[Angad Singh Makkar is a 4th year BA LLB (Hons.) student at Jindal Global Law School in Sonipat, Haryana]
The equitable rule of corporate opportunity, which aims to balance the fiduciary duty owed by a director to the company and the director’s serving of individual entrepreneurial interests, has been varyingly applied across several jurisdictions. Most notably, while the courts in the United Kingdom (UK) are viewed traditionally as strict enforcers of this rule, the approach of courts in the United States (US) is deemed to be more flexible.[1] The approach of Indian courts, however, remains unclear to this date, with Vaishnav Shorilal Puri; Seaworld Shipping and Logistics Pvt. Ltd. v. Kishore Kundanlal Sippy[2] being the only Indian case which truly delves into the rule of corporate opportunity, showcasing a muddled application of the two distinct approaches. This post will analyse the strict approach of the UK courts specifically, and it will be argued that a pragmatic application of this approach is most suitable to India’s company law framework.
The premise behind the corporate opportunity doctrine is fundamentally sound, insofar as it ensures that a director is precluded from exploiting, for personal benefit, information that she receives by virtue of her role as a director. In that sense, the doctrine is merely an extension of the fiduciary duty of a director to the company, a cornerstone of company law, into an obligation to render undivided loyalty to the company.[3] However, the problem arises when this rule is applied so rigidly so as to preclude directors from availing any opportunity of a corporate character, thereby stifling ‘directorial entrepreneurialism’.[4] Such strict application of the rule has been long prevalent in the UK, and it is best reflected in the landmark cases of Keech v. Sandford[5] and Regal (Hastings) v. Gulliver.[6]
In Keech, a child had inherited, as a beneficiary, the lease on a profitable property near London. Upon the expiry of the lease, the landlord refused to renew the lease for the benefit of the child. Subsequently, the trustee, Mr. Sandford, availed the opportunity of the lease in his favor. When this matter was brought to court, a harsh perspective on the fiduciary duty of loyalty was propounded and the trustee was held liable to account. Essentially, the mere placing of oneself in a position of conflict of interest was seen as amounting to a breach of trust. Lord Chancellor King’s plea that this “rule should be strictly pursued, and not in the least relaxed”[7] has been effectively complied with, as his reasoning in Keech has gone on to form the basis of the stringent application of the corporate opportunity rule.
Moving squarely into the realm of company law, the case of Regal (Hastings) was the first to import the principle propounded in Keech and uphold a strict corporate opportunity doctrine. In this foundational case, a company, Regal, owned a cinema hall and wanted to purchase two others. To do so, it incorporated a subsidiary, Hastings Amalgamated Cinemas Ltd., with a share capital of £5,000. It was agreed that Regal would subscribe to shares worth £2,000, with the remaining shares to be subscribed to by the directors of the subsidiary, which included Mr. Gulliver. Eventually, the shares of both companies were sold for a profit. The question before the court was whether the directors could be held liable to account to Regal for their profits. Affirming the liability of the directors in this case, Lord Russell expounded upon the rule obligating fiduciaries to account for profit. It was held that the absence of bona fides, fraud or other factors (for instance, whether at all the company would have otherwise received the profit) were irrelevant, and the application of the corporate opportunity rule merely hinged on the fact of a profit accruing while acting as a fiduciary.
Nevertheless, courts in the UK have adopted a more practical approach to the corporate opportunity rule in the recent past. Rather than blindly applying a rigid rendition of this rule, courts have employed a fact-specific analysis, with the bona fides of directors’ actions, source of information about the opportunity, commercial impossibility for the company to take on an opportunity and the like now swaying the courts’ ultimate decisions.[8] The cases of Balston Ltd. v. Headline Filters Ltd.[9] and Island Export Finance Ltd. v. Umunna[10] are particularly emblematic of this pragmatic approach. Notably in Island Export, Hutchinson J. opined that precluding a director from availing an opportunity after the end of his directorship, merely because he had acquired knowledge of this opportunity in his role as a director, would go against public interests.
In the Indian domain, Vaishnav Shorilal stands out as the foundational judgment elucidating the law on corporate opportunity. Herein, the 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’). Though the Company Law Board ruled in favour of the Sippy Group and held the directors of the Puri Group accountable, the Bombay High Court overturned this decision and found Contship’s unwillingness to deal with the Sippy Group, asserted by Contship through its affidavit, to be a material factor in its analysis.
Intriguingly, the Court delved into a detailed analysis of section 88 of the Indian Trusts Act, 1882 (a relic of India’s colonial past) while formulating its decision as well. Further, despite acknowledging that the Puri Group’s actions were hardly bona fide, the Court still ruled in the Puri Group’s favour. Inexplicably, the Court took into account factors relevant under the US corporate opportunity doctrine, such as the unwillingness of a third-party to contract with the company,[11] while purporting to act in accordance with the common law rule espoused in the UK. Thus, Vaishnav Shorilal failed to truly lay down a cohesive approach to the corporate opportunity rule that could be consistently followed by Indian courts, and the law on corporate opportunity in India still lacks clear direction.
It is key to note that since the judgment in Vaishnav Shorilal, India has gone on to enact the Companies Act, 2013. Section 166(4) of this Act is of great relevance, insofar as it encapsulates the ‘no-conflicts principle’ vis-à-vis directors of a company.[12] Read alone, it could be argued that this provision argues for a strict application of the corporate opportunity rule in India, along the lines of the rulings in Keech and Regal. However, this author argues that in light of the aforementioned jurisprudential developments pertaining to the corporate opportunity in the UK, and the Bombay High Court’s ruling in Vaishnav Shorilal (flawed as it may be), Indian courts must adopt an open-ended interpretation of section 166(4). At the same time, extending this interpretation to include factors which find no place in the Indian company law framework, as was done in Vaishnav Shorilal, is equally problematic. Essentially, rather than positing a rigid corporate opportunity doctrine which leads to inequitable decisions against directors, Indian courts should aim to develop a just and equitable corporate opportunity doctrine which harmonizes the fiduciary duties of directors with the notion of directorial entrepreneurialism. The pragmatic approach put forth in the cases of Balston and Island Export, thus, serves as a roadmap towards enforcing a commercially, and legally, sound corporate opportunity doctrine in India.
– Angad Singh Makkar
[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 531-545 (2013).
[2] [2004] 120 Comp Case 681 (Bom).
[3] See note 1 above.
[4] See note 1 above.
[5] (1726) Sel. Case. Ch. 61 (Ct of Chancery)
[6] [1942] 1 All ER 378
[7] See note 5 above.
[8] See note 1 above.
[9] [1990] F.S.R. 385
[10] [1986] B.C.L.C. 460.
[11] See note 1 above.
[12] Section 166(4) of the Companies Act, 2013 reads: “A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.”