Introduction
This Article aims to analyse the concept of ‘directorial entrepreneurialism’ in India through the analysis of the only available literature on it which is the case of ‘Vaishnav Shorilal Puri vs Kishor Kundan Sippy’ decided by the Bombay High Court (Citation: 2006 (4) Bom CR 358, (2006) 6 Comp LJ 74 Bom, 2006 69 SCL 349 Bom). A balance must be struck between the nature of duty owed by the director to the company and the restriction on his capacity to use the opportunities which come his way.[1] In India however there is very less jurisprudence on this issue. One such case that delved a little into the issue was this judgement. This Article systemically breaks down the judgement and aims to bring more clarity on the matter.
Brief Facts:
Puri Group and the Sippy Group had equal shares and equal number of directorships in two shipping companies, SSCO and SSTS. The dispute arose out of the Sippy Group’s claims that the Puri Group diverted the agency business of SSTS with an international shipping company (Contship) to a company floated by the Puri Group (Seaworld). The Company Law Board (CLB) passed the judgement in favour of Sippy Group and held the directors of Puri Group accountable. These set of appeals are before the Bombay HC from the judgement of a Single Judge in a Letters Patent.
Background:
The case basically revolves around the questions of Corporate opportunity and Director’s fiduciary duties towards a Company. The case is marred by numerous factual details that have led to the alleged ‘loss of faith’ between the two parties. This loss of faith emanated from the floating of a different company by the Puri Group under the name ‘Seaworld’ and the losses that the subsidiary company of SSCO- Meridian Trade faced which were primarily looked after by the Sippy Group. Major reliance was based on Section 88 of the Indian Trusts Act[2] and section 397 of the Companies Act, 1956.[3]
Issue 1.
Whether the diversion of Contship agency from SSTS to Seaworld amounted to a breach of fiduciary duty on the part of Puris as Directors as referable to Section 88 of the Indian Trust Act? OR whether on account of the termination of the agency of SSTS by Contship, SSTS no longer had a corporate opportunity and, therefore, there was no such breach of fiduciary duty by Puris ?
Contention of the Parties:
The contention of Puris on the question of breach of fiduciary duty was on the basis of both parts of section 88 of Indian Trust Act, i.e. establishment of a fiduciary character between both parties and where a director had entered into dealings in which his own interests were adverse to those of the erstwhile company or partnerships, not being met. The Counsel for Puris argued that Puris had no scope of gaining advantage by posing as directors of SSTS after the termination of agency and it was Contship’s preference to stay with Puris as they had always dealt with their work through them. For the second part of the section, it was contended that since the agency contract between Contship and SSTS ceased to exist, the corporate opportunity ended as well. Hence, both parts of Section 88 failed to meet.
The direction as given by the CLB and the learned Single Judge is on the lines of the English Law in Industrial Development Consultants v. Cooley[4], wherein it was held that question whether the benefit of the contract would have been obtained for the plaintiff, but for the defendant’s breach of fiduciary duty, was irrelevant.
Court’s Analysis:
The judges in deciding the first issue laid emphasis on the judgements of two cases, C.G. Chetty v. C.S. Chetty and Ors[5]. and Deva Sharma v. L.N. Gaddodia[6]. They relied on these cases for the establishment of fiduciary relationship under Section 88 of the Indian Trust Act[7]. The court relied on the Apex Court’s judgement in C.G. Shetty’s case which stated that there is no necessity for a business partnership to be renewed once it has come to an end and in Deva Sharma’s case where it was said that once the fiduciary relationship ends, the individual is free to secure benefit for himself. Hence, in the current case it was decided, since the termination of agency of SSTS had been done by Contship, the business opportunity between the two ceased to exist and thus the diversion of Contship agency from SSTS to Seaworld cannot amount to breach of fiduciary duty on the part of Puris.
Issue 2.
Whether the alleged conduct of Puris amounted to oppression of Sippys within the meaning of Section 397 or that it led to mis-management of SSTS and SSCO within the meaning of Section 398 of the Companies Act?
Contention of the parties
The contention of Puris on the question of Oppression and Mismanagement was that this claim rose solely on the basis of a transaction between the Puris and NOL (Neptune Orient Lines) a company based in Singapore around 10 years before the present appeal. Puris had taken a loan for investing in NOL from SSCO which was approved by Sippys. In their petition before the CLB however, Sippys maintained that the loan was never repaid. It was contended by Puris that Sippys had lied about the non-receiving of the money that the Puris owed to SSCO. Puris claimed that CLB even on finding that, Sippys had ‘not come to the Court with clean hands’ had decided in their favour and ordered Puris to pay the amount along with an additional interest.
Sippys relying on the English interpretation of ‘oppression’ as ‘unfair prejudicial conduct’ as mentioned in Section 210 of the English Companies Act which forms the basis of Section 153-C of Companies Act 1913 which is the predecessor of section 397[8]. Sippy contended that the act of Puris to float ‘Samrat Logistics’ in Goa and going to the extent of giving a NOC on behalf of SSTC all the while keeping Sippy out of the loop is extremely suspicious. Furthermore, the fact that Contship had terminated its Agency was kept from Sippys. These acts together objectively point towards an unfair prejudicial conduct of the Puris.
On the question of Oppression as claimed by Sippys, Puris maintain that the accepted definition of ‘unfair prejudicial conduct’ is very different from ‘Oppression’ as envisaged under Section 397.
Court’s Analysis
The court while debating on the questions of oppression and mismanagement delved into various cases and authorities as cited by both the parties. Major reliance was based on the case of Shanti Prasad Jain v. Kalinga Tubes Ltd[9] where the court came to the conclusion that mere lack of confidence between the majority shareholders and the minority shareholders would not be enough and such oppression must involve an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.[10]
The Court opined that the UK jurisprudence on ‘unfair prejudicial conduct’ was in fact never adopted by the Indian Courts. In Needle v. Newy a mere inefficient act of the parties was not held to be oppressive.[11]
Thus, the Court on this issue dismissed the Sippys contention and held that while Puris had acted in an unfair manner and that the non-disclosure of termination was a bad conduct however it did not tantamount to oppression under the Indian Context.
Conclusion and Critical Analysis:
This case is the only Indian judgement on the doctrine of Corporate Opportunity and Fiduciary Duty. The principle of the fiduciary duty owed by the Director to the Company actually finds its roots in the general principles of fiduciary duty of loyalty.[12] The principle laid down in UK cases of Keech v. Sandford[13]andRegal (Hastings) v. Gulliver[14] clearly point towards a rigid application of the principle. As a trustee of the Company, the Director is expected to act ‘with a total absence of temptation’.[15] In the US, the general rule to test the violation of this principle is to see the relation between the Company’s LOB and the opportunity’s relation to it and the to see the scope of the company utilising the opportunity. This case was a confused application of two school of thoughts. In India however, owing to the structure of big companies being family owned businesses, there exists an immense opportunity for misuse of this doctrine. Section 166 codifies the fiduciary duties of the Director and 166(4) lays down the no-conflict rule and solidifies the UK jurisprudence on the Corporate Opportunity and Fiduciary Duty. However, a rising sense of criticism is that such a strict approach prohibits ‘directorial entrepreneurialism’[16] and the scholarship suggests a more equitable approach to the doctrine.[17]
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[1] S.V. Joga Rao & Y. Shiva Santosh Kumar,Understanding the Law on Corporate Opportunity: Inputs for India, 55 Journal of the Indian Law Institute (2013), https://jguelibrary.informaticsglobal.com:2075/stable/pdf/43953655.pdf?ab_segments=0%252Fbasic_search_SYC-5455%252Ftest&refreqid=excelsior%3Ab54bbe81cdded6aefd4e5479306f3891 (last visited Sep 28, 2020).
[2] 88. Advantage gained by fiduciary.- Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.
[3] 397. Application to Tribunal for relief in cases of oppression: (1)Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members (including any one or more of themselves) may apply to the 1 Company Law board] for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub- section (1), the 1 Company Law Board] is of opinion-
(a) that the company’ s affairs are being conducted in a manner prejudicial to public interest or] in a manner oppressive to any member or members; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding- up order on the ground that it was just and equitable that the company should be wound up; the Company Law Board] may with a view to bringing to an end the matters complained of, make such order as it thinks fit.
[4] (1972) 2 All E.R. 162. This case also applied the strict rule of Fiduciary duty.
[5] AIR 1931 Mad 619
[6] AIR 1956 P H 49
[7] ibid at 1
[8] Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965]2SCR720
[9] Ibid. The two majority shareholders in a company faced some financial issues and deemed it fit to employ the help of S.P. Jain to provide the necessary finances and was appointed as the Chairman. Later, however the two majority shareholders and Jain faced a deadlock and Jain filed a petition u/s 397.
[10] Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965]2SCR720 [Para 19]
[11] Needle Industries (India) Ltd. and Ors. v. Needle industries Newey (India) Holdings Ltd. and Ors. [1981]3SCR698. The Court held that “…on a true construction of Section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as shareholder” and “… but that recommendation was not accepted” and that “…we have not adopted that modification in India.”
[12] Andrew D. Hicks, The Remedial Principle of Keech v. Sanford Reconsidered 69(2) CLJ 290 (2010).
[13] (1726) Sel. Case. Ch. 61 (Ct of Chancery)
[14] [1942] 1 All ER 378
[15] S.V. Joga Rao & Y. Shiva Santosh Kumar, Understanding the Law on Corporate Opportunity: Inputs for India, 55 Journal of the Indian Law Institute 532 (2013).
[16] Angad Singh Makkar, IndiaCorpLaw IndiaCorpLaw (2018), https://indiacorplaw.in/2018/11/law-corporate-opportunity-india-crossroads.html.
[17] ibid
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