Introduction:
Directors play an instrumental role in the functioning of the day to day affairs of the company. Directors are involved in certain key aspects of the management, and have a better understanding of the company’s affairs. This could also be misused in a way akin to them making secret profits or using such information for their personal benefit. This leads us to an important question: Do the directors hold a fiduciary duty to anyone, and if so, to whom and to what extent. It is in this background that the case of Regal Hastings Ltd. v Gulliver[1] assumes special significance.
Main body:
The appellant company (“Regal”) owned and ran a cinema in Hastings. Its Board of Directors (“BOD”) consists of one Bentley, and the respondents Gulliver, Bobby, Griffiths and Bassett. The respondent Garton was the solicitor of Regal. The BOD formed a lease for acquiring two other cinemas, which was to be done via a subsidiary (“Amalgamated”). This subsidiary to be formed by Regal, was to have a capital of 5000 £1 shares, out of which 2000 were to be subscribed by Regal, and the rest to Regal or its nominees as full consideration for services rendered. Meanwhile, an offer of £92,500 was received from would-be purchasers, out of which £77,500 as price of Regal’s cinema, and £15,000 as price of the leasehold cinemas, which was later accepted. The whole beneficial interest in the lease would go to Regal and its shareholders by virtue of its stake in Amalgamated.
Now, to find the subscription for the remaining 3000 £1 shares, Bentley, Gulliver, Bobby, Griffiths and Bassett and the solicitor Garton decided to each contribute £500. It is pertinent to note that Gulliver did not himself subscribe to the shares; his promised portion was spilt 3 way- £200 by Seguliva A.G. Co., £200 by South Downs Land Co. and £100 by one Miss Geering. All five BOD of Regal were BOD of Amalgamated, with the addition of Garton.
After this was done, the leases of the two cinemas were transferred to Amalgamated. The proposed sale of the Regal and the leasehold cinemas of £92,500 fell through. However, another proposal came through wherein the £3000 worth of shares (not held by Regal) were sold for a sum of £3 16s. 1d. per share, i.e. a profit of £2 16s. 1d. per share. As a sequel to the sale of shares, the company was now managed by a new BOD. They issued the litigation to recover a sum of £8,142 10s from its five former directors and Garton.
The court hence culled out four issues, namely:
I. To hold the respondents liable, is it necessary to make out a case of fraud or mala fide intentions? And if so, do the plaintiffs also have to show how have the respondent’s actions have caused loss to the company?
II. Did the respondents make profits on their shares by virtue of being a Director at Regal?
III. Did the respondents owe a fiduciary duty to the shareholders of Regal and thereby should have gained their informed consent?
IV. Should Gulliver and Garton also be held liable for their role in the transaction?
The appellants contended that profits secured by the directors were by virtue of knowledge they acquired as directors and solicitor of the company. Since, they acted without the knowledge or consent of Regal, they are in breach of their fiduciary duty. The relief sought was to make the BOD accountable for the conflicting circumstances where they made the profit. The respondents primarily argued that their actions were not mala fide, they did not cause loss to the company, and that they acted in the interest of the company by buying shares which the company couldn’t afford.
Since the lower courts had unnecessarily delved into the question of fraud (not alleged), the House of Lords agreeing with the appellant’s contention, held that under the principles of equity, a person occupying a fiduciary position is prohibited from entering into transaction (whether with honest or mala fide intention) which places him in a position of conflict of interest. The liability against such person is independent of fraud or mala fide. The court referred to Keech v. Sandford[2] to illustrate the aforementioned principle. Further, in Ex parte James[3], the solicitor by virtue of being the trustee to the commission, purchased a bankrupt estate. It was held the principles of equity and rule of conflict of interest is strict in its application to a person holding position of confidential character (trustee and assignee) and such transactions, without previous consent of interested party are not to be permitted in any case without disclosing full information. In Hamilton v. Wright[4], the court held that the knowledge acquired as a trustee is in itself sufficient ground for disqualification and neither such trustee nor his representative to be allowed to retain such advantage.
In solidifying its position of equitable principle applying to directors, the Court looked to a catalogue of cases. In Parker v. McKenna[5], court ruled that it shall not enquire into whether the bank lost money due to the acts of director and limit its questioning to whether the agent (director) gained profit without the knowledge of the principal (company). In Imperial Mercantile Credit Association (Liquidators) v. Coleman[6], the director was held bound to disregard its own personal interest whenever a conflict of interest position arises, as it’s the duty of a director is towards the benefit of those whose interest they are in-charge. The courts stated that they would have allowed for such a transaction, provided that the BOD had moved a resolution in the shareholders general meeting. Hence, the non-disclosure towards the shareholders was considered integral to the action of the directors.
For adjudging the capacity in which the shares came to be acquired, the court reviewed the resolution inviting BOD of Regal and Garton to subscribe £3000 worth of shares. The implications were that Regal no longer owned as a whole or controlled Amalgamed, thus shareholders were deprived of the right to acquire these shares, and subsequently a reduced portion in the sale price of the leased cinemas. The Court established the fact that the shares were acquired by virtue of their position as directors of Regal by scrutinizing the testimony of Garton and the records of the resolution wherein Gulliver is said to have moved BOD to contribute £500 each and similarly Garton was also asked of his willingness to contribute. The records of resolution of Amalgamated makes it further clear, according to which ‘it was resolved to invite its directors of subscribe 500 shares each’.
On the question of fiducial duty of the director, the courts attention was drawn to In Re Forest of Dean Coal Mining Co[7], In Re Faure Electric Accumulator Co[8], Imperial Hydropathic Hotel Co[9]., and Blackpool v. Hampson[10], wherein a distinction has been made between directors and trustees.
The court while acknowledging that upon the circumstances, directors may or may not resemble an agent or trustee, distinguishes these cases on the ground that they are not concerned with the question of directors making profits.
As regards the position of Gulliver it was held that he wasn’t responsible for the profits as he himself did not subscribe to the shares, rather the profits accrued to independent parties who subscribed his £500. Also, Garton acted in the role of solicitor of Regal while subscribing to shares worth £500. A solicitor entering into a transaction on his own behalf, at the request of his client, cannot be made to account for profits he made on sale of such shares.
Conclusion:
The key takeaway is that directors owe a fiduciary duty towards the company and it is the directors duty to not have conflict between the company’s interest and his personal interest. They can be held liable for their actions/profits outside the company if their actions relate to the company by virtue of their position as director of the company. This being one of the landmark cases relating to duties of directors, has been upheld and relied on in cases like Dale & Carrington v Prathapan[11] and Collyer Logistics International v Collyer India Freight Forwarding Co.[12]
The principle has found a conspicuous place under section 166(4) of the Companies Act, 2013. Replying to a suggestion in reference to pari passu section 166(4) of the Companies Bill, 2011, the Ministry of Corporate affairs noted that its intention is not to prohibit Directors form from entering in fair dealings, rather to only prohibit them from making any undue personal gains at the cost company[13]; they are to make a full disclosure to the company in any such dealings.
Notes:-
[1][1] [1967 2 A.C. 134]
[2] (1726) Sel. Cas. Ch. 61.
[3] (1803) 8 Ves. 337.
[4] (1842) 9 Cl. & F. 111.
[5] 10 Ch. App. 96.
[6] (1873) L.R. 6 H.L. 189
[7] (1878) 10 Ch.D. 450.
[8] (1888) 40 Ch.D. 141.
[9] (1873) L.R. 6 H.L. 189.
[10] 23 Ch.D. 1, 12.A
[11] (2005) 1 SCC 212.
[12] 2009 SCC OnLine CLB 50.
[13] Standing Committee of Finance’s 57th Report, The Companies Bill, 2011 <https://www.prsindia.org/ uploads/media/Company/Companies_Bill_%20SC%20Report%202012.pdf>.
Author Details
| Anshul Ramesh
Bio: Fourth-year law student pursuing B.A., L.L.B. (Hons.) at Jindal Global Law School Contact: anshulramesh@yahoo.in; 8356853152 |
Pratyush Gupta
Bio: Fourth-year law student pursuing B.A., L.L.B. (Hons.) at Jindal Global Law School Contact: guptapratyush@outlook.com; 8319350248 |
Author Bio
