[Anik Bhaduri is a candidate for the MSc in Law and Finance at the University of Oxford]
In 2013, the Companies Act became the first legislation in the world to explicitly adopt a stakeholder-oriented conception of the corporation. In addition to introducing a mandatory requirement that certain companies allocate a portion of their funds towards corporate social responsibility (CSR), the statute also fundamentally reconfigured the scope of directors’ duties. Historically, directors were understood as agents of the company (effectively, of its shareholders), and accordingly owed fiduciary duties primarily to the company. However, marking a significant departure from this shareholder-centric framework, section 166(2) of the Companies Act mandates that directors act in the best interests of “the company, its employees, the shareholders, the community and for the protection of the environment.”
Over the past decade, commentators have repeatedly raised concerns regarding the vagueness of this provision, particularly the absence of any clear guidance on how directors are to reconcile the competing interests of different stakeholder groups. Despite these unresolved questions, judicial engagement with the interpretation of section 166(2) remained sparse, rendering the practical implications of this expanded fiduciary duty largely uncertain.
This uncertainty was addressed more directly in December last year in MK Ranjitsinh v Union of India, where the Supreme Court explicitly acknowledged the stakeholderist undertones of Indian company law. The Court observed:
“Historically, a director’s primary duty was to maximize value for shareholders. However, Section 166(2) of the Companies Act, 2013 dismantled this narrow view by imposing a broader fiduciary duty. Directors are now legally mandated to act in good faith not just for members, but for the “best interests of the company, its employees, the shareholders, the community, and for the protection of environment.” This crucial expansion recognizes that a corporation is an organ of society, and its “social” responsibility extends to the wider community impacted by its operations.” (emphasis added)
This post argues that the decision is at odds with both the established tenets of law concerning fiduciary relationships as well as the statutory schema of the Companies Act. Accordingly, instead of providing the long-sought clarity regarding the interpretation and practicality of Section 166(2), the judicial observations in this decision add to the confusion and incoherence already plaguing the effective implementation of the law.
Distinguishing between Statutory Duties and Fiduciary Duties
At the outset, it is crucial to note that directors’ duties may be categorised into distinct common law and statutory duties. The former emerged gradually through judicial decisions in common law courts, encompassing a variety of individual duties falling within the broad categories of fiduciary duties and the duty of care. As a legal notion, fiduciary duties had originated in the courts of equity, which held that directors stand in a fiduciary relationship with the company itself, and were therefore obliged to act bona fide solely in the interests of the company. Shareholders could initiate derivative actions in the name of the company, seeking equitable relief for the breach of these duties. Since these duties are owed to the company in personam, they are essentially in the realm of private law, and can be enforced by the aggrieved parties themselves. Further, given their inherently private nature, the scope and extent of these duties can be modified contractually, subject to certain limits prescribed by the law.
By contrast, statutory duties are imposed by the legislature through the enactment of a statute, and are mandatory in nature. Unlike fiduciary duties, these duties are not engendered through private ordering, and cannot therefore be modified through contracts. The breach of statutory duties is often penalised by the state itself through civil or criminal sanctions, although some statutory frameworks provide for equitable remedies (such as disgorgement) and private enforcement. In common law jurisdictions, including the United Kingdom, company law statutes often codify aspects of directors’ fiduciary duties. However, such codification does not amount to a complete or identical restatement of the equitable principles and, in some instances, modifies or expands upon them. While statutes may create fiduciary obligations, not all statutory duties are fiduciary in character, particularly where their content departs from established equitable principles.
The statutory duties of directors in India, set out under Section 166 of the Companies Act, although similar to the duties of directors under common law in many respects, also differ in various significant ways. In particular, the statutory duty of directors to act in the best interests of various stakeholders departs sharply from the predominantly shareholder-centric duties under the common law. As I argue below, the Supreme Court’s categorisation of such a duty as fiduciary is at odds with established principles of equity.
Certainty of Objects and the Limits of Fiduciary Relationships
While the delegation of operational management by the shareholders to directors is often considered similar to the creation of an agency relationship, courts of equity had historically considered this relationship more similar to a trust where the directors act as “‘trustees”’ for the shareholders. In Knight v Knight (1840), Lord Langdale MR outlined that for a trust to be valid, three conditions (now known as the three certainties), must be met:
- Certainty of intention: there must be an unequivocal intention to create a trust;
- Certainty of subject matter: the assets constituting the trust must be determinable;
- Certainty of objects: the beneficiaries to which the trustee owes a duty must be identifiable.
Historically, in the context of company law, the certainty of object was provided by the creation of the company and the delegation of management to the directors through the articles of association. The subject matter involves the assets and property owned by the company, while the beneficiary is the company itself (i.e., the body of shareholders taken cumulatively, or creditors in the context of insolvency). The fiduciary duty owed by directors to the company, therefore, meets the three certainties of trusts and can be enforced through derivative actions.
However, when the category of beneficiaries is expanded to broadly defined constituencies like “the community”, and more importantly, to an inanimate notion like “the environment”, it is not clear whether this third test, i.e., certainty of objects, is met. While courts have departed from the rigid requirement of a complete list of beneficiaries to be available for the trust to be valid, it is still essential for the courts to determine with certainty whether “any given individual is or is not a member of the class” The expansion of a fiduciary duty to an undefined, broad, and vague class would therefore be at odds with established principles of equity.
Contrary to these principles of equity, which necessitate that the beneficiaries (or at least a broad class thereof) be clearly identifiable, the Indian Supreme Court in fact emphasises the broad definition of the word “community” to underscore the stakeholderist foundations of Indian company law. The failure of the Court to engage with ongoing discussions on the inclusion of non-shareholder constituencies (such as creditors) as beneficiaries of directors’ duties further compounds the discord with established principles of equity.
The Statutory Departure from Fiduciary Duties
The observations of the Court also depart from the statutory scheme. First, the statute does not refer to “fiduciary” duties in section 166 or anywhere else in the statute. Given that Indian statutes often explicitly refer to fiduciary relationships between two parties (for instance, regulation 15(1) of the SEBI (Investment Advisors) Regulations, 2013), the absence of the word “fiduciary” from this statute is rather conspicuous. Accordingly, a literal interpretation suggests that the duties of directors are statutory duties owed in rem and not to any beneficiary in particular. This inference is further buttressed by the fact that section 166(7) prescribes fines to be paid by the directors for a failure to fulfil their duties under section 166(2). The schema of section 166 indicates that the statute envisages the directors’ duties to be enforced by the state itself, and not by private parties.
Second, the statute does not recognise or provide for derivative actions, which have historically been allowed in common law jurisdictions, including India. Arguably, the absence of an explicit recognition of derivative actions is not meaningful, since the Companies Act 1956 (predecessor to the 2013 Act) also did not recognise such actions, but they were allowed by courts anyway. However, the omission becomes more meaningful when viewed in light of the overall statutory framework. Section 291 of the Companies Act, 1956 allowed directors to “exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do”. The provision did not in any way contradict the established case law on fiduciary duties of directors and the availability of equitable remedies to shareholders. In fact, the vaguely worded provision implicitly indicated that the gaps in the legislation were to be filled in through case law, and as such, the interpretation of the statute necessitated reliance on precedent. Further, the 1956 Act did not contain any provision similar to section 166(7), and derivative actions were therefore the only means to hold directors accountable for wrongs to the company (although wrongs to shareholders individually could be prosecuted under section 397(1), which provided for “Oppression and Mismanagement”).
Although the statute does not explicitly depart from the historical underpinnings of company law in the principles of equity, several High Court decisions have questioned the continued availability of common law derivative actions. In 2018, the Delhi High Court observed that “derivative actions in common law, to the extent the statutory regime for oppression and mismanagement is equipped to deal with, are no longer maintainable in India, and the proper remedy for suits such as the present one would be under Section 241 before the NCLT.” While Prof. Varottil has criticised this line of judicial reasoning and argued that common law derivative actions should still be available, it is hard to deny that the extent and scope of such derivative actions, as well as their potential impact in constraining directors, have reduced substantially. Even assuming that directors do still owe fiduciary duties to the company, the open-ended statutory duty under section 166(2) overrides such a duty. Accordingly, while a derivative action can potentially succeed if a director has engaged in blatant self-dealing (which also constitutes “oppression and mismanagement”), a persistent value-decreasing business strategy can often be justified as an act furthering the interests of the broadly defined constituencies of environment or community, without any effective sanction.
Conclusion
Although the abovementioned remarks of the Court in MK Ranjitsinh do not constitute part of the ratio decidendi, the Court’s conflation of statutory duties with fiduciary duties, in a manner that departs from both the statutory scheme and settled principles of equity, reflects the underlying legal ambiguity. More fundamentally, however, the decision raises a broader question regarding the role of fiduciary duties and equitable reliefs in the Indian statutory framework. In the absence of adequate clarity regarding the interplay between state sanctions (such as fines) and equitable remedies in the enforcement of Indian company law, legal anomalies like the extension of private law notions like fiduciary duties beyond their traditional domain are likely to persist.
– Anik Bhaduri
Leave a comment