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Posted on November 13, 2021
Diversion of Business Opportunities by Directors for Their Own Benefits – Impact Analysis
A company is a legal entity which is having a separate legal standing and is an artificial jurisdictional person as per the provisions of the Companies Act. It is again separate from its promoters, members, and other stakeholders as well. And the business of such a separate entity is to be conducted by the company alone and for this, it depends on the collective body of humans who are appointed in the entity in a fiduciary capacity of directors.
The Board of Directors can be understood as persons who are collectively managing the business of the company and are the reason for the success or failure of any business or company. The duties of directors vary or increase or decrease with respect to composition of company along with its nature. But while discharging any of its duties performed as a director or the one in fiduciary capacity it should be done with honesty and without negligence, where the directors act as if the business was owned by themselves.
Duties of Directors as per Gower’s Principles of Modern Company Law
By applying the general equitable principle, the following four rules were laid down with respect to the directors of company:
- Directors must act in good faith in, what they believe to be in the best interests of the company;
- The Directors must not exercise the powers conferred upon them for the purpose different from those for which they were conferred;
- The Directors of the company must not fetter their discretion on how they shall act; and
- The Directors without the informed consent of the company, 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.
Case of Official Liquidator Vs. PA Tendolkar (1973) 43 Com
The honourable Supreme Court held in this case that, “a director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely conscious of but liable for fraud in the conduct of the business of the company even though no specific act of deception is proved against him personally. He cannot shut his eyes to what must be obvious to everyone, who examines the affairs of the company even in an apparent manner or outwardly. If he does so, he could be held liable for neglection of duties even if he is not shown to be guilty of participating in the commission of the fraud which is in question or is being reported. It is enough if his dereliction of duty is of such character as to enable frauds to be committed and losses thereby incurred to the company.”
Diversion of Business Opportunities of the Company
In certain circumstances of taking a decision for the company, the personal interest of the director would come in conflict with the interest of the company. This conflict-of-interest rule is universal and inflexible. And if in such a situation, the director diverts the business opportunity of the company this creates even a conflict of duty and interest. This shall again be considered as the directors entering into an agreement without informing the company about exploiting good business opportunities available to the company at the cost of the company.
A fiduciary is not allowed to enter into any engagements in which he had or could have, a personal interest conflicting with or which might be in conflict, with those of whom he is bound to protect is universal and inflexible. And such fiduciary would be required to disclose the details of such opportunity which was diverted by him for his own benefit which otherwise would have been available to the company, prior to acting in such manner.
Case Crown Dilmum Vs. Sutton (2004))1BCLC 4688(ChD)
Under this case, the director diverted an investment opportunity available to the company to another company and made the investment in such an opportunity pursuant to an agreement. And he also failed to disclose the same with the company.
It was held that the director cannot have a genuine belief that the company would not be interested in such investment opportunity and thereby does not hold any right to make a decision to take the opportunity which came his way and divert the same to another company at his own will. So, this can be considered as a breach of statutory duties and it commences from the moment where he failed to make full disclosure with the company.
Duty of Disclosure
Duties of directors are higher than the duties which are imposed on an employee by the law. The director is not a senior manager but a fiduciary and is responsible for taking decisions and acting for the success of the company along with his fellow directors. So, the primary duty of such a director is to act in the good faith and interest of company. And it is thus their duty to disclose his interest in any business connected with the company as the duty of a fiduciary is combined with the duty of loyalty, honesty towards the company.
Various provisions of the Companies Act make it mandatory to disclose the director’s interest in any business transaction in the Board Meeting and this shall be taken note of. And he shall be asked to abstain from voting or such discussion which is pertaining to the transaction in which he is interested and also his presence will not be counted for quorum. A director may also be disqualified to continue as a director or to be appointed as director, in case he fails to disclose his interest in other company’s according to the law of the Companies Act, 2013.
Liabilities held by Director to the Company after Resignation
Even if the director ceases to be a director of the company also, he shall hold some duties and liabilities towards the company. And if such a director makes preliminary arrangements for the commission of a breach of duty in fiduciary capacity while he is a director and then resigns from such position, he remains accountable to the company for any profit he obtains from the transaction as a whole.
CMS Dolphin Ltd. Vs. Simone (2001)2 BCLC704(ChD)
As per this case, a director of an advertising agency resigned from such a position without giving any notice and set another entity which was again an ad agency. It was first carried on as a partnership entity and later changed into company. He recruited the staff from the previous company and also took some of the major clients and also diverted the benefits of the new contracts as well. Now the company made certain profits and later on became insolvent.
Here, the court held that the underlying basis of liability of a director who is trying to take advantage of a maturing business opportunity of the company after his resignation, of which he had prior knowledge as a result of his being a director. So, such opportunity is to be treated as if it were a property of the company in relation to which the director held fiduciary duties. And through resignation, he was setting or arranging to exploit the opportunity and other contracts of the company which is again the breach of his fiduciary duties.
We can say that a director shall be held liable to account for profits he is exploiting the opportunity available to the company in a personal manner, a partnership, or through a company that is controlled by him. And he shall also be liable even if his partners or fellow members were not aware of the breach of his fiduciary duty for the conducting of business in the new agency set by him.
So, it was settled that, a director shall remain under an obligation that he shall not use his own or another person’s benefit the confidential information of the company by holding the virtue of the position of director and such obligation shall terminate only when the company releases him from the obligation or when the information is published or come under public domain.