Lagunas Nitrate Syndicate 8, in
the following words:
If directors act within their powers, if they act with such care as is to be reasonably expected
of them having regard to their knowledge and experience and if they act honestly for the
6 Regel (Hastings) Ltd. V. Gulliver, [1942] All ER 378 (HC)
7 Infra, 9
8 [1899] 2 Ch. 392
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benefit of the company they discharge both their equitable as well as legal duty of the
company.
Three propositions laid down by Justice Romer in City Equitable Fire Insurance Co.9
(which was relied upon in India in the case of National Bank of Upper India, Lucknow vs.
Dina Nath Sapru and others):10
(i) A director need not exhibit in the performance of his duties a greater degree of skill than
may reasonably be expected from a person of his knowledge or experience.
(ii) A director is bound to give continuous attention to the affairs of his company, his duties
being of an intermittent nature to be performed at periodical Board meetings or committee
meetings. He is not bound to attend all Board and committee meetings, though he ought to
attend all such meetings as he is reasonably able to.
(iii) In respect of all such duties as may be properly left to some other official having regard
to the exigencies of business or articles of association of the company, a director is, in the
absence of grounds for suspicion, justified in trusting that official to perform such duties
honestly.
In discharging their duties, directors must act honestly and must exercise such reasonable
degree of skill and diligence as would amount to reasonable care which an ordinary man
might be expected to take.11 While negotiating a contract for his / her company, a director
should make it clear to the other party that the contract will be entered into by the company
and not the director personally. If he does not do this and the other party believes that he is
contracting with the director or agent and not the company, the contract they conclude will be
a personal one made with the director and he will be personally liable for fulfilment of the
promises made.12

9 (1925) Ch 407
10 AIR 1926 Oudh 243
11 Govind Narayan Karkade vs. Rangnath Gopal Rajopadhye, AIR 1930 Bom 572.
12 Raja Ram Jaiswal vs. Ganesh Prasad AIR 1959 All 29.
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Section 201 states a provision in the companys Article or in any agreement that excludes the
liability of the directors for negligence, default and misfeasance, breach of duty or breach of
trust, is void. The company cannot even indemnify the directors against such liability. But, if
a director has been acquitted against such charges, the company may indemnify him against
costs incurred in defence.
Section 633 further states that where a director may be liable in respect of the negligence,
default, breach of duty, misfeasance or breach of trust but if he has acted honestly and
reasonably and having regard to all circumstances of the case, he ought fairly to be excused,
the court may relive him either wholly or partly from his liability on such terms as it may
think fit. However, the plea of a director that he was merely a non-executive independent
director at the time of issuance of the prospectus by itself is not enough to grant him relief
under Section 633.13
Duty not to Delegate
Director being an agent is bound by the maxim delegatus non potest delegare which
means a delegate cannot further delegate.14 Thus, a director must perform his functions
personally. A director may, however, delegate in the following cases:

Where permitted by the Companies Act or Articles of the company.

Having regard to the exigencies of business certain functions may be delegated to the
other officials of the company.

Directors have, both collectively and individually, a continuing duty to acquire and maintain
a sufficient knowledge and understanding of the companys business to enable them properly
to discharge their duties as directors. Whilst directors are entitled (subject to the articles of
association of the company) to delegate particular functions to those below them in
management chain, and to trust their competence and integrity to a reasonable extent, the
exercise of the power of delegation does not absolve a director from the duty to supervise the
discharge of the delegated functions. It has been held that no universal application can be
formulated as to this duty of supervision, and the question of whether it has been discharged,

13 TEC Venkatesh v. ROC [2007] 78 SCL 1 (AP)

14 MESSY I.P., ADMINISTRATIVE LAW(8th Edn. Eastern Book Company) 2012.
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must depend on the facts of each particular case, including the directors role in the
management of the company.15
Though the directors as a body are responsible for the conduct of the companys business, it
is undoubted law that they can delegate their powers to one or more of themselves for the
purpose of carrying it on more conveniently.16
Duty to do Legal Acts and Proper use of powers
Directors must not exercise the powers conferred upon them for purposes different
from those for which they were conferred. Notwithstanding that Directors have acted in
honest belief for what they believe to be for the benefit of the company, they may
nevertheless be liable for improper use of their powers, especially for purposes collateral to
what they have been conferred for, for instance, furthering the Directors own interests or
diluting the majority shareholding. A breach occurs when the dominant purpose of the act is
improper.17
It is a settled principle of law that ignorance of the law is not a defence in legal proceedings
for violation of any statutory obligation. Specifically in the context of companies and its
directors, it has been observed that where directors use their powers to part with the moneys
of their company in a manner or for a purpose which the law forbids, it is not a defence to
proceedings to make them liable for their act to plead merely that they acted in ignorance of
the law.18
A similar prohibition would also apply in cases where a director obtains any secret
commission or any illegal gratification for the award of a contract with the company. 19 A
company can recover from its director any money received by him by way of a bribe in fraud
15 Barings plc (No. 5) Re (1999) 1 BCLC 433 at page 489: (1999) 1 All ER 1017 (Ch D) by
Jonathan Parker, J.
16 Public Prosecutor vs. T.P. Khaitan (1957) 27 Com Cases 77, 83: AIR 1957 Madras 4
17 A, Ramaiya, GUIDE TO THE COMPANIES ACT, PART 1 (16th ed. 2008)
18 Louis Steen vs. Charles Allen Law (1963) 3 All ER 770
19 Boston Deep Sea Fishing & Ice Co. Ltd. vs. Ansell (1886-1890) All ER Rep 65 (CA)
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of the company and the company can also sue him and the person giving the bribe for any
loss sustained through entering into a disadvantageous contract or the company may rescind
the contract.
Unfettered Discretion
Directors must not fetter their discretion for any reason whatsoever. They cannot
validly contract or act pursuant to any arrangement either with one another or with third
parties as to how they shall vote at board meetings or otherwise conduct themselves in the
future. However, this does not include contracting to take further action to give effect to a
contract entered into in a bona fide exercise of such discretion. Nominee Directors must be
particularly careful not to act only in the interests of their nominators, but must act in the best
interests of the company and of its shareholders as a whole.
Lack of Conflicting Interests
Directors must not, without the informed consent of the company, place themselves in
a position in which their personal interests or duties to other persons are liable to conflict with
their duties to the company or where there is a real and distinct possibility of conflict. This
requirement covers the following aspects:20
i.

Directors have to make continuous disclosures of their interests in the various

transactions of, and with, the company. A Director cannot enter into a contract
with the company without its informed consent, even if there is no unfair

ii.

advantage to be gained, or abuse of position, by such Director.

Directors cannot use, without the consent of the company, the companys
properties, opportunities or information for their own profit. In order to establish a
breach of this duty, it must be shown: (1) that what the Directors did was so
related to the affairs of the company that it can be said to have been done in the
course of their management and in utilization of their opportunities and special
knowledge as Directors, and (2) that what they did resulted in a profit to
themselves. The English Courts, adopting a strict approach, have held directors to
be in breach of this fiduciary duty, even if the opportunity was not one which
would have been of use to the company. Indian courts generally follow this strict
English law approach.

20 Supra, 17
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iii.

Directors have a duty not to compete with the company, which is in many respects
a corollary of the immediately preceding rule.

DIRECTORS AND BREACH OF TRUST

Traditionally the duties of directors were non-statutory. They were fashioned out
essentially from the common law as developed through cases. The Nigerian Act contains the
following provision on the point:21
A director of a company stands in a fiduciary relationship towards the company
and shall observe the utmost good faith towards the company in any transaction with it or
on its behalf.
The first and the most obvious obligation of persons in fiduciary positions are to act with
honesty. Greatest good faith is expected in the discharge of their duties.22 Good faith
requires that all their endeavours must be directed to the benefit of the company. Where a
Director acts dishonestly to the interest of the company, he will be held liable for breach of
fiduciary duty. Most of the powers of Directors are powers in trust and, therefore, should be
exercised in the interest of the company and, not in the interest of the Directors or, any
section of members. Thus, in a case where the Directors, in order to forestall a take-over bid,
transferred the unissued shares of the company to trustees, to be held for the benefit of the
employees, and an interest-free loan from the company was advanced to the trustees to enable
them to pay for the shares, it was held to be a wrongful exercise of the fiduciary powers of
the Directors.
Directors are bound to use fair and reasonable diligence in discharging the duties and to act
honestly, and act with such care as is reasonably expected from him, having regard to his
knowledge and experience. Sensibility
In R.K. Dalmia and others v. The Delhi Administration 23 it was held that "A director will be
personally liable on a company contract when he has accepted personal liability either
21 The Companies Act and Allied Matters Act, 1990. S. 279.
22 Bank of Poona v. Narayandas, AIR 1961 Bom 252.
23 1962 AIR 1821
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expressly or impliedly. Directors are the agents or the trustees of a Company." As far as
fiduciary duties/obligations are concerned, any breach by any director would visit them with
liability. Our Supreme Court has considered this issue of fiduciary liability. It has been
observed in Official Liquidator vs. PA Tendulkar.24
Directors Knowledge as knowledge of the company
Where an individual can be identified with a company then that individuals knowledge may
be regarded as the knowledge of the company, if he is under a duty to communicate that
knowledge to the company. In most cases, a Managing Director is identified with his
company and therefore the Managing Directors knowledge is imputed to the company. 25 The
officer of a company is under a duty, if he is aware that a transaction into which his company
or a wholly owned subsidiary is about to enter is illegal or tainted with illegality, to inform
the board of the company of this fact.26
It has been held that the default of the managing director who is the directing mind and will
of his company, could be attributed to the company.27 In the same case (i.e. Lennards
Carrying Company Case) Viscount Haldane articulated the alter ego doctrine peculiar to
company law and as something distinct from the ordinary principle of agency and vicarious
liability. In a celebrated passage (At page 713), he observed that a corporation is an
abstraction. It has no mind of its own any more than a body of its own; its active and
directing will must consequently be sought in the person of somebody who for some purposes
may be called an agent, but who is really the directing mind and will of the corporation.
This principle has also been followed in India inasmuch as the Supreme Court of India has,
in J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors.28, held
that, since a company is a legal abstraction, without a real mind of its own, it is those who
24 AIR 1973 SC 1104
25 Union India Sugar Mills Co. Ltd., Re, AIR 1933 All 607
26(Belmont Finance Corporation vs. Williams Furniture Ltd. (No. 2), (1980) 1 All ER 393
27 Lennards Carrying Company vs. Asiatic Petroleum Ltd. 1915 AC 705 (HL)
28 [1997] 88 Comp Cas 285 (SC)
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in fact control and determine the management of the company, who are held vicariously
liable for commission of statutory offences. The directors of the company are, therefore,
rightly called upon to answer the charge, being the directing mind of the company. The
Supreme Court relied upon the Lennards Carrying Companys case as well as Tesco
Supermarkets vs. Nattras,29 where the House of Lords held that the question: what natural
persons are to be treated in law as being the company for the purpose of acts done in the
course of its business, including the taking of precautions and the exercise or due diligence to
avoid the commission of a criminal offence, is to be found by identifying those natural
persons who by the Memorandum and Articles of Association or as a result of action taken by
the directors, or by the company in general meeting pursuant to the Articles, are entrusted
with the exercise of the powers of the company.

CASE LAW ANALYSIS

1. Dale and Carrington Investment (P) Ltd v. P.K. Prathapan And Ors,30
At this stage it may be appropriate to consider the legal position of Directors of
companies registered under the Companies Act. A company is a juristic person and it acts
through its Directors who are collectively referred to as the Board of Directors. An individual
Director has no power to act on behalf of a company of which he is a Director unless by some
resolution of the Board of Directors of the Company specific power is given to him/her.
Whatever decisions are taken regarding running the affairs of the company, they are taken by
the Board of Directors.
The Directors of companies have been variously described as agents, trustees or
representatives, but one thing is certain that the Directors action behalf of a company in a
fiduciary capacity and their acts and deeds have to be exercised for the benefit of the
company. They are agents of the company to the extent they have been authorized to perform
29 (1972) AC 153 (HL
30 (2004 )122 Comp Case 161 SC, (2004) 4 Comp LJ 1 SC
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certain acts on behalf of the company. In a limited sense they are also trustees for the
shareholders of the company. To the extent the powers of the Directors are delineated in the
Memorandum and Articles of Association of the company, the Directors are bound to act
accordingly. As agents of the company they must act within the scope of their authority and
must disclose that they are acting on behalf of the company.
The fiduciary capacity within which the Directors have to act enjoins upon them a
duty to act on behalf of a company with utmost good faith, utmost care and skill and due
diligence and in the interest of the company they represent. They have a duty to make full and
honest disclosure to the shareholders regarding all important matters relating to the company.
It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to
issue shares for a proper purpose. This duty is owed by them to the shareholders of the
company. Therefore, even though Section 81 of the Companies Act which contains certain
requirements in the matter of issue of further share capital by a company does not apply to
private limited companies, the directors in a private limited company are expected to make a
disclosure to the shareholders of such a company when further shares are being issued. This
requirement flows from their duty to act in good faith and make full disclosure to the
shareholders regarding affairs of a company. The acts of directors in a private limited
company are required to be tested on a much finer scale in order to rule out any misuse of
power for personal gains or ulterior motives. Non-applicability of Section 81 of the
Companies Act in case of private limited companies casts a heavier burden on its directors.
Private limited companies are normally closely held i.e. the share capital is held within
members of a family or within a close knit group of friends. This brings in considerations
akin to those applied in cases of partnership where the partners owe a duty to act with utmost
good faith towards each other. Non-applicability of Section 81 of the Act to private
companies does not mean that the directors have absolute freedom in the matter of
management of affairs of the company.
This Court held that the directors act on behalf of a company in a fiduciary capacity and their
acts and duties are to be exercised for the benefit of the company. It, however, while
analyzing the acts of a director as an agent of the company observed that in a limited sense
they are also trustees for the shareholders of the company. However, without discussing the
limitations of such fiduciary relationship, it was observed: "15_ The fiduciary capacity within
which the Directors have to act enjoins upon them a duty to act on behalf of a company with
utmost good faith, utmost care and skill and due diligence and in the interest of the company
they represent. They have a duty to make full and honest disclosure to the shareholders
15 | P a g e

regarding all important matters relating to the company. It follows that in the matter of issue
of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose.
This duty is owed by them to the shareholders of the company. Therefore, even though
Section 81 of the Companies Act which contains certain requirements in the matter of issue
of further share capital by a company does not apply to private limited companies, the
directors in a private limited company are expected to make a disclosure to the shareholders
of such a company when further shares are being issued. This requirement flows from their
duty to act in good faith and make full disclosure to the shareholders regarding affairs of a
company. The acts of directors in a private limited company are required to be tested on a
much finer scale in order to rule out any misuse of power for personal gains or ulterior
motives."
2. Regal (Hastings) Ltd. v. Gulliver and Ors,31 Lord Russell of Killowen observed as
under:
"Directors of a limited company are the creatures of a statute and occupy a position peculiar
to them. In some respects they resemble trustees, in others they do not. In some respects they
resemble agents, in others they do not. In some respects they resemble managing partners in
others they do not. The said judgment quotes from Principles of Equity by Lord Kames. In
one sentence the entire concept is conveyed. The sentence runs "Equity prohibits a trustee
from making any profit by his management, directly or indirectly. Ultimately the issue in
each case will depend upon facts of that case".
3. Lindley MR observed in Alexander v. Automatic Telephone Co.32:
"The Court of Chancery has always exacted from directors the observance of good faith
towards their shareholders and towards those who take shares from the company and become
co-adventurers with themselves and others who may join them. The maxim "Caveat emptor"
has no application to such cases, and directors who so use their powers as to obtain benefits
for themselves at the expense of the shareholders, without informing them of the fact, cannot
retain those benefits and must account for them to the company, so that all the shareholders
may participate in them."

31 [1942(1) All ER 379]

32 (1900) 2 Ch. 56
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4. Needle Industries (India) Ltd. and Ors v. Needle Industries Newey (India) Holding
Ltd. and Ors33 is a judgment of this Court in which amongst various other aspects the
power of directors regarding issue of additional share capital was also considered.
This Court observed:
"The power to issue shares is given primarily to enable capital to be raised when it is required
for the purposes of the company but it can be used for other purposes also as, for example, to
create a sufficient number of shareholders to enable the company to exercise statutory
powers, or to enable it to comply with legal requirements as in the instant case. Hence if the
shares are issued in the larger interest of the company, the decision cannot be struck down on
the ground that it has incidentally benefited the Directors in their capacity as shareholders. So
if the Directors succeed, also or incidentally, in maintaining their control over the company or
in newly acquiring it, it does not amount to an abuse of their fiduciary power. What is
objectionable is the use of such power simply or solely for the benefit of Directors or merely
for an extraneous purpose like maintenance or acquisition decontrol over the affairs of the
company. Where the Directors seek, by entering into an agreement to issue new shares, to
prevent a majority shareholder from exercising control of the company, they will not be held
to have failed in their fiduciary duty to the company if they act in good faith in what they
believe, on reasonable grounds, to be the interests of the company. But if the power to issue
shares is exercised from an improper motive, the issue is liable to be set aside and it is
immaterial that the issue is made in a bona fide belief that it is in the interest of the company."
5.

Piercy v. S. Mills & Co. Ltd., 34 where directors, who controlled merely a minority of
the voting power in the company allotted shares to themselves and their friends not
for the general benefit of the company, but merely with the intention of thereby
acquiring a majority of the voting power and of thus being able to defeat the wishes of
the existing minority of shareholder. It was held that, Directors are not entitled to use
their powers of issuing shares merely for the purpose of maintaining their control or
the control of themselves and their friends over the affairs of the company, or merely
for the purpose of defeating the wishes of the existing majority of shareholders." even
assuming that the directors were right in considering that the majority's wishes were

33 AIR 1981 SC 1298

34 1920 1 Ch 77 (Ch D)
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not in the best interests of the company, the allotments were invalid and ought to be
declared void and was held that It follows from this case that the exercise by directors
of fiduciary powers for purposes other than those for which they were conferred is
invalid. It may be said that although the power of issuing shares is given to directors
primarily for the purpose of enabling them to raise capital when required for the
purpose of the company, this was not the object of the directors in this case..."
6. The Tea Brokers (P) Ltd. and Ors. v. Hemendra Prosad Barooah 35 was also a case
of a minority shareholder who on becoming managing director of the company, issued
further share capital in his favour in order to gain control of management of the
company. Barooah and his friends and relations were majority shareholders of the
respondent company having 67% of the total issued capital of the company. Barooah
personally held 300 equity shares out of 1155 shares issued by the company. He was
at all material times a director of the company. His case was that he was wrongfully
and illegally ousted from the management of the company. One Khaund, who initially
started as an employee of the company had 110 shares in the company and belonged
to the minority group. Khaund was appointed as the managing director of the
company. Barooah's grievance was that Khaund took advantage of his position as
managing director and acted in a manner detrimental and prejudicial to the interests of
the company and in a manner conducive to his own interest. Khaund had hatched a
plan with other directors, to convert petitioner Barooah into a minority and to obtain
full and exclusive control and management of the affairs of the company. In a petition
filed under Sections 397 and 398 of the Companies Act, 1956, acts of Khaund were
found to be by way of 'oppression and mismanagement' within the meaning of
Sections 397 and 398 of the Companies Act. Allotment of 100 equity shares by the
company to Khaund at a meeting of the Board of Directors said to have been held on
14 January, 1971 was held to be illegal. The Board of Directors of the company was
superseded and a special officer was appointed to carry on management of the
company with the advice of Barooah, Khaund and a representative of labour union.
There were several other directions issued by the court which are not necessary to be
mentioned here. The Division Bench considered in detail the relevant legal position.
Without using the phrase 'proper purpose doctrine' the principle enunciated therein,
35 [(1998) 5 Company Law Journal 463]
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was applied. The following observations of Justice A.N. Sen are reproduced: "It is
well settled that the directors may exercise their powers bona fide and in the interest
of the company. If the directors exercise their powers of allotment of shares bona fide
and in the interest of the company, the said exercise of powers must be held to be
proper and valid and the said exercise of powers may not be questioned and will not
be invalidated merely because they have any subsidiary additional motive, even
though this be to promote their advantage. Exercise of power by the directors in the
matter of allotment of shares, if made mala fide and in their own interest and not in
the interest of the company, will be invalid even though the allotment may result
incidentally in some benefit to the company."

FIDUCIARY DUTY AND INDIAN TRUSTS ACT

Chapter IX of the Indian Trusts Act provides for certain obligations in the nature of trusts.
The Trust Act recognizes various kinds of trusts including resulting trust. An express trust,
however, may be created by reason of an agreement between the parties. 36 By reason of
Section 88 of the Indian Trusts Act, a person bound in fiduciary character is required to
protect the interests of other persons but the heart and soul thereof is that as between two
persons one is bound to protect the interests of the other and if the former availing of that
relationship makes a pecuniary gain for himself; Section 88 would be attracted. What is
sought to be prevented by a person holding such fiduciary benefit is unjust enrichment or
unjust benefit derived from another which is against conscience that he should keep. When a
person makes a pecuniary gain by reason of a transaction, the cestui qui trust created there
under must be restored back.

A Director of a Company indisputably stands in a fiduciary capacity vis-a-vis the Company.

He must act for the paramount interest of the company. He does not have any statutory duty
to perform so far as individual shareholders are concerned subject of course to any special
arrangement which may be entered into or a special circumstance that may arise in a
particular case. Each case, thus, is required to be considered having regard to the fact
situation obtaining therein and having regard to the existence of any special arrangement or
special circumstance.37

36 Barclays Bank v. Quistclose Investments [1970] AC 567

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"Directors owe no fiduciary or other duties to individual members of their company in

directing and managing the company's affairs, acquiring or disposing of assets on the
company's behalf, entering into transactions on its behalf, or in recommending the adoption
by members of proposals made to them collectively. If directors mis-manage the company's
affairs, they incur liability to pay damages or compensation to the company or to make
restitution to it, but individual members cannot recover compensation for the loss they have
respectively suffered by the consequential fall in value of their shares, and they cannot
achieve this indirectly by suing the directors for conspiracy to breach the duties which they
owed the company. However, there may be certain situations where directors do owe a
fiduciary duty and a duty to exercise reasonable skill and care in advising members in
connection with a transaction or situation which involves the company or its business
undertaking and also the individual holdings of its members."38
In Dawson International plc vs. Coats Patons plc 39 was relied upon holding that the
Directors are, in general, under no fiduciary duty to shareholders and in particular current
shareholders with respect to the disposal of their shares in the most advantageous way as
directors are not their agents and as such are not normally entrusted with the management of
their shares. It was, however, observed that if the directors take it upon themselves to give
advice to current shareholders they have a duty to act in good faith and not fraudulently nor
can mislead the shareholders whether deliberately or carelessly, in which event, they may
have a remedy. A distinction, thus, has been carved out as regards the fiduciary duty of the
directors with regard to the property and funds of the company as contra-distinguished from
the duty of directors to current shareholders as sellers of their shares. In case of conflict
between two interests, the company's interest must be protected. The directors, however, will
have a fiduciary relation if they have taken unto themselves the burden of giving advice to
current shareholders.

37 Supra, 17
38 In Pennington's Company Law 6th Edn. at page 608-09.
39 1988 SLT 854
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The aforementioned principles of law found favour with the Court in Needle Industries
(India) Ltd. And Others Vs. Needle Industries Newey (India) Holding Ltd. 40 wherein it was
held: "Where directors of a company seek, by entering into an agreement to issue new shares,
to prevent a majority shareholder from exercising control of the company, they will not be
held to have failed in fiduciary duty to the company if they act in good faith in what they
believe, on reasonable grounds, to be the interests of the company. If the directors' primary
purpose is to act in the interests of the company, they are acting in good faith even though
they also benefit as a result."
In Bajaj Auto Ltd. v. N.K. Firodia and Another 41, the Court was concerned with the
discretionary exercise of power by the Directors in terms of Section 111(3) of the Companies
Act. In the light of refusal by director to register a transfer, the Court held that it is necessary
for the directors to act bonafide and not arbitrarily in the following terms: " Article 52 of the
appellant company provided that the Directors might at their absolute and uncontrolled
discretion decline to register any transfer of shares. Discretion does not mean a bare
affirmation or negation of a proposal. Discretion implies just and proper consideration of the
proposal in the facts and circumstances of the case. In the exercise of that discretion the
Directors will Act for the paramount interest of the company and for the general interest of
the shareholders because the Directors are in a fiduciary position both towards the company
and towards every shareholder. The Directors are therefore required to act bona fide and not
arbitrarily and not for any collateral motive." This Court therein also applied the bona fide
test of the Director and for the benefit of the company as a whole. In that case, the directors
assigned reasons which were tested from three angles view, viz., (i) whether the directors
acted in the interest of the company; (ii), whether they acted on a wrong principle; and, (iii)
whether they acted with an oblique motive or for a collateral purpose. It was observed in M/s.
Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala & Others 42 that the action of
the directors must be set aside if the same was done oppressively, capriciously, corruptly or in
some other way mala-fide. In this case, this Court is not faced with such a situation. The
Board has observed that it is universally recognised that the director of a company stands in a
40 (1981) 3 SCC 333
41 [(1970) 2 SCC 550]
42 [(1962) 2 SCR 339]
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fiduciary capacity with the company; the extent of his fiduciary duties is not codified by any
statute and is tested on the facts of each case.

CONCLUSION
The liability of a director arising under the above and any other laws can be mitigated
by delegating the responsibility to some other officer of the company, provided however the
director could be held liable if his knowledge, consent or attribution to the offence is
established. The company in respect of the negligence, default, breach of duty, misfeasance or
breach of trust may indemnify director, if he has acted honestly and reasonably in discharge
of his duties. In principle, the company is bound to indemnify the director against the
consequences of all lawful acts done by him in exercise of the authority conferred upon him.
Accountability is an important element of Board effectiveness. There should be some
mechanism for evaluating the performance of the directors. The extent of liability of a
director would depend on the nature of his directorship.
Finally, I would like to make note that for prosecuting a person (whether a company or a
natural person) some nexus must exist between the offence committed and the person charged
/ held responsible for the offence. As stated herein above, in some cases, the statute itself
clearly identifies the person who will be held responsible for the commission of an offence,
and in other cases much depends on the prosecutions establishing a case against such person.
In the current Indian scenario, one is observing renewed force and attention being given to
norms of good corporate governance and a deprecation of corporate misfeasance /
malfeasance. Unfortunately, however, there is no codified law (other than provisions of the
Companies Act) that could define clearly the roles and responsibilities of a Managing
Director specifically in this context of corporate governance. However given the fiduciary
nature of a Directors position, it is obligatory for a Director to act, at all times, in a
reasonable and responsible manner and in the interest of a company as well as its
shareholders.

BIBLIOGRAPHY

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Books Referred MAJUMDAR, A.K., AND KAPOOR, DR. G.K., COMPANY LAW AND PRACTICE,
Taxmann Publications (P) Ltd., New Delhi, 13th ed, 2008
SINGH, Dr. AVTAR, PRINCIPLES OF MERCANTILE LAW, 818, Eastern book Company,
Lucknow, 7th ed., 2005
SINGH, Dr. AVTAR, COMPANY LAW, 15th edn, EBC.

Halsburys Laws of England, Agency, 4th edition, 2010.

Pollack & Mulla, Indian Contract and Specific Relief Acts, 13th edition, 2010.
A, Ramaiya, GUIDE TO THE COMPANIES ACT, PART 1 (16th ed. 2008)

Websites Referred-

www.readycompanies.com
www.narasappa.com
www.companydirectors.com
businesshelp.lloydstsbbusiness.com

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