Duties of Directors

By:
Varsha Gaikwad
Assistant Professor
Duties of Directors
Section 166 of the Indian Companies
Act 2013 provides for the general
duties owed by a director towards the
company, including the duty to act in
accordance of the articles of a
{
company, to act in its good faith and
best interest, with reasonable care, to
avoid conflict of interest and to avoid
any undue personal gain.
 Percival v. Wright
 The plaintiffs were the Joint registered owners of 253 shares of £ 10 each (with 91. 8s.
paid up) in a company called Nixon's Navigation Company, Limited.

 Mr. Percival through his solicitors inquired from the company if any body was willing
to purchase their shares £12.5 a priced based on independent valuation. Mr. Wright
who was the chairman of a company, with two other directors, agreed to buy shares
from Mr. Percival at £12.10 each. Mr. Percival then found out the directors had been
negotiating with another person for the sale of the whole company at far more than
£12.10 a share.

 After the sale, the shareholders (Percival) discovered that before and during the
negotiations for that sale, the board of directors had been involved in other
negotiations to sell the entire company, which would have made those shares
substantially more valuable than the aforesaid value.

 The plaintiff filed a suit, claiming breach of fiduciary duty, in that the shareholders
should have been told of these negotiations by the Directors.

 The plaintiffs brought this action against the chairman and the two other purchasing
directors, asking to have the sale set aside on the ground that the defendants as
directors ought to have disclosed the negotiations, when treating for the purchase of
the plaintiffs' shares .
 The plaintiffs' contention was that the directors hold a
fiduciary position as trustees for the individual
shareholders, and that, where negotiations for sale of the
undertaking are on foot, they are in the position of
trustees for sale. The shareholders should have been told
of these negotiations by the Directors.

 Defendant contended that a shareholder knows that the

directors- are managing the business of the company in
the ordinary course of management, and impliedly
releases them from any obligation to disclose any
information so acquired.
Swinfen-Eady J. held in the case of the Percival v
Wright regarding the directors’ duties towards the
shareholders-

“The directors of a company are not trustees for individual

shareholders and may purchase their shares without
disclosing pending negotiations for the sale of the company’s
undertaking.

Court held the directors owed duties to the company and not
shareholders individually. There is no question of unfair
dealing in this case. The directors did not approach the
shareholders with the view of obtaining their shares. The
shareholders approached the directors, and named the price
at which they were desirous of selling. The plaintiffs’ case
wholly fails, and must be dismissed with costs.
 Ferguson v. Wilson
 The Washoe United Consolidated Gold and Silver Mining Company, Limited, was registered on
the 17th of July, 1864, and the Plaintiff, George Ferguson , was one of the promoters and original
directors.

 On the 15th of June, a meeting of the promoters was held, at which the following resolution was
passed with reference to advances to be made to the company, which resolution was confirmed by
the directors at a meeting held after the registration of the company:—

“ Making an advance for a period of two months, to enable operations at the Washoe mines to be
continued, it is hereby resolved and agreed that, at any time after the expiration of the said two
months (from the date of advance), such advance, shall be repaid from any moneys, held in hand at
the time being, of the company, and that, so long as the said amount shall remain unpaid, interest
after the rate of £6 per cent. per annum shall be paid to the promoter(who advanced the money to the
Company) And it is further resolved that shareholder shall have the option at any time, while the
amount remains unpaid, to take the money back for the company or take shares in the Washoe
Consolidated Gold and Silver Mining Company , or partly paid-up shares, to the amount, or for such
part thereof as the said, Promoter may desire, or of accepting a deposit receipt of £1 per share on five
hundred shares, or any proportion thereof, at the said of the Promoter's discretion.”
pursuance of above resolution Freguson advanced 700 pounds to the Company, So now if
company have to pay back the money or loan to Freguson, then the issue arised between directors
and Freguson, whether he is to be paid back in cash or whether he is to be paid through issue of
shares in the company, consider the above resolution. The Company here was inclined to repay the
loan in cash and not in shares.

Freguson went against the Directors of the Company with remedy of specific performance and
prayed that directors to issue shares of company in compensation of debt.

Court said-
It cannot, therefore, be considered as a case of contract between the Plaintiff and the other
directors of the company, or as a case of contract between all the directors, including the Plaintiff,
and the Plaintiff in his individual character; it is simply a case, and was intended to be a case, of
contract between the Plaintiff and the company.

Further clarifying the role of Directors:

They are merely agents of a company. The company itself cannot act in its own person, for it has
no person; it can only act through directors, and the case is, as regards those directors, merely the
ordinary case of principal and agent. Wherever an agent is liable those directors would be liable;
where the liability would attach to the principal, and the principal only, the liability is of the
company. This being a contract alleged to be made by the company, then how it can be maintained
that an agent can be brought into this Court, or into any other Court, upon a proceeding which
simply alleges that his principal has violated a contract that he has entered into. In that state of
things, not the agent, but the principal, would be the person liable.
Peskin v Anderson
 There was a Club, which was a proprietary club. It was not a
members’ club. It was the property of its holding company,
The Royal Automobile Club Limited (RACL), which was
incorporated in 1897 as a company limited by guarantee.

 The full members of the Club were members of RACL. The

board of directors of RACL for the time being constituted the
Committee of the Club.

 RAC Motoring Services (RACMS), which operated the

motoring services business, was also owned by RACL. So the
full members of the Club had an indirect interest in it.
 The defendants' case is that in March 1998 an approach was made
to RACL by Cendant Corporation with a view to acquiring the
business of RACMS. This is disputed by the claimants.
Coincidentally, a proposal to call an EGM, as the first step in a
process to de-mutualise the Club and to de-merge RACMS , was
made in a letter dated 27 March 1998 from the then chairman of
RACL, Mr Jeffrey Rose, to all the full members of the Club. The
board resolved that it would not elect any person as a member of
RACL after 27 March 1998. In May 1998 the terms of sale of
RACMS to Cendant for £450m were finally agreed.

 The effect of the scheme was that the members ceased to be

members of RACL at the close of business on 8 July 1998. A new
company named RAC Acquisitions became the sole member of
RACL. (AoA of the Company)
 Peskin claimed damages against the directors of the Royal
Automobile Club Ltd because he resigned his membership and
ceased to be a member of the company before its eventual
demutualisation, and so failed to get a cash benefit. Members who
were entitled received over £35,000 each. The directors had not
disclosed from day one that negotiations about and proposals for
demutualisation by sale of the organisation were in progress, and
Peskin claimed that they were under a duty to do so.

 Former members of the Royal Automobile Club (RAC) sued the

directors for failing to disclose that they had plans to demutualise.
They claimed that they could have received £35,000 had they stayed
in the club, but had given up their membership. They claimed that
the directors had breached a duty owed to them as shareholders to
inform them of the upcoming demutualisation plan.

 The RAC applied to have the claims struck out as having no

prospect of success as directors did not owe a duty to individual
shareholders. The RAC succeeded in having the claims struck out at
first instance before Neuberger J, and the claimants appealed to the
Court of Appeal.

.
The decision:

 The Court of Appeal ruled that the directors were not under a duty
to do so. There was no special relationship.

 It was affirmed that the fiduciary duties owed to the company arise
from the legal relationship between the directors and the company
directed and controlled by them. However any fiduciary duties
owed to the shareholders do not arise from that legal relationship.
They are dependent on establishing a special factual relationship
between the directors and the shareholders in any particular case.

 Events may take place which bring the directors of the company
into direct and close contact with the shareholders in a manner
capable of generating fiduciary obligations, such as a duty of
disclosure of material facts to the shareholders, or an obligation to
use confidential information and valuable commercial and financial
opportunities, which have been acquired by the directors in that
office, for the benefit of the shareholders. But on the facts of the case
before them, no such special relationship was claimed, and the
actions failed.
SANGRAMSINH P. GAEKWAD & ORS v. SHANTADEVI P. GAEKWAD

 Sir Pratapsingh Rao Gaekwad was the Ruler of Baroda, and

Respondent, Maharani Shantadevi Gaekwad was his wife;
Fatesinghrao Gaekwad (FRG) and Appellant were their sons. (For
certain reasons with which we are not concerned, the estate of
Gaekwad came into the hands of their elder son, Fatesinghrao P.
Gaekwad (FRG) even during the life time of Sir Pratap Singh.)

 FRG floated several companies, including Baroda Rayon Corporation

Ltd. (BRC), Gaekwad Investment Corporation Company Ltd. (GIC),
and GIC’s subsidiary, Alaukik Trading & Investment Corporation
Pvt. Ltd. (Alaukik).

 GIC was a small company with 425 shares, the majority of which
were held by a Trust where FRG was a trustee. GIC’s fortunes were
linked to BRC as GIC’s major source of income was dividends from
BRC. In 1986-87, BRC did not declare a dividend, so GIC decided to
raise funds from existing members by broad-basing/ rights issue.
 EGM dt. 17.12.1987: Resolution to issue 15,000 equity shares
priced at 100 rupees each and the offer was to existing
shareholders who must convey their interest by 10.03.1988.

 21.03.1988: Since only Mrs. Puar and Mrs. Shubhangini-devi

Gaekwad subscribed for shares (500 & 25, respectively), the GIC
Managing Committee allotted 6,475 shares to Appellant, and
kept aside 8,000 shares for FRG.

 After FRG’s death, 3,000 of these 8,000 shares were allotted to

FRG’s daughters with Appellant as the guardian. Respondent
alleged that this share (rights) issue and allotment was invalid,
oppressive, and that after FRG’s death, she became the rightful
Class I heir.
 Supreme Court-
 The court held that a director ‘indisputably stands in a fiduciary capacity vis-à-vis the
company’ and must act for the paramount interest of the company. He does not have any
statutory duty towards individual shareholders subject to any special arrangement or a
special circumstance that may arise in a particular case. In case of conflict between
interests of the company v. interests of shareholders, the company’s interest must be
protected.

 Directors, however, will have a fiduciary relation if they have taken unto themselves the
burden of giving advice to current shareholders. Such fiduciary duty would exist in the
context of strong familial relationships having regard to their personal position of
influence in the company. The purpose of this exception is to prevent directors from
taking undue benefit or having ill intent of making pecuniary benefit to the detriment of
the shareholder.

 This duty to disclose with respect to the issue of additional shares is relatable to ‘proper
purpose’, i.e., if the purpose is proper and the action of the director is bona fide.
Diversion of Corporate
Opportunity
Varsha Gaikwad
Section 166- Duty of Directors
• (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the
articles of the company.
• (2) A director of a company shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests of the company, its employees,
the shareholders, the community and for the protection of environment.
• (3) A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
• (4) 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.
• (5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage
either to himself or to his relatives, partners, or associates and if such director is found guilty of
making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
• (6) A director of a company shall not assign his office and any assignment so made shall be void.
• (7) If a director of the company contravenes the provisions of this section such director shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to five
lakh rupees.
Examples
• A Director knows thar company is looking for land to purchase. Finds
out a land that is sold at reasonable cost. The director then purchases
property in their own name, and then sells it to the company at a much
higher price.
• D owned land and then found out that company wants to buy land.
Didn’t find out about it due to company in the first place. Then sold at
a profit to the company.
Regal (Hastings) v Gulliver [1942] 1 All ER 378

• Regal were in negotiation for the purchase of two cinemas in Hastings. There were five directors on the board,
including Mr Gulliver, the chairman. Regal incorporated a subsidiary, Hastings Amalgamated Cinemas Ltd, with a
share capital of £5,000. There were six directors on its board, who included the five directors of Regal. Regal was
only prepared to subscribe £2,000. Consequently, it was agreed that each of the directors of Amalgamated would
themselves subscribe for 500 shares each, with the exception of Mr Gulliver. He said that he would find investors.
He duly did so, and as a result 200 shares in Amalgamated were allotted to a Swiss company called Seguliva; 200 to
a company called South Downs Land Co Ltd and 100 to a Miss Geering. Mr Gulliver himself held 85 out of 500
shares in Seguliva and 100 out of 1,000 shares in South Downs Land Co. He was a director of Seguliva and the
managing director of South Downs Land Co, and signed the subscription cheques on their behalf. Miss Geering was
a friend of his. The shares in Amalgamated were subsequently sold at a profit; and the issue was whether the
directors were liable to account to Regal for their profit.

• Held: Directors are liable to account for activities outside the company if (i) what the directors did was so related to
the affairs of the company that it can properly be said to have been done in the course of their management and in
utilisation of their opportunities and special knowledge as directors and (ii) what they did resulted in profit for
themselves.
Principle by Lord Russell of Killowen
• “The rule of equity which insists on those who by use of a fiduciary
position make a profit, being liable to account for that profit, in no
way depends on fraud, or absence of bona fides; or upon questions or
considerations as whether the property would or should otherwise
have gone to the plaintiff, or whether he took a risk or acted as he did
for the benefit of the plaintiff, or whether the plaintiff has in fact been
damaged or benefited by his action. The liability arises from the mere
fact of a profit having, in the stated circumstances, been made.”
Lord Wright
• The Court of Appeal held that, in the absence of any dishonest
intention, or negligence, or breach of a specific duty to acquire the
shares for the appellant company, the respondents as directors were
entitled to buy the shares themselves. Once, it was said, they came to
a bona fide decision that the appellant company could not provide the
money to take up the shares, their obligation to refrain from acquiring
those shares for themselves came to an end. With the greatest respect, I
feel bound to regard such a conclusion as dead in the teeth of the wise
and salutary rule so stringently enforced in the authorities. It is
suggested that it would have been mere quixotic folly for the four
respondents to let such an occasion pass when the appellant company
could not avail itself of it.
Lord King, L.C.
• He stated that the person in the fiduciary position might be the
only person in the world who could not avail himself of the
opportunity."
Vaishnav Shorilal Puri v. Kishore Kundan Sippy
(2006) 6 Comp LJ 74 (Bom)
• 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.
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, 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. and Deva Sharma v. L.N.
Gaddodia. They relied on these cases for the establishment of fiduciary
relationship under Section 88 of the Indian Trust Act. 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. 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 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.
• 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.
• 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.
Problem 01
• Facts
• A child (the future Mr A) inherited a property. Mr S was entrusted to look after this
property until the child was of age. However, the lease expired before Mr A had
grown up.
• The landlord had told Mr S that he did not want the child to have the renewed
lease.
• There was clear evidence of the refusal to renew the lease for the benefit of the
infant.
• Yet the landlord was happy to give Mr S the opportunity of the lease instead. Mr S
entered into the lease.
• When Mr A grew up and as an Adult, he sued Mr S for the profit that he had been
making by getting the lease.
• Issues
• Was Mr S, as trustee, in breach of the no conflict rule?
• Keech v Sanford (1726) EWCH J76
Problem 02
• There were four directors each holding a 25% share in Toronto Construction
Co. Three of them wanted to part ways with the fourth director. The three
directors made arrangements in their own name to procure a lucrative
contract with Canadian Pacific Railway Company that was similar to the
ones previously executed by the jointly owned company. They then formed
a new company to divert this opportunity and carry out the contract.
• The three directors, by using their majority votes in a general meeting,
passed a resolution to approve the sale of part of the assets belonging to
their jointly owned company to the newly formed company. In addition,
they also obtained a declaration that the jointly owned company had no
interest in the contract procured by the directors.
• The fourth director (i.e., the minority shareholder) claimed that the
ratification was invalid and that the contract belonged to Toronto
Construction Co.
 Problem 02
• The three directors were found to have breached their fiduciary duties to the original company. Through
the exercise of their controlling power, they procured the ratification at the general meeting of their
breach of duty. They diverted to themselves property transactions and assets of the company.
• Hence, it was noticed that there was a lack of honesty and transparency both in the transaction as well
as the subsequent process of ratification.
• The directors had misused their voting powers. The contract should have belonged to the company.
Effectively, they misappropriated a business opportunity that was available to the company.
• The Privy Council declared the ratification invalid and held that the three directors were liable as
constructive trustees of the company for the profits they had improperly gained through these actions.
They were liable to surrender the profits to the company.
• The misappropriation was considered a fraud on the minority.
• The above case of Cook v Deeks suggests a fair view. To authorize a director to take a corporate
opportunity, it must only be the disinterested shareholders who must take the decision. The director who
is seeking authorization must not be allowed to vote his or her own shares in this context.
Misappropriation of company property:
Cook v Deeks [1916] 1 AC 554
• The Privy Council found that the directors had breached their fiduciary
duty to the company and the members’ resolution was invalid.
 Problem 03
• Mohan and Sohan Bhullar were brothers who owned and operated a grocery store on
Springfield Street in Huddersfield (the Bhullar company). Over time, the Bhullar
company acquired additional property for the operation of additional grocery stores, plus
another property, Springbank, that the Bhullar company leased to the operator of a
bowling alley. Mohan’s sons, Steven and Kalvinder (Tim), were added to the Bhullar
company board of directors.
• Other members of Mohan’s and Sohan’s families participated in the operation of the
Bhullar company, but only Mohan, Sohan, Steven, and Tim were board members. A
falling out occurred between Mohan’s and Sohan’s families, who decided to part ways.
• The negotiations to split the Bhullar company took considerable time, during which
Mohan adopted the position that the company should acquire no further properties.
• Subsequently, Sohan’s family (defendants) discovered that the property adjoining
Springbank (the new property) was for sale. The new property included the parking lot
leased and used by the bowling alley. Sohan’s family acquired the new property through
another company they owned, Silvercrest Trading (GB) Ltd (Silvercrest), without
disclosing to Mohan’s family (plaintiffs) that the property was available.
• Mohan’s family sued, contending that Sohan breached his fiduciary
duty to the Bhullar company by not disclosing the opportunity to
purchase the Springbank-adjoining property. Mohan’s family sought
damages and transfer of the new property to the Bhullar company.
Sohan’s family contended that they innocently came upon the new
property and that Mohan’s family was not involved or showed interest
in the new property. The trial court rejected Mohan’s family’s request
for damages but ruled that the property had to be transferred from
Silvercrest to the Bhullar company. Sohan’s family appealed to the
England and Wales Court of Appeal.
 Bhullar v Bhullar
[2003] EWCA Civ 424
• Corporate opportunity doctrine
• Duty to avoid conflicts of interest = duty to communicate opportunities
• A director owes a duty to avoid conflicts of interests, including through the
exploitation of a corporate opportunity.
• In this case the company operated grocery stores, but also owned a
commercial property which it let to tenant.
• The tenants used part of an adjacent property as a car park.
• One of the company’s directors saw a ‘for sale’ sign on the adjacent
property.
• He caused a company which he controlled to buy the land without telling
the other directors of the company.
Bhullar v Bhullar
[2003] EWCA Civ 424
• It was held that he was under a duty to communicate the opportunity
to the company because it would have been a ‘worthwhile’ opportunity
for the company.
Problem 04
• Mr Cooley was an architect employed as managing director of
Industrial Development Consultants Ltd., part of IDC Group Ltd.
The Eastern Gas Board had a lucrative project pending, to design a
depot in Letchworth. Mr. Cooley was told that the gas board did not
want to contract with a firm, but directly with him. Mr. Cooley then
told the board of IDC Group that he was unwell and requested he be
allowed to resign from his job on early notice. They acquiesced and
accepted his resignation. He then undertook the Letchworth design
work for the gas board on his own account. Industrial Development
Consultants found out and sued him for breach of his duty of loyalty.
Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443

• The court held that the director had improperly taken advantage
of the 3rdparty’s employment offer.
• This opportunity came to his notice in his capacity as a director
and Cooley was liable to account for the profit he made as a
consequence of entering into the contract.
Proper Purpose Rule
• The rule requires Directors to exercise their powers only for the
purposes for which the power are conferred, either by statutory
documents or by corporate constitutional documents.
• It has been one of the major directors fiduciary duties.
Eclairs Group Ltd (Appellant) v JKX Oil & Gas plc (Respondent)

• JKX Oil [“JKX”] is a company listed on the London Stock Exchange. Eclairs and Glengary, both incorporated in the
British Virgin Islands, owned substantial minority shareholdings in JKX, sufficient to block special resolutions:
27.55% and 11.45% respectively. Eclairs was owned beneficially by Ukrainian politician-businessmen, Mr.
Kolomoisky and Mr. Bogulyubov, both having acquired the reputation of ‘raiders’. Glengary was owned by a Mr.
Zhukov.

• Relations between JKX and Eclairs/Glengary do not appear to have been particularly cosy: by 2013, the directors of
JKX perceived that they were the target of a raid by the two minority shareholders. From 2010 to 2012, JKX (which
was going through a financially challenging time) attempted to raise capital, but these attempts fell through in view
of the blocking minority with the raider group. In March 2013, Eclairs and Gregory wrote to JKX, calling for an
extraordinary general meeting to consider resolutions for removal of the existing CEO of JKX, Mr. Dixon, from the
Board. An AGM was convened for June 2013. The agenda included the re-election of Dr Davies, the approval of the
directors’ remuneration report and resolutions empowering the board to allot shares for cash.

• JKX issued disclosure notices to Eclairs and Glengary (as permissible under UK law), calling upon Glengary to
provide information about their shareholding, their beneficial ownership and any agreements or arrangements
between the various persons interested in them. Prompt responses gave information about the shareholding, but
denied that the addressees were party to any agreement or arrangement among themselves.
• JKX argued that in determining for what purposes powers could be used for, regard must be had to principles
of contractual interpretation and implication of terms: “Where the purpose of a power was not expressed by
the instrument creating it, there was no limitation on its exercise save such as could be implied on the
principles which would justify the implication of a term.” They further contended that such a term could only
be implied on grounds of necessity.
High Court Mann J
• Serving of IDN was valid because it was duly performed by JKX
Directors pursuant to section 793 of Companies Act 2006 and JKX
AoA.
• The JKX directors had reasonable cause to believe that the responses
to the IDN were false or materially incorrect.
• The JKX Directors had imposed the Restriction Notices for an
improper purpose, namely to prevent the shareholders voting against
resolutions at the upcoming AGM, hence the RN should therefore be
set aside
Court of Appeal
• Agreed to first two findings of the High Court but reversed the third
one.
• Majority held that the PPR had no significant place in the dispute case
the RN could not be impugned.
• Reasons given are
1. the boards purpose was not improper
2. boards power to issue RN was not unilateral and shareholders only
had to respond to the IDN more fully to avoid the RN
Supreme Court, Lord Sumption and Lord Hodge
• Reaffirmed the application of the PPR and ruled that the directors of
JKX had acted for an improper purpose hence the imposed RN was
invalid.
Four Stages to identify Proper Purpose Rule
• To identify power in Question
• To clarify proper purpose for which power is delegated to the
directors
• To certify substantial purpose for which the power was exercised
• To decide if substantial purpose was proper
What if there are multiple purposes all influential
in different degrees, some of which are proper &
some which are not?

• Lord Sumption & Lord Hodge agreed to approach the problem from a
‘but for’ causation test
 Howard Smith and Amphol Petroleum

• There was a dispute between two companies to take over RW Millers. Both
Howard Smith and Ampol held shares in this company. Ampol and Bulkships
together held 55% in Millers. The directors did not want Ampol to buy the
shares of RW Millers as Howard Smith created better take over terms by
offering employment to the directors even in future. In response to Smith’s bid,
Ampol and Bulkships issued a joint statement that they had decided act jointly
in future operations of RW Millers and reject any offer for their shares from
Howard Smith or from any other source.
• The directors of RW Millers issued $10m of new shares, which according to
them was to complete the finance of two tankers. The shares were issued to
Howard Smith. The effect of this issue was that Millers and much needed
capital. Bulkships and Ampol’s shares were reduced to 36.6 per cent of the
issued shares. This made Howard in a position to make an effective take over.
Ampol challenged the validity of shares issued to Howard. Millers directors
contended that the primary reason to issue shares to Howard was to obtain
more capital.
• ISSUES:
• 1) Were the directors motivated by any purpose of personal gain or
advantage?
• 2) Whether directors had a proper purpose in issuing shares to Howard
Smith?
• 3) Whether the directors had the power to allot or alter prior majority
shareholder position in the interest of the company?
• A director has the power to issue shares to raise capital for the
company and he/she issues new shares for improving the aspects of
business and increasing cash flows for the company, but this was done
with keeping in mind his/her reputation and a guarantee of better pay
to the director. The underlying effect of this decision would affect the
rights of the majority shareholders. Would the use of power be
considered improper or proper?
 Business Judgement Rule
• Business judgment rule is a legal principle that makes officers, directors, managers, and other agents of a
corporation immune from liability to the corporation for loss incurred in corporate transactions that are
within their authority and power to make when there is sufficient evidence to show that the transactions
were made in good faith. It is presumed that the directors of the company carry along with them a bona fide
regard for the interests of the corporations. Therefore in most cases the court refuses to review the actions
of the directors of a corporation unless there is an allegation on the conduct that the directors violated their
duty of care to manage the corporations to the best of their ability. The business judgment rule specifies that
the court will not review the business decisions of the directors who perform their duties:
• 1. in good faith;
• 2. with care that an ordinary prudent person in a like position would exercise under similar circumstances;
and
• 3. in a manner the directors reasonably believe to be in the best interests of the corporation.
• The business judgment rule is very difficult to overcome and courts will not interfere with directors unless
it is clear that they are guilty of fraud or misappropriation of the corporate funds or in other similar
situations.
 Cede & C0. v. Technicolor, Inc
634 A.2d 345, 361 (Del. 1993)
• Plaintiffs (Cinerama, Inc. and Cede & Co.) together held 4.405% of Technicolor
•1970: Technicolor had a long prominent history in the film/audio-visual
industries, with core business of film processing for Hollywood movies; However,
by late 1970s, it started suffering losses due to competition; Although the CEO,
Kamerman initiated efforts to reduce costs and eliminate efficiencies, it was
concluded that principal business of theatrical film processing was not viable in
long term
• May 1981: Technicolor's board approved Kamerman's plan to enter field of rapid
processing of consumer film through network of stores (one-hour photo stores) -
However, the securities market reacted negatively and its stocks dropped; In
following months, Technicolor fell behind on its schedule of OHP stores and
reported losses for those which did open - was viewed as a drain on resources
• Summer 1982: Ronald Perelman of MacAndrews & Forbes Group (MAF)
concluded that Technicolor was ripe for a takeover; However two obstacles - (i)
MAF's lender banks unwilling to finance hostile takeover, and (ii) Technicolor's
incorporation documents required supermajority of 95% for approval of a merger
• September 1982: Perelman met Fred Sullivan, one of Technicolor's directors,
through a mutual acquaintance and discussed potential merger - Sullivan did not
disclose this discussion to other Technicolor board members, but placed a personal
purchase order for 10,000 Technicolor shares from the stock market
• Perelman told Sullivan of MAF's intention to purchase 100% of Technicolor's
stock, of which 5% would be via market purchases (he had already purchased
4.8%) - Sullivan disclosed details of Perelman meetings to Kamerman, who
agreed to meet Perelman, but similarly failed to disclose to other directors
• Kamerman quietly engaged investment banker and outside legal counsel
• Kamerman and Bjorkman (together, holding 11%) entered into individual stock
purchase agreements with MAF, and negotiated that MAF that MAF would have
right to purchase additional 18% of Technicolor's authorized but unissued stock in
case of competing bid - therefore MAF would control about 34% of Technicolor
• Sullivan also wanted finder's fee and Kamerman wanted post-merger employment
contract as CEO
• 27.10.982: Kamerman issued notice calling for special meeting of BoD in 2
days without disclosing purpose, and with only a few directors receiving
notice in time
• 29.10.1982: Kamerman informed board of history of negotiations with
Perelman, that original offer was for $20 per share to which Kamerman
countered with $25, with the final price settling at $23 - Kamerman
weighed in that price was "good" and recommended that it be accepted
keeping in mind losses due to OHP stores; Followed by presentations by
investment banker - Board unanimously agreed to offer and to repeal of
supermajority provision in incorporation documents
• Question of whether the unanimous approval was protected by the business
judgment rule or should be subject to judicial review for fairness (or lack
thereof)
JUDGEMENT
• In exercising their powers, directors are under unyielding fiduciary duty to
protect interests of the corporation and to act in best interests of
shareholders
• Business judgment principle is an extension of these basic principles and
creates a presumption that in making a business decision, directors of a
corporation acted on an informed basis, with due care, in good faith, and in
the honest belief that the action taken was in best interests of the company
• Duty of care and duty of loyalty are the traditional trademarks of a fiduciary
acting in service of a corporation and its shareholders
• Here, directors, as a board, breached their duty of care and were grossly
negligent in reaching an uninformed decision to approve sale of the
company to MAF @ $23
• This case went on for 22yrs. From 1983-2005.
• Had 2 trials 1st trail lasted 47 days and 2nd trial for 9 days total of 56
days.
• The total number of Appeals in this case were 6. 5 reversed and 1
affirmed.
• This appeal was for a total of 201,200 shares
• The actual merger price was $23/share
• Final valuation came to $28.41/share
• Net recovery $5.41/share
• Total recovery of $1.1 million
• Legal Fees $20 million
Board Meetings
Prof. Varsha Gaikwad
Need for Board Meetings
• One of the main aims of any meeting should be to deliver
decisions and determine future approaches.
• It takes the decision on behalf of the Company.
• The decision of a Board meeting will not be considered valid unless it
is properly convened, duly constituted and properly conducted.
• The Board ,meeting must therefore be convened by proper authority,
by a proper notice, the proper person must be the chair and the
requisite quorum must be present.
Type of meetings
• Statutory Meetings
• Annual General Meeting
• Extra Ordinary General meeting
Board meeting (s.173-s.195)
• Board Meeting- s.173-s.175
• Power of the Board- s.176-183
• Audit Committees and Nominations- s.177-s.178
• Related Party Transaction- s.184,188,189
• Loan & Investment- s.185,186,187
• Residual Units- s.190,191,192,193
• Forward Dealing & Insider Trading s.194-195
Meetings of the Board
S.173 (1)
• First Board Meeting should be held within 30days from the date of
incorporation of company.
• Minimum 4 Board Meeting every year.
• Maximum gap between 2 Board meetings is 120days
• S.173 (1) shall apply to Non-Profit Organisations (Section 8
Companies) only to the extend that the BOD of such companies shall
hold at least one meeting within every 6 calendar months.
S. 173 (2)
• Directors may participate either personally or by video conferencing
by other audio visual means.
• Rule 3 of the (Meeting of Board and its Powers) Rules, 2014
• Rupak Gupta v U. P. Hotels Ltd. [2016] 71 (NCLT- New Delhi)
S. 173 (3)
• Notice shall be given in writing
• Notice Period to call Board Meeting is 7days.
• Mode of sending notice- by hand delivery or by post or by other electronic
means.
• Shorter notice may be called at shorter notice to transact urgent business
subject to the condition that at least one independent director if any shall
be present at the meeting.
• In case of absence of independent directors from such a meeting of the
Board decisions taken at such a meeting shall be circulated to all the
directors and shall be final only on ratification thereof by at least one
independent director, if any.
S.173 (4)
• Every officer of the company whose duty is to give notice under this
section and who fails to do so shall be liable to a penalty of twenty-
five thousand rupees.
S.173 (5)
• One person Company, small company and dormant company and a
private company which is a start up:
• Atleast one meeting in each half of a calendar year
• Minimum gap between 2 Board meetings is 90 days
• However, the private company is not entitled to exemption if it has
made default in filing of Financial Statement or Annual Returns to
ROC.
Content of Notice
• No specific requirement in Section 173
• Date, Time and place must be given as a matter of good secretarial practices.
• Rule 4
• Matters not to be dealt with VC/AV
i. Approval of annual Financial Statement u/s Section 134 (1)
ii. Approval of Board’s Report u/s 134 (1)
iii. Approval of Prospectus
iv. The Audit Committee Meetings for consideration of Financial Statement
including CFS to be approved by Board of Directors.
v. Approval of matters relating to amalgamation, merger, demerger, acquisition
and take over.
(This rule has been Omitted)
Point to Remember
• A director who desires to attend the meeting through electronic
mode can participate electronically if he submits his declaration to
the company. This Declaration shall be valid for a period of one year.
Now with prior intimation, this Director can also attend the meeting
physically.
• However, if the requirement of quorum u/s 174 is fulfilled, even
directors can attend meeting through video conferencing through this
5 matters.
• It is the discretion of the company to provide facility of VC and not
mandatory.
Quorum of Board Meeting s. 174
• S.174(1) Quorum is 1/3rd of Total Strength or 2 Directors whichever is
higher.
• Round off the fraction to the highest number
• Total strength does not include directors whose offices are liable to be
vacant
• Quorum for Board meeting of Section 8 Companies- Eight members
or 25% of its total strength whichever is less. Provided that quorum
shall not be less than two members
S.174(3)
• Where at any time the number of interested directors exceeds or is
equal to two third of the total strength of the Board of Directors, The
number of directors who are not interested directors and present at
the meeting, being not less than two shall be the quorum during such
time.
Analysis of Section 174 (3)

Check whether Interested directors If yes, then check

number of interested shall be counted in number of Directors
Step 1:

Step 2:
Note:
directors exceeds or is Total Strength since who are not interested
equal to two third of office not vacated but and present in Board
total strength not counted in Quorum Meetings. If at least 2
non interested
directors are present,
then the quorum is
present

If an interested director discloses his interest to the board u/s 184, then for the purposes of quorum under 174
(3), he would be counted in the quorum
Passing of Resolution by Circulation s.175
• S.175(1) Resolution has been circulated in draft, together with the
necessary papers. If any, to all the directors or members of the committee
at their addresses registered with the company in India by hand delivery or
by post or by courier or through such electronic means (Electronic means
includes email or fax as per Rule 5 as may be prescribed.
• AND approved by a majority of the directors or members, who are entitled
to vote on the resolution (If 11 directors were entitled to vote, 2 abstained
from voting, 5 voted in favour, % of directors who approved= 5/11 and not
5/9.) Minimum 1/3rd of total no. of directors may require that resolution
under circulation must be decided at meeting.
• S.175 (2) A resolution under sub-section (1) shall be noticed at a
subsequent meeting of the Board on the meeting thereof, as the case may
be, and made part of the minutes of such meeting.
POWER OF THE BOARD
Section 176 to Section 183
• S. 176 Acts done by a person as a director shall be deemed to be
valid, even if it is subsequently noticed that his appointment was
invalid by reason of any defect or disqualification, or office was later
terminated because of any provisions of Act/Articles. However, any
act done which came to notice of company shall be invalid.
• Acts of Managing director after expiry of his term is not valid because
the company cannot claim that the company was not aware of the
expiry of tenure of 5years
Audit Committee (Section 177)
 At least 3 directors out of which independent directors are in majority
 Must be financially educated
 Terms of reference
 the recommendation for appointment, remuneration and terms of appointment of auditors of
the company;
 review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
 examination of the financial statement and the auditors’ report thereon;
 approval or any subsequent modification of transactions of the company with related parties;
 scrutiny of inter-corporate loans and investments;
 valuation of undertakings or assets of the company, wherever it is necessary;
 evaluation of internal financial controls and risk management systems;
 monitoring the end use of funds raised through public offers and related matters.
 Nomination and Remuneration Committee
(Section 178)
 3 or more non-executive directors of which majority shall be independent directors
 Duties include identification and recommendation of appropriate senior management and directors to the board
 Must formulate a policy to provide for appointment and remuneration of directors, key managerial personnel
and other employees
 In the event that a company does not have profits, or where profits are inadequate, managerial remuneration
requires approval of the Nomination and Remuneration Committee
o Stakeholder Grievance Committee (Section 178)
 To resolve the grievances of the security holders of the company
 A company having more than 1000 shareholders, debenture holders, deposit holders and other security holders
must constitute a Stakeholders Relationships Committee
 Minimum strength not provided for- however, the chairman must be a non-executive director
 Similar duties to that of the existing ‘shareholders grievances’ committee
 Expansion of scope from ‘shareholders grievances’ under the Listing Agreement to ‘Stakeholders Relationships’
under the Companies Act, 2013
 However, a cause of action under Section 178 can be raised only by a security holder.
 Section 179
Power of Board of Director
• The Board of Directors of a Company shall exercise the following powers on behalf
of the Company by means of resolutions passed at meetings of the Board namely:-
a) To make calls on shareholders in respect of money unpaid on their shares
b) To authorize buy-back of securities under section 68
c) To issue securities, including debentures, whether in or outside India
d) To borrow monies
e) To invest the funds of the company
f) To grant loans or give guarantee or provide security in respect of loans
Note: Powers given in clause (d) to (f) can be delegated to committee of directors, the
managing director or any other principal officer of Branch office
Matters given in clause (d) to (f) may be decided by the board by circulation instead
of at the meeting in case of Section 8 Companies.
Section 179
(g) To approve financial statement and the Board’s report
(h) to diversify the business of the company
(i) To approve amalgamation, mergers or reconstruction
(j) To take over a company or acquire a controlling or substantial stake
in another company
 MPDC v. Dabhol

• 3 US companies – set up dabhol power. Then MPDC also bought shares. After investment by petitioner, the shares – MPDC held 30%
and the rest divided with Enron holding a majority
• AoA- every SH holding 10% shares – nominate a director to the board. Total allowed – 13 max and 3 minimum. Initially MPDC had 3
directors- later became 14% so – became 1. 8 directors from others and other nominee directors from creditors. When Enron went
bankrupt, no money left for dabhol. All 6 directors resigned. The nominee directors also left. Then 3 directors left – 1 from MPDC and
2 from the other small Shareholders. At this stage, reached the min. no. of directors. In 2002, MPDC director also resigned. Since it
was below the limit, the remaining 2 could not act- no QUORUM
• Section 174- minimum quorum for board meeting of directors – 1/3 rd of total, or 2- whichever number is higher
• In 1956 act – private companies were not given any minimum quorum – Dabhol’s quorum was
• The Dispute- (1) claim for oppression and mismanagement (not now)(conduct has to be burdensome, harsh, continuous, illegal-
cannot be a single instance) and (ii) directors meeting on 4th June 2002 was invalid cause below the required quorum – at the
meeting, resolution was passed to increase number of directors and improve financial position. Companies Act, 1956, Sections 397,
402,403 and 406 - Appointment - shareholder - Prejudicial to public interest - Company petition for diverse reliefs was filed by
petitioner u/ss. 397, 402,403 and 406 of 1956 Act - In amended company petition, petitioner prayed that it be declared that affairs of
Respondent Company were being conducted in the manner oppressive to petitioner and prejudicial to public interest - After
Respondent issued phase II equity, petitioner withdrew two of its shareholder directors from board - IDBI moved application for
appointment of a court receiver in respect of various assets of company - Interim orders passed by Company Law Board/CBI - Two
appeals filed before Company Court, one by petitioner and other by Respondents Nos.2 to 5 – Court allowed the appeal of Respondents
Nos. 2 to 5 and dismissed appeal of petitioner -
• Hence instant Appeal. Board of Dabhol constituted of EMC (65.8%), EEC (10%), CIPM (10%), MPDCL (14.2%) and had [7, 1, 1, 1]
directors respectively.
T M Paul v City Hospital

• City Hospital Private Limited was a company incorporated under the Companies Act with
Dr. TM Paul (“appellant”) as its Managing Director. Some of the shareholders gave Dr.
Paul a notice to convene an Extraordinary General Body Meeting and accordingly a
meeting was scheduled for 18th August, 1992 with the agenda being to- a) pass the
resolution of the previous meeting, b) approve the balance sheet, and c) transfer the shares
of late Dr. KM Joseph. Three additional issues that were not in the agenda were also taken
up for consideration in the meeting, namely, a) to appoint 3 new directors, b) to clear
outstanding dues to Bank of India, and c) to lease the hospital premises for a period of 5
years. This meeting was not attended by 4 of the doctors (“respondents”) who had
previously asked for postponement of the meeting, but their requests were rejected. One
of the doctors who was away in Pondicherry did not even receive notice of the meeting
and 2 others received it only at late night 17th August. In yet another meeting convened
on 29th August, according to the respondents, a fabricated and highly detrimental
resolution was passed by Dr. Paul to sell the shares of one of the doctors despite her
opposition.
• The prayer before the court was to declare the board meetings held on 18th and
29th August as illegal and void.
INSIDER TRADING
 Rakesh Agarwal v SEBI
• The Appellant is the Managing Director of ABS Industries Ltd., Vadodara (ABS) a company incorporated under the
Companies Act 1956 (name of the company has been subsequently changed to Bayer ABS Ltd.). The main business of ABS
is manufacture of ABS resins (Acrylonitrile Butadiene Styrene) and SAN, (Styrene Acrylonitrile resins). Shares of ABS are
listed on Bombay Stock Exchange National Stock Exchange, Ahmedabad Stock Exchange and Vadodara Stock Exchange.
Bayer AG (Bayer) is a company registered in Germany having many subsidiaries in various parts of the world. Bayer took
controlling stake in ABS in October 1996 by acquiring
• (a) 55,80,000 shares in the allotment made on a preferential basis by ABS (@ Rs.70/-)
• (b) 20% shares from the existing shareholders @ Rs.80/- per share in a public offer.
• It has been stated by SEBI that there were allegations of purchases being made prior to announcement of Bayer acquiring
controlling stake in ABS, on the basis of inside information. In that context investigations were undertaken by SEBI to
ascertain the truth or otherwise of those allegations. SEBI’s investigation is stated to have revealed that one Mr. I. P. Kedia,
brother in law of the Appellant had purchased shares preceding Bayer’s acquisition of ABS and that the said acquisition was
made at the behest of the Appellant and the Appellant funded the acquisition. The investigation is also stated to have revealed
that the shares wereacquired on the basis of the unpublished price sensitive information relating to impending takeover of
ABS by Bayer, available to the Appellant by virtue of his position as the Managing Director of ABS and also as the
negotiator from the side of ABS, in the negotiations with Bayer.
• The findings of the investigation was forwarded to the Appellant asking him to show cause as to why action should not be
taken against him for violation of the SEBI Regulations. The Appellant replied to the notice denying the charges. SEBI
thereafter adjudicated the notice. SEBI held the Appellant guilty of violating the provisions of regulation 3(i) of the SEBI
Regulations and passed the impugned order.
Judgement

• From the facts of the case, it is clear that the Appellant was acting in the interest of the company
and to protect the interest of the company shares were purchased and, therefore the Appellant can
not be considered to have violated the prohibition contained in regulation 3(i).
• The fact that the Appellant in the process of tendering the shares in the public offer, tendered the
shares at a price higher than the rate at which he purchased the same can not be viewed as an action
to gain unfair advantage over other shareholders.
• The gain was incidental to the main objective of enhancing the interest of ABS. He was already in
management of the control of the company. It is too presumptuous to say that he had traded in the
securities to protect his interest. He has not retained his managerial position at the cost of any other
person.
• In the totality of the facts and circumstances and in view of the underlying objective of the insider
trading regulation, I am not inclined to agree with the finding that the Appellant is guilty of
indulging in insider trading as alleged by the Respondent. Since there is no evidence to show that
he had gained unfair advantage over other shareholders the direction to deposit Rs.34 lakhs to
compensate any investor who seeks compensation as a result of the sale of shares of ABS to Shri I.
P. Kedia during September 9 to October 1, 1996 is untenable.
V. K Kaul v
• Mr. V.K. Kaul, appellant in Appeal No. 55 of 2012, was a non-executive independent director of
Ranbaxy Laboratories Limited (Ranbaxy) for the period from January 1, 2007 to December 18,
2008. Ranbaxy is the parent company of Solrex Pharmaceuticals Limited (Solrex). Ranbaxy is also
the holding company of Rexcel Pharmaceutical Limited (Rexcel) and Solus Pharmaceutical
Limited (Solus) which are 100 per cent subsidiaries of Ranbaxy.
• Solrex is the partnership firm between Rexcel and Solus. Therefore, Solrex is a company directly
under the control of Ranbaxy.
• Certain alerts were generated at the National Stock Exchange Limited and the Bombay Stock
Exchange Limited during the period from March 17, 2008 to April 9, 2008 on the basis of which
the Board took up joint investigation in the dealings of the scrip of Orchid Chemicals and
Pharmaceuticals Ltd. (the target company). Solrex made large investments in the scrip of the target
company from March 31, 2008 onward. It was noted that Mrs. Bala Kaul, appellant in Appeal No.
56 of 2012, wife of Mr. V.K. Kaul, appellant in Appeal No. 55 of 2012 had traded in the scrip of
the target company ahead of large investments made by Solrex in the scrip of the target company.
• The funds for the said trading were provided by Mr. V.K. Kaul and trading was done through
Religare Securities Limited, who is also the stockbroker of Solrex. Mrs. Bala Kaul bought a total of
35,000 shares at an average price of ' 131.71 on 27th and 28th March 2008 and sold them on April
10, 2008 at an average price of ‘ 219.94.
• This trading was allegedly done on the basis of Unpublished Price Sensitive Information (UPSI)
available with Mr. V.K. Kaul to the effect that Solrex is going to invest large amounts in the scrip of
the target company. The basis of this conclusion appears to be that the Board of Directors of Rexcel
and Solus had passed a resolution on March 20, 2008 to open a joint demat account in the name of
both companies on behalf of Solrex. Solrex bought shares of the target company from March 31,
2008.
• The Board came to the conclusion that the decision to purchase shares of the target company
would have been taken by Ranbaxy on March 20, 2008 and on that basis the demat account was
opened and subsequently Mr. Malvinder Singh Ithe CEO and MD of the Company) was authorized
for funding to the subsidiaries of Ranbaxy. Therefore, the UPSI came into existence on March 20,
2008.
 Mr. Janak Dwarkadas, senior advocate on behalf of the appellant
• Mr. Janak Dwarkadas that the adjudicating officer of the Board has erred in holding that the decision of Solrex to purchase shares of the target company is UPSI.
Referring to the definition of 'price sensitive information' under Regulation 2(ha) of the regulations, he submitted that only such information, which, if published,
is likely to materially affect the price of the securities of the company can be treated as price sensitive information. Further, in terms of Regulation 2(k), the
actual publication of UPSI can be undertaken only by the company to which the UPSI pertain.
• A combined reading of Regulations 2(ha) and 2(k) of the regulations indicate that UPSI must be an information which can affect the price of the securities of a
company and which may be published by that company alone. According to learned senior counsel, in the instant case, the information purported to be UPSI
pertains to the securities of the target company and the target company would never have been in a position to publish such information as it was not privy to the
purported UPSI. Therefore, according to him, information relating to a third party investor seeking to buy shares of a listed company from the market cannot be
treated as UPSI regarding the target company. The target company would not have any knowledge of this information prior to the transactions.
• It was further argued by him that attributing any other meaning to the concept of UPSI would be inconsistent with the scheme and purpose of the regulations and
in particular regulation 3A because it would result in a situation where any company proposing to invest in another listed company would be in violation of
regulation 3A simply by being in possession or knowledge of its own investment. It was also argued by him that show cause notice and the impugned order are
based on the report of the investigating officer but the report has not been made available to the appellants. Thus, the whole inquiry is vitiated for violation of
principles of natural justice. Learned senior counsel for the appellants further submitted that the adjudicating officer has erred in arriving at the conclusions on
the basis of circumstantial evidence giving a go by to the direct evidence available on record.
• The statements made by Mr. Malvinder Singh, Mr. Umesh Sethi, Mr. Sandeep Mohendroo, Mr. Amitabh Gupta and Mr. Sunil Kumar, associated with the
decision taking process of these companies have clearly stated that Mr. V.K. Kaul was not associated with the decision about purchase of shares of the target
company and that he was not informed about such decision.
• It was further submitted that in any case, there was no UPSI and the decision to buy the shares of the target company was taken on the basis of information
already in public domain. Mrs. Bala Kaul is a regular trader. The price of the scrip of the target company was falling due to large quantities of shares being sold
by foreign entity and also by pledgee of the shares. However, the fundamentals of the company were strong and, therefore, Mrs. Bala Kaul took advantage of the
falling price and bought the shares. It was, therefore, argued that order passed by the adjudicating officer in both the appeals needs to be set aside.
Mr. Darius Khambata, learned Advocate General, appearing on behalf of the respondent Board

• The term 'price sensitive information' as defined in the regulations is wide enough to include any information relating directly or indirectly to a
company. The regulations do not require that the UPSI must be in the possession of or in the knowledge of the company in whose securities the
insider deals.
• If an insider deals in the securities of a company listed on any stock exchange when in possession of UPSI relating to that company, regulation 3(i) of
the regulations will get attracted. Regulation 2(ha) of the regulations defines 'price sensitive information to mean any information which relates
directly or indirectly to 'a company' which, if published, is likely to materially affect the price of securities of company. The explanation to the said
sub-regulation makes a deeming provision with regard to certain information to be price sensitive. Regulation 2(k) defines 'unpublished’ to mean
information which is not published by company or its agents and is not specific in nature. The explanation further provides that speculative reports in
print or electronic media shall not be considered as published information.
• A bare reading of the aforesaid provisions make it clear that the information must relate to 'a company’ and not necessarily 'the company' which
is dealing into the shares.
• while interpreting a definition, it has to be borne in mind that the interpretation placed on it should not be repugnant to the context, it should also be
such as would aid the achievement of the purpose which is sought to be served by the Act. A construction which would defeat or is likely to defeat
the purpose of the Act has to be ignored. He drew our attention to Section 106 of the Evidence Act to say that the information with regard to UPSI
was specially in the knowledge of the appellant and burden of proof was on them. Since the appellants had failed to discharge their duties, the Board
was fully justified in arriving at its own conclusion based on evidence available on record. The very fact that Mr. V.K. Kaul purchased shares of the
target company on 27th and 28th March, 2008 i.e. immediately after decision of Solrex to buy shares of the target company and then disposing them
of within a short span itself is a strong evidence that the trading was based on insider information. Therefore, no fault can be found with the
conclusions arrived at by the adjudicating officer.
• Mr. V.K. Kaul, being an insider, purchased 35000 shares of the target company on
behalf of his wife Mrs. Bala Kaul, on 27th and 28th March 2008, ahead of trading
in the scrip of the target company by Solrex. It was, therefore, alleged that the
appellant, being a connected person of Ranbaxy under Regulation 2(c)(i) of the
Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992 (for short the regulations), was an insider and traded on behalf
of his wife in the scrip of the target company based on UPSI in his possession and,
thus, violated Section 12A(d) and (e) of the Act.
Chandrakala
• The Board conducted investigations into the rise in price and volume in the scrip of M/s. Rasi
Electrodes Ltd. (the Company) during the period from June 8, 2007 to July 20, 2007. The scrip of
the company is listed on the Bombay Stock Exchange. It was noted that certain promoter entities
had traded in the scrip during the investigation period.
• It was further noticed by the Board that the agenda for the board meeting to be held on June 30,
2007 was discussed internally between Mr. B Popatlal Kothari, chairman and managing director
and Mr. G Mahavirchand Kochar, whole time director of the company. The agenda was finalized
between June 19 to 21, 2007. The rate of dividend was finalized in the meeting held on June 30,
2007. The period of June 19 to 30, 2007 was considered as a period when the information about the
financial results and dividend was unpublished price sensitive information.
• It was further noted by the Board that the agenda for the board meeting regarding bonus issue to
be held on July 25, 2007 was discussed internally during the period July 15 to 17, 2007 and the
agenda papers were circulated on July 17, 2007. The period July 15 to 17, 2007 was considered to
be the period when information about the issue of bonus shares was unpublished price sensitive
information. The Board analyzed the trading details of the company related entities who dealt in
the scrip when the price sensitive information was unpublished and noticed the trading details as
under:
 Investigation on Price Rise 8
June 2007- 20 July
2007
Board Meeting Agenda Finalised Final Decision in UPSI
Board meeting

30 June 2007 19 June 2007- 21 Price finalized 19 June 2007- 30

(dividend price) June 2007 on 30 June 2007 June 2007
(Internal
Discussion among
insiders)
25 July 2007 15 July 2007- 17 Agenda Circulated 15 July 2007- 17
Bonus Issue July 2007 to everyone July 2007
17 July 2007
Allegation
• It was observed that the appellant is wife of Uttam Kumar Kothari who is the promoter of the
company and is brother of B Popatlal Kothari, chairman and managing director and Ranjit Kumar
Kothari, director of the company. Therefore, according to the Board, the appellant was deemed to
be a connected person with the company and its directors who had access to unpublished price
sensitive information and hence an insider.
• The appellant is alleged to have traded in the scrip of the company based on the unpublished price
sensitive information relating to financial results, dividend and bonus issue. Hence, it was alleged
that the appellant had violated regulation 3(i), (ii) and 4 of the regulations. A show cause notice
dated March 11, 2011 was issued calling upon the appellant to show cause as to why an enquiry
should not be held against her and penalty imposed for the alleged contravention of the regulations.
The appellant denied the allegation. After considering the reply of the appellant and granting
personal hearing, the adjudicating officer found the appellant guilty and, by the impugned order
dated August 30, 2011, imposed penalty as stated above. Hence, this appeal.
• The appellant is the wife of Uttam Kumar Kothari who is the brother of B Popatlal Kothari, chairman and managing
director of the company and Ranjit Kumar Kothari, director of the company. She also stays at the same address as that of
her husband and of the chairman and managing director of the company. As such, she is deemed to be a connected person
with the company and its directors and had access to unpublished price sensitive information. Since she has traded while in
possession of unpublished price sensitive information the order of the adjudicating officer needs to be upheld.
• On the other hand, learned counsel for the appellant argued that the case of the appellant stands on an entirely different
footing and is not covered by the earlier order of the Tribunal referred to above. In support of this contention, learned
counsel for the appellant submitted that Mr. Uttam Kumar Kothari, husband of appellant had relinquished the interest in the
company as promoter as early as 31st March, 2005.
• Since Mr. Uttam Kumar Kothari, brother of the chairman and managing director of the company and husband of the
appellant, ceased to be promoter of the company in 2005, he was only a shareholder of the company and had no
information about the day to day working of the company. Therefore, his wife, the appellant before us, cannot be said to be
a person “deemed to be a connected person”. Regarding residential address of her husband and chairman and managing
director of the company, it was submitted that the address of the appellant is different from that of the chairman and
managing director of the company. They stay in different apartments constructed on the same plot which has been mistaken
as same address. It was further submitted that the appellant’s trades were independent of the corporate announcements and
were never induced / driven by the said corporate announcement. The appellant was trading in the ordinary course
according to her own commercial wisdom prior to the corporate announcements, during the said corporate announcements
and post corporate announcements. The appellant had not only bought the shares but had also sold the shares which belies
the allegation that she was acting on the basis of unpublished price sensitive information.
Judgement
• A person who is in possession of unpublished price sensitive
information which, on becoming public is likely to cause a positive
impact on the price of the scrip, would only buy shares and would not
sell the shares before the unpublished price sensitive information
becomes public and would immediately offload the shares post the
information becoming public. This is not so in the case under
consideration. The trading pattern of the appellant, as shown in the
chart above, does not lead to the conclusion that the appellant’s trades
were induced by the unpublished price sensitive information.
SEBI v Abhijit Rajan
• Mr. Abhijit Rajan was the chairman and managing director of
Gammon Infrastructure Projects Limited GIPL. and another company
Simplex Infrastructure Limited SIL were awarded separate contracts
by the National Highways Authority of India NHAI. However,in 2013,
the Board of GIPL passed a resolution authorizing the termination of
contracts. The information was communicated to the stock exchange
21 days later. During that period, Mr. Rajan had already sold his
shares which became the subject matter of an investigation of insider
trading shares by SEBI.
• Two issues arose before the SC, one of which was
1. Does the Sale of Equity Shares by Mr. Rajan, under the compelling
circumstances amounts to insider trading.
There is no requirement under the SEBI (PIT) Regulations,1992, for SEBI
to prove the motive of the insider, only an essential requirement of
possession of unpublished price-sensitive information (UPSI) on part of
the insider is required to be established by SEBI to prove his liability.
Judgement
• Mr. Rajan advanced his arguments by contending that the sale of shares was occasioned by the
compelling need to save the bankruptcy of the parent company of GIPL and utilize the proceeds of
the share sale towards it rather than making unlawful gains. He further advanced that he had no
motive to use the UPSI to defraud the securities market.
• The SC in its turn went beyond the SEBI Regulations by applying a profit motive test.The
Supreme Court observed that Mr. Rajan’s actions were contrary to the arithmetic movement of the
Securities market, had the UPSI been disclosed. Based on this analysis, the SC concluded that Mr.
Rajan’s actions did not originate from unlawful motives, but from a pressing need to prevent the
parent company of GIPL from going into bankruptcy.
• In view of the Court, the result that is profit/loss from the resulting transaction may not provide an
escape route to the insider, but one cannot ignore human conduct. The determining factor is
whether the insider has the necessary motive to make unlawful gains and manipulate the securities
market. However, one may observe that in holding ‘Motive’ as an essential requirement, both the
SC and SAT have deviated from their past rulings. In Chairman, SEBI v Shriram Mutual
Fund the SC held that unless the language of the statute otherwise indicates, it is unnecessary to
ascertain whether the violation is intentional or not. A similar viewpoint was shared by SAT with
SEBI in Hindustan Lever Ltd v SEBI.
 Shruti Vora
• series of newspaper articles were published in 2017 which stated that quarterly financial results of around 12 companies
were out and were circulated on a messaging platform ‘WhatsApp’, before they were officially declared by the companies.
• Six of Twelve namely, Bajaj Auto Ltd., Bata India Ltd., Ambuja Cements Ltd., Asian Paints Ltd., Wipro Ltd., and Mindtree
Ltd appealed to the Securities Exchange Board of India (SEBI) as a consequence.
• Hereafter, SEBI started an investigation on such WhatsApp groups where, in the course of inquiry it was found that
financial results of these firms were completed 15 days before the disclosure of the information officially.
• The information circulated was found closely related to the exact figures that were officially published.
• The suspected group member Shruti Vora’s WhatsApp was used to retrieve communication. On the basis of further
investigation and evidence, Govind Aggrawal was identified as the source of the information, which he sent on via
WhatsApp to Shruti Vora before she passed it on to some Aditya Gaggar.
• WhatsApp conversations pertaining to Wipro Ltd. were deemed to be unpublished price sensitive information (UPSI), and
the dissemination of information via WhatsApp pertaining to the company’s financial data was considered to be the
transmission of UPSI.
• As a result, UPSI possession was charged against the Noticees in the current case, Prathiv Dalal and Shruti Vora. Prathiv
Dalal and Shruti Vora were subsequently declared to be “Insiders” engaging in insider trading, and the adjudicating officer
imposed a fine of INR15,000,000 in each case in accordance with SEBI (PIT), 2015 Regulation[2].
• As a result, the appellants challenged the adjudicating officer’s decision and eventually moved to the Honourable Securities
Appellate Tribunal (hereafter referred to as SAT).
• Whether a WhatsApp message flagged as “forwarded as received”
which then circulated inside in a group about quarterly financial
results of a firm Company closely matching with vital data would
qualify as unpublished price sensitive information (UPSI) under the
Securities and Exchange Board of India (Prohibition of Insider
Trading) Act, immediately after the company’s internal finalization
of the financial results and before the publication/disclosure of the
same by the concerned company?
Problem Question
• An agreement was entered into by the Appellants (“the Company”) and the
Respondents (“the Distributors”) for the sale and marketing of 1/6th of
company’s steel on 01.06.1967. This agreement also made a reference to
arbitration. There were 2 more identical agreements entered into by the
Company with other distributors which were ratified in a meeting of the
board of directors on the same day the agreement on dispute was approved
i.e. 15.06.1967. However, it should be noted that 6 out of the 13 directors
were direct beneficiaries of these agreements. During the process of
winding up it was contended by the official liquidator (representing the
Company) that the agreement entered on 01.06.1967 should be rescinded as
the same was vitiated by fraud and are against the interests of the company.
Globe Motors v. Mehta Teja
Singh
• The basic question is as to the conduct of the
directors and whether it satisfies the test
considering their fiduciary relationship to the
company. Therefore, the Court held that the
terms of the agreement dated 01.06.1967 were
detrimental for the company and the same was
used by the directors for their personal
benefit without doing any amount of work. Hence
the agreement is void and appellants are
entitled for the remedyforrecession.
• when a substantial portion of the board becomes interested in some or
the other transaction, even when the interested directors disclose their
interest and do not participate in the decision-making, their presence is
enough to incentivize the entire board to indulge in back scratching,
thereby prioritizing their self-interest over the company’s. Cases like
these indicates that there should be a higher threshold for ensuring
independence of the board, However, if this case was to be decided as
per the amended Companies Act, participation of interested director in
the decision-making would itself violate section 184 and render the
transaction voidable
Problem 2
• Dinesh Mirchandani was acting as the sole proprietor of Tristar Consultants.
The Defendant and Plaintiff firms had agreed that the Plaintiff firm was to
recommend suitable candidates to the former on the basis of criterion
discussed by them and conducting an interview. However, this agreement
was cancelled by the Defendants. After this, there was an exchange of
correspondence between the Plaintiff and Mr. Sanjay Kumar- the director of
Defendant firm. On behalf of Defendant firm, Mr. Kumar agreed to pay
professional fee and expenses incurred by the petitioner. Alleging that the
said agreement was not honoured, suit was filed seeking recovery of Rs.
17.61 lakhs. The contention herein was whether the suit claiming personal
liability of Mr. Kumar would be justified despite the fact that he was simply
acting as an agent of Defendant.
Tristar Consultant v. Customer
Services India
• Directors act as agents of Company and the latter acts through the
former. It also states that Directors have been defined as Company’s
agents since they act in a fiduciary manner vis-à-vis the Company.
They also perform acts and duties for the benefit of the company.
However, Directors are only agents of the Company to the extent they
have been given the authority to certain acts on behalf of it. Here, the
Court held that Mr. Kumar was acting in his capacity as the
agent/Director of Defendant firm. Hence, he was not liable in his
personal capacity. The petition was dismissed.
 NUS Working Paper 2016/006
NUS Centre for Law & Business Working Paper 16/03

The Stakeholder Approach Towards Directors’ Duties

Under Indian Company Law: A Comparative Analysis

Mihir NANIWADEKAR
Umakanth VAROTTIL

[email protected]
[email protected]

[August 2016]

This paper can be downloaded without charge at the National University of Singapore, Faculty of Law Working
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www.law.nus.edu.sg/wps/
 NUS Working Paper 2016/006
NUS Centre for Law & Business Working Paper 16/03

The Stakeholder Approach Towards Directors’ Duties

Under Indian Company Law: A Comparative Analysis
Mihir Naniwadekar ([email protected])
Umakanth Varottil ([email protected])

[August 2016]

This paper is part of the larger National University of Singapore, Faculty of Law Working Paper Series and can also be
downloaded without charge at: http://law.nus.edu.sg/wps/.

© Copyright is held by the author or authors of each working paper. No part of this paper may be republished,
reprinted, or reproduced in any format without the permission of the paper’s author or authors.

Note: The views expressed in each paper are those of the author or authors of the paper. They do not necessarily
represent or reflect the views of the National University of Singapore.

Citations of this electronic publication should be made in the following manner: Author, “Title”, CLB Working Paper
Series, Paper Number, Month & Year of publication, http://law.nus.edu.sg/clb/wps.html. For instance, Varottil,
Umakanth, “The Evolution of Corporate Law in Post-Colonial India: From Transplant to Autochthony”, CLB Working
Paper Series, No.15/01, January 2015, http://law.nus.edu.sg/clb/wps.html.
 THE STAKEHOLDER APPROACH TOWARDS DIRECTORS’ DUTIES

UNDER INDIAN COMPANY LAW: A COMPARATIVE ANALYSIS

Mihir Naniwadekar * & Umakanth Varottil**

Abstract

Recognizing that common law does not cast any general duty upon directors towards non-
shareholder constituencies, legislatures have sought to formulate a tolerable solution to
what they perceive as a gap in existing common law. The British Parliament engaged in
one such legislative intervention by adopting the “enlightened shareholder value” (“ESV”)
model through section 172 of the UK Companies Act 2006 (the “2006 Act”). This requires
directors to have regard to non-shareholder interests as a means of enhancing
shareholder value over the long term. Another approach was taken by the Indian
Parliament through section 166(2) of the Companies Act, 2013 (the “2013 Act”), which
appears at first glance to cast a duty on directors to treat non-shareholder interests as an
end in itself. In other words, section 166(2) follows the pluralist approach by placing all
interests (whether of shareholders or other stakeholders) on par without creating any
hierarchy and as being valid in their own right.

In this article, we examine the nature and content of the duty cast under section 166(2) of
the 2013 Act in India. In doing so, we also draw on the experiences from similar debates in
other jurisdictions, principally the United Kingdom (UK). Our principal thesis is that while
section 166(2) of the 2013 Act at a superficial level extensively encompasses the interests
of non-shareholder constituencies in the context of directors’ duties and textually adheres
to the pluralist approach, a detailed analysis based on an interpretation of the section and
the possible difficulties that may arise in its implementation substantially restrict the
rights of stakeholders in Indian companies. This makes the Indian situation not altogether
different from the ESV model followed in the UK.

Key words: Directors’ duties, company law, shareholders, stakeholders, enlightened shareholder value, India,
United Kingdom

*
Advocate, Mumbai High Court, India.
**
Associate Professor, Faculty of Law, National University of Singapore.
I. INTRODUCTION

An existential (but problematic) question in company law relates to the very purpose for which
companies are incorporated and managed. Are companies to be run solely for the purpose of
maximizing the profits of the shareholders? Does the law insist upon protecting – or even
recognizing – interests of non-shareholder constituencies? Do the directors of a company owe
any duties to act in the interests of anyone other than shareholders? Theoretically speaking, these
thorny questions have been the subject matter of rival claims. On the one hand, the shareholder
theory visualizes the shareholders as owners of the firms, thereby requiring companies to be run
in a manner that maximizes their value. On the other hand, the stakeholder theory adopts a
broader perspective and requires companies to be managed on a sustainable and inclusive basis
so as to consider the interests of non-shareholder constituencies such as employees, creditors,
consumers, environment and the community in general. It is generally believed that while Anglo-
American jurisdictions tend to be shareholder centric in nature, other jurisdictions in Europe and
Asia embrace the stakeholder theory to varying degrees. 1

This debate plays out more specifically in the context of duties owed by directors of companies.
In common law, although directors legally owe their duties to the company (being a separate
legal personality) and are required to act in the best interests of the company, this effectively
means that in a solvent company they are to consider the interests of the members as a whole (as
opposed to individual members). 2 Indeed, common law has often recognized that the directors of
a company may have duties relating to non-shareholder constituencies in specific contexts. For
instance, directors of a company have a duty to consider the interests of creditors during
insolvency. 3 Although the matter is not devoid of controversy, it is arguable that while the
directors do not owe a duty to the company’s creditors, in discharging their duty to an insolvent
company they ought to keep in mind the interests of the creditors, which displace shareholders’
interests at that stage.4

1
For a discussion of the competing theories and the relevant literature, see Andrew Keay, ‘Stakeholder Theory in
Corporate Law: Has it Got What it Takes?’ (2010) 9 Rich J Global L & Bus 249; Sarah Kiarie, ‘At crossroads:
shareholder value, stakeholder value and enlightened shareholder value: Which road should the United
Kingdom take?’ (2006) 17 ICCLR 329.
2
This principle was effectively summed up by the UK Company Law Review Steering Group when it said, while
considering a possible statutory formulation of a duty to promote the success of the company: “… what is in
view is not the individual interests of members, but their interests as members of an association with the
purposes and the mutual arrangements embodies in the constitution…” Company Law Review Steering Group,
Modern Company Law for a Competitive Economy: Developing the Framework (Department of Trade &
Industry, 2000), para 3.51.
3
For a duty to consider the interests of creditors, see generally, Liquidator of West Mercia Safetywear Ltd v Dodd
(1988) 4 BCC 30; Facia Footwear Ltd (In Administration) v Hinchliffe [1998] 1 BCLC 218; Re Pantone 485
Ltd [2002] 1 BCLC 266; Gwyer v London Wharf (Limehouse) Ltd [2003] 2 BCLC 153; [2002] EWHC 2748; Re
MDA Investment Management Ltd [2004] BPIR 75; [2003] EWHC 227 (Ch).
4
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187; Yukong Line Ltd v Rendsburg
Investments Corporation (No. 2) [1998] 1 WLR 294.

1
Recognizing that common law does not cast any general duty upon directors towards non-
shareholder constituencies, legislatures have sought to formulate a tolerable solution to what they
perceive as a gap in existing common law. The British Parliament engaged in one such
legislative intervention by adopting the “enlightened shareholder value” (“ESV”) model through
section 172 of the UK Companies Act 2006 (the “2006 Act”). Briefly, this requires directors to
have regard to non-shareholder interests as a means of enhancing shareholder value over the
long term. 5 Although this is a hybrid approach that adopts features of both the shareholder and
stakeholder theories, in the event of a conflict among various interests, it has a stated preference
for shareholder interest thereby creating a distinct hierarchy. Another approach was taken by the
Indian Parliament through section 166(2) of the Companies Act, 2013 (the “2013 Act”), which
appears at first glance to cast a duty on directors to treat non-shareholder interests as an end in
itself. In other words, section 166(2) follows the pluralist approach by placing all interests
(whether of shareholders or other stakeholders) on par without creating any hierarchy and as
being valid in their own right (without necessarily constituting a means to enhancing shareholder
value). 6 This approach stays true to the stakeholder model in corporate law.

In this article, we examine the nature and content of the duty cast under section 166(2) of the
2013 Act in India. We consider the implications of the duty on the scheme of the law generally,
and how it is likely to impact other settled principles. We also examine some of the difficult
questions emanating from section 166(2). How do directors resolve conflicts among various
stakeholder interests? How do non-shareholder constituencies obtain the benefit of these
directors’ duties? How should Indian courts rationalize and apply the provisions of section
166(2)? In looking at these questions, we also draw on the experiences from similar debates in
other jurisdictions, principally the United Kingdom (UK). We believe that analysing section
166(2) in the context of the comparative developments in the UK will be helpful in several ways.
First, both India and the UK have engaged in codification exercises when it comes to directors’
duties in general, and those relating to non-shareholder constituencies in particular. Second, one
can make up for the lack of clarity in legislative debates in the enactment of section 166(2) in
India by examining the rather detailed legislative efforts and consultations that preceded section
172 in the UK. Such a comparative analysis will shed light on the purpose, scope and meaning of
section 166(2), which is an important exercise given that the provision is likely to receive
judicial attention in the near future.

5
Deryn Fisher, ‘The enlightened shareholder – leaving stakeholders in the dark: will section 172(1) of the
Companies Act 2006 make directors consider the impact of their decisions on third parties?’ (2009) 20 ICCLR
10; Andrew Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s
“Enlightened Shareholder Value Approach”’ (2007) 29 Sydney L Rev 577; Virginia Harper Ho, ‘“Enlightened
Shareholder Value”: Corporate Governance Beyond the Shareholder-Stakeholder Divide’ (2010) 36 J Corp L
59.
6
See Umakanth Varottil, ‘The Evolution of Corporate Law in Post-Colonial India: From Transplant to
Autochthony’ (2016) 30 Am U Int’l L Rev (forthcoming).

2
Our principal thesis in this article is that while section 166(2) of the 2013 Act in India at a
superficial level extensively encompasses the interests of non-shareholder constituencies in the
context of directors’ duties and textually adheres to the pluralist stakeholder approach, a detailed
analysis based on an interpretation of the section and the possible difficulties that may arise in its
implementation substantially restrict the rights of stakeholders in Indian companies. Moreover,
while the stated preference of the Indian Parliament veers towards the pluralist approach that
recognizes the interests of shareholders and non-shareholder constituencies with equal weight,
the functioning the Companies Act as well as principles of common law relating to directors’
duties makes the Indian situation not altogether different from the ESV model followed in the
UK. Proponents of the stakeholder theory in India must do better than to declare victory with the
enactment of section 166(2). Arguably, the magnanimity of its verbiage and rhetoric in favour of
stakeholders merely pays lip service to them and obscures any real teeth or legal ammunition
available to non-shareholder constituencies to assert those rights as a matter of law.

This introduction apart, we begin in the second section of this article with a broad outline of the
shareholder-versus-stakeholder debate in the corporate law literature and an examination of the
position of stakeholders under law (both in India and the UK) prior to the codification exercise.
The third section examines the language of section 166(2) as enacted, and also looks at the
intentions of the legislature in introducing the provision in its present form. We also take a brief
detour into the provisions of section 172 of the 2006Act in the UK to examine the similarities
and differences in the statutory scheme in the two jurisdictions. The fourth section attempts to
look at some of the problems that may arise in applying the language of section 166(2). In
particular, we look at the question of conflicts between the interests of various stakeholders inter
se, and conflicts between stakeholders on the one hand and shareholders on the other. We also
examine whether the recognition of the directors’ duties to consider non-stakeholder interests
would in any manner affect any broader principles of law. We conclude by offering some brief
remarks on how one could interpret the relevant provisions going ahead.

II. THE BACKGROUND: SHAREHOLDERS AND STAKEHOLDERS

An underlying theory behind the company law of most common law jurisdictions is that the
managerial powers of the board arise out of delegation from the shareholders. 7 This delegation is
now also seen as having constitutional – and not just agency – character; yet, the role of directors
was traditionally seen as promoting the interests of the shareholders. 8 The question of whether

7
Reinier Kraakman, et al, The Anatomy of Corporate Law (Oxford: Oxford University Press, 2nd ed, 2009), 12-
14.
8
See generally, for a broad outline, Paul Davies, ‘Enlightened Shareholder Value and the New Responsibilities
of Directors’, Inaugural W.E. Hearn Lecture, University of Melbourne Law School (2005). Davies also clarifies
that directors’ duties to act in “the interests of the company” identifies the company with one or more groups of
people who, in the case of a solvent company, ought to be its members (or shareholders). Paul Davies,

3
that is all there is to the role of directors has risen to prominence recently. Should directors
consider only shareholder interests, or should they also consider ‘stakeholder’ interests? The
question is not a new one, 9 yet modern developments and attempts at legislative reformulations
in recent years have thrust it into prime focus.

To be sure, the shareholder primacy approach does not mean that directors must refrain from
considering the interests of other stakeholders: directors are not prevented from taking into
account the interests of other stakeholders, as long as they do this as a means to the end of
maximizing shareholder wealth in the long term. Prior to the codification of directors’ duties,
company law in both India and the UK did recognize stakeholder interests to varying extents.

Beginning with India, at the time of independence the colonial law was unequivocal in its zeal to
protect shareholders so as to enable companies to attract capital. 10 Corporate law did not play
any role at all in taking cognizance of the interests of non-shareholder constituencies. This
position continued immediately following independence, but the change in philosophy began
taking shape in the 1960s with amendments to the Companies Act, 1956 (the predecessor of the
2013 legislation). 11 Consistent with the country’s journey through years of socialism, the role of
company law in India has extended beyond the mere protection of shareholders. 12 It
encompasses the protection of employees, creditors, consumers and society. For instance,
employees obtained certain special rights under company law, such as preferential payment for
dues in case of winding up of a company, 13 and also the right to be heard in case of significant
proceedings involving a company such as in a scheme of arrangement (merger, demerger or
other corporate restructuring) 14 or in a winding up 15 of the company.

‘Shareholder Value, Company Law and Securities Markets Law’ (2000), available at
http://ssrn.com/abstract=250324, 6-7.
9
The question was in a sense central to the Berle-Dodd debate that occurred decades ago. AA Berle, Jr,
‘Corporate Powers as Powers in Trust’ (1931) 44 Harv L Rev 1049; E Merrick Dodd, Jr, ‘For Whom are
Corporate Managers Trustees?’, (1932) 45 Harv L Rev 1145 (with Berle arguing that companies must have
responsibilities only to shareholders, and Dodd arguing that companies must be responsible for other
constituencies such as employees, customers and the general public).
10
Varottil, ‘The Evolution of Corporate Law in Post-Colonial India’.
11
Ibid.
12
See Tarun Khanna & Krishna Palepu, ‘Globalization and Convergence in Corporate Governance: Evidence
from Infosys and the Indian Software Industry’ (2004) 35 J Int’l Bus Studies 484 (laying out the debate in the
context of protection of employees using the stakeholder theory).
13
Companies Act, 1956, s. 529-A.
14
Companies Act 1956, s. 391. See In Re, River Steam Navigation Co. Ltd (1967) 2 Comp LJ 106 (Cal.) (holding
that in considering any scheme proposed, the Court will also consider its effects on workers or employees); In
Re Hathisingh Manufacturing Co. Ltd(1976) 46 Comp Cas 59 (Guj) and Bhartiya Kamgar Sena v Geoffrey
Manners & Co Ltd (1992) 73 Comp Cas 122 (Bom) (approving the proposition that while sanctioning a scheme
of arrangement the court should consider not merely the interests of the shareholders and creditors but also the
wider interests of the workmen and of the community).
15
Companies Act, 1956, s. 443.See National Textile Workers’ Union v Ramakrishnan (P.R.)A.I.R. 1983 SC 75
(holding that a court can hear the employee if it determines the employee should be heard to administer justice).

4
As far as creditors are concerned, while company law does provide them with the standard rights
and remedies, 16 other special laws confer further corporate law rights such as the ability of the
creditors to convert their loans into equity of the debtor company and, more specifically from a
corporate governance standpoint, to appoint nominee directors on boards of debtor companies. 17
These rights are seemingly provided to protect the interests of the creditors. Building upon the
element of “public interest”, affected parties may exercise remedies in case the affairs of a
company are carried out in a manner prejudicial to public interest, 18 or if a scheme of
arrangement 19 is not in consonance with public interest.20 For example, while according its
sanction to a merger, demerger or corporate restructuring that is carried out through a scheme of
arrangement, the court must take into consideration the effect of such a transaction on public
interest. 21 Hence, Indian company law (both under common law as well as statute) did recognise
stakeholder interests even before the codification of directors’ duties was effected in 2013.

Moving to the UK, the seemingly shareholder-centric approach adopted in that jurisdiction did
leave sufficient room to cater to stakeholder interests. At one level, English courts have been
understood to interpret the “interests of the company” as synonymous with the interests of the
shareholders as a collective body (rather than individual shareholders). 22 Less clear is the answer
to the question whether the interests of the shareholders are to be considered in the short term or
on a long-term basis. 23 While the realization of short-term value to shareholders will narrow the
focus on their interests, a long-term sustainable view of shareholder interests will naturally
require the directors to consider the interests of other stakeholders such as employees, creditors

16
Companies Act, 1956, s. 439(1)(b) (stating that these include the right to initiate a winding up of the company,
which is a customary company law right conferred on creditors in most jurisdictions).
17
See e.g., State Bank of India Act, 1955, s. 35A.
18
Companies Act, 1956, s. 397(2).
19
See Jennifer Payne, ‘Schemes of Arrangement, Takeovers and Minority Shareholder Protection’ (2011) 11 J
Corp L Stud 67 (mergers, demergers and other forms of corporate restructuring are usually effected through a
scheme of arrangement that not only requires the approval of different classes of shareholders and creditors, but
also the sanction of the relevant court of law).
20
Companies Act, 1956, s. 394(1), proviso.
21
Hindustan Lever Employees’ Union v Hindustan Lever Ltd AIR 1995 SC 470.
22
See Brady v Brady (1987) 3 BCC 535; Elaine Lynch, ‘Section 172: a ground-breaking reform of director’s
duties, or the emperor’s new clothes?’ (2012) 33 Comp Law 196, at 196; Daniel Attenborough, ‘Recent
developments in Australian corporate law and their implications for directors’ duties: lessons to be learned from
the UK perspective’ (2007) 18 ICCLR 312, at 313.
23
Provident International Corporation v International Leasing Corp Ltd [1969] 1 NSWR 424 at 440; Paramount
Communications Inc v Time Inc 571 A. 2d 1140 (Del, 1989); Harlowe’s Nominees Pty Ltd v Woodside (Lakes
Entrance) Oil NL (1968) 121 CLR 483; Teck Corporation Ltd v Millar (1973) 33 DLR (3d) 288 (BCSC);
People’s Department Stores Inc v Wise [2004] SCC 68; Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR
627 (HL). Keay summarizes the principle emerging from these cases by saying, “while directors are to manage
their companies with shareholders in mind, they do have a reasonably wide discretion in the factors which they
may consider in deciding what is going to benefit the company.” Andrew Keay, ‘Tackling the Issue of the
Corporate Objective: An Analysis of the United Kingdom’s “Enlightened Shareholder Value Approach”’
(2007) 29 Sydney L Rev 577 at 581.

5
and consumers. 24 There is, however, some level of clarity that the law has rarely insisted upon
realization of short-term profits to shareholders. 25 The long-term view of shareholders is
consistent with the ESV model.

Moreover, common law as well as statute have recognised the interests of specific stakeholders
such as creditors and employees. As already discussed, 26 directors must take cognizance of the
interests of creditors (whose interests represent that of the company) in case of insolvency. There
are also instances of stakeholder interests being considered in specific factual scenarios. For
instance, in Parke v. Daily News, 27 the court considered whether it was legitimate for a company
to pay gratuitous compensation to an employee who has been dismissed. An action by a
shareholder challenging such gratuitous payment to the employees was allowed. 28 The Supreme
Court of India considering a somewhat similar issue arrived at a different conclusion: it
emphatically considered that it was within the proper purpose of the company to consider
employee interests, and upheld the payments of ex gratia sums to employees. 29 Statutorily,
section 309 of the Companies Act 1985 in the UK provided that directors had a duty to consider
the interests of employees, although the employees did not have a remedy against the directors
for breach of such a duty. 30 Hence, while the interests of stakeholders did receive recognition
under English law, there was nothing to suggest that these interests were to be considered on par

24
Generally, it is understood that directors are not required to prefer short-term shareholder interests.
Illustratively, even if a company makes adequate profits, it may well choose not to distribute them entirely as
dividend. Directors may well choose to retain the funds within the company or use them for purposes other than
distribution, with the goal of long-term wealth creation, which might benefit other stakeholders as well. There is
also no obligation to maximize immediate profits at the cost of long-term interests. Andrew Keay, ‘Tackling the
Issue of the Corporate Objective: An Analysis of the United Kingdom’s “Enlightened Shareholder Value
Approach”’ (2007) 29 Sydney L Rev 577. Also see, for a useful summary, Corporations and Markets Advisory
Committee, The Social Responsibility of Corporations (2006) at 84-89.
25
Exceptional situations include the extensively debated ruling of a US court in Dodge v Ford Motor Co 170 NW
668 (1919) (Michigan) or where a company is up for sale and the principal duty of the directors is to realize the
best possible price for shareholders (Heron International Ltd v. Lord Grade [1983] BCLC 244 (Court of
Appeal)).
26
See nn. 3-4 above.
27
[1962] Ch 927.
28
In a note commenting on this decision, Professor Pennington foreshadowed the modern debate: “The other
question of policy is whether it is satisfactory that directors should be required by law to manage the company’s
affairs solely with a view to the financial benefit of shareholders. Are there not other interests which deserve
recognition..? R.R. Pennington, ‘Terminal Compensation for Employees of Companies in Liquidation’ (1962)
25 Modern Law Review 715.
29
Shahzada Nand & Sons v CIT, AIR 1977 SC 1182. The Court held (at para 4):
… It is obvious that no business can prosper unless the employees engaged in it are satisfied and contented
and they feel a sense of involvement and identification and this can be best secured by giving them a stake
in the business and allowing them to share in the profits… What is the requirement of commercial
expediency must be judged not in the light of the 19th Century laissez faire doctrine which regarded man as
an economic being concerned only to protect and advance his serf-interest but in the context of current
socio-economic thinking which places the general interest of the community above the personal interest of
the individual and believes that a business or undertaking is the product of the combined efforts of the
employer and the employees…
30
Lynch, ‘Section 172’, pp. 198-199.

6
with that of shareholders. In that sense, the preexisting position appears similar to the ESV
model rather than a pluralist approach. 31

Apart from legal developments, it is also worth noting that the ideas of corporate social
responsibility (CSR) and socially responsible investing (SRI) gained traction towards the end of
the twentieth century. 32 The interests and preferences of institutional investors altered the
manner in which boards and managements began viewing stakeholders. 33 To that extent, the
ethical preferences of shareholders began driving greater recognition of stakeholder interests.

All of these indicate that stakeholder interests did receive a fair bit of attention in the UK even
prior to the reforms that led to the enactment of the 2006 Act. Although stakeholders did not
necessarily possess legal enforceable rights against corporate boards, directors did owe duties (to
the company) to consider stakeholder interests. Hence, some commentators have argued that the
ESV model did exist even prior to the 2006 Act, and that section 172 merely codifies the
preexisting position, and does not create any new rights to stakeholders. 34

After highlighting that stakeholder interests were recognized both in India and in the UK prior to
recent legal reforms, we now analyze the specific statutory duties imposed on directors with
respect to the interests of stakeholders in both these jurisdictions.

III. THE LANGUAGE AND LEGISLATIVE INTENT: BREAKING DOWN THE STATUTORY
DUTIES

Starting with the statutory reforms in India, section 166(2) of the 2013 Act reads:

A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.

The journey of this provision from its original draft form to the finally enacted version is itself
illuminating. The genesis of this provision can be found in Clause 147(2) of the Companies Bill,
2008, which remained unchanged in the Companies Bill, 2009. The clause in these Bills was

31
Ibid.
32
Kiarie, ‘At crossroads’, p. 336.
33
Fisher, ‘The enlightened shareholder’, p. 14.
34
Attenborough, ‘Recent developments in Australian corporate law’, p. 318; Lynch, ‘Section 172’, pp. 202-203;
Rachel C Tate, ‘Section 172 CA 2006: the ticket to stakeholder value or simply tokenism?’, available at
https://www.abdn.ac.uk/law/documents/Section172CA2006-thetickettostakeholdervalueorsimplytokenism.pdf.

7
based on the recommendations of the Irani Committee Report. 35 The provision as originally
inserted did not make reference to non-shareholder constituencies. The Irani Committee Report
did not categorically indicate that the intent at that time was anything other than a codification of
existing common law; at the same time, the Committee did make a reference to the duties of
directors to the interest of employees and potentially other stakeholders. After finding that
international practice (especially the UK) considers a wide spectrum of directors’ duties, the
Irani Committee Report in the relevant part states: 36

18.3 Certain basic duties should be spelt out in the Act itself such as
(a) duty of care and diligence;
(b) exercise of powers in good faith, i.e., discharge of duties in the best interest of the
company, no improper use of position and information to gain an advantage for
themselves or someone else;
(c) duty to have regard to the interest of the employees, etc.

Interestingly, the Committee does not appear to have spelt out in detail as to which stakeholders
other than the employees would benefit from the duty. Further, the Committee did mention that
there was a duty of exercise of powers in good faith in the best interest of the company. At the
same time, the duty recommended with respect to employees and other possible stakeholders was
not one of acting in good faith to promote their interests: it was simply a duty to ‘have regard to
the interest of the employees, etc.’ In the event, Clause 147 of the 2008 and 2009 Bills did not
spell out specifically any duty in relation to non-shareholder interests. Clause 147(2) simply
stated:

A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interest of the
company.

The introduction of the phrase “a director … shall act … in the best interest of its employees, the
community and the environment…” can be traced to the corresponding provision in the
Companies Bill, 2011 (which eventually took shape in the form of the2013 Act). The 2011 Bill is
the result of deliberations by a Parliamentary Standing Committee on Finance, and the rationale
for the introduction of this phrase can be gleaned from the Standing Committee Report. 37 The
Standing Committee noted that the Institute of Company Secretaries of India (“ICSI”), the

35
Report of the Expert Committee on Company Law, May 2005 (“Irani Committee Report). Available at:
http://reports.mca.gov.in/Reports/23-
Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf.
36
Irani Committee Report, Part 3, Chapter IV – Management and Board Governance, Duties and Responsibilities
of Directors, paras 18.1 – 18.3, pp. 43 – 44
37
Twenty-first Report, Standing Committee on Finance (2009-2010) (Fifteenth Lok Sabha), The Companies Bill,
2009 (Ministry of Corporate Affairs), Lok Sabha Secretariat, New Delhi, August 31, 2010. Available
at:http://www.prsindia.org/uploads/media/Companies%20Bill%202009.pdf.

8
professional body regulating company secretaries, had recommended that a specific reference be
inserted for a duty of directors towards shareholders, employees, environment and community. 38
This suggestion was forwarded to the Ministry of Corporate Affairs. The Ministry accepted the
suggestion; in addition to accepting the suggestion, the Ministry also noted that an appropriate
provision was required to be made by way of an enabling clause allowing directors to consider
non-shareholder interests particularly in view of the proposed voluntary CSR norms also sought
to be introduced.39 The Ministry therefore recommended the insertion of the clause as it
presently stands. It needs to be clarified that the Ministry does not appear to have considered the
clause merely as an enabling provision for CSR norms; in other words, the Ministry appears to
have considered the provision as something more than simply enabling directors to consider non-
shareholder interests. This is evident from at least two factors: first, the specific wordings were
inserted on the suggestion of the Ministry, which could easily have chosen different wordings if
the intent was a mere enabling provision (for example, “having regard to” stakeholder interests);
secondly, the Ministry did make reference to ‘enabling’ CSR, but also specifically accepted the
recommendations of the ICSI. The ICSI had clearly envisaged the clause as being in the nature
of a positive duty on the directors, requiring directors to consider stakeholder interests and not
merely as being in the nature of an enabling provision allowing directors to do so. The Ministry’s
recommendation was seconded by the Standing Committee, which noted: 40

The Committee welcome the proposed changes with regard to the duties of a director to
promote the objects of the company in the best interests of its employees, the community
and the environment as well, particularly in the backdrop of Corporate Social
Responsibility, which is proposed to be included in this statute…

This discussion indicates that the language of section 166(2) was a well-considered one and
inserted to cast a positive duty on directors; and was not merely an enabling provision as such.
The legislative policy seems to be specifically to adopt the pluralist model; and the language
chosen thus seems to deliberately shy away from the ESV model. 41

38
Ibid, para. 11.77.
39
Ibid, para. 11.78.
40
Ibid, para 11.80.
41
It is also interesting to note that around the time the Standing Committee was deliberating upon these issues,
business associations in India were also moving towards a pluralist approach. Illustratively, one may consider
the recommendations of the Murthy Committee constituted by NASSCOM, a premier trade body of the Indian
IT/BPO industry. The Committee was constituted to make recommendations in the aftermath of the Satyam
scandal which had emerged by then; where a leading Indian IT company had admitted to large-scale
irregularities. The Murthy Committee also leans towards a pluralist approach towards directors’ duties; and in
exploring the interests of non-shareholder parties, it considers not just stakeholders such as employees and
customers, but also vendors and even competitors. NASCOMM, Corporate Governance and Ethics Report
(2010), available at:
http://survey.nasscom.in/sites/default/files/upload/66719/Corporate_Governance_Report.pdf.

9
The Committee’s concluding remark on this issue reproduced earlier is of some interest: the
Committee seems to read the clause as casting a duty to act in good faith for the promotion of the
objects of the company in the interest of the shareholders and other stakeholders. Thus, the duty
is seen as one of good faith to promote the objects of the company. The objects of the company
are to be promoted in the best interest of the shareholders and other stakeholders. Thus, there is
no independent duty to the stakeholders. The plain language of section 166(2) however could be
construed as meaning that there is a duty to act in good faith, (a) in order to promote the objects
of the company for the benefit of its members as a whole, and (b) in the best interests of the
company, its employees, the shareholders, the community and for the protection of environment.
In other words, the text of section 166(2) seems to leave open the interpretation that there are two
duties of good faith; first, to act in good faith in order to promote the objects for the benefit of
the members as a whole, and secondly, in addition, to act in good faith in the best interests of
stakeholders. The Standing Committee however seems to have considered the clause as resulting
in a duty to act in good faith to promote the objects of the company in the interests of the
company and all stakeholders. On the Committee’s view, there is no independent duty to act in
the best interests of the stakeholders: the duty is simply one of promoting the objects. The
objects are to be promoted in the best interests of the company as well as the stakeholders. It is
not clear that the Committee’s view is borne out by the language of the clause; in particular, the
clause seems to be distinctly in two parts. This is clear from the separate references to ‘…for the
benefit of its members as a whole’ and ‘and in the best interest of the company…’ The
Commmittee’s view will make one of those parts redundant. The point is not merely linguistic:
whether there is one single duty or two separate duties will be of relevance in attempting to
analyse how to resolve conflicts between the interests of shareholders and stakeholders. 42 It will
also be of relevance in determining the nature and content of the duties and the types of conduct
which will satisfy the thresholds set by the clause. We return to these aspects later.

The relevance of these discussions becomes clearer from an examination of the corresponding
English provision. The debates in the UK point ultimately to a choice by Parliament in the 2006
Act to adopt the ESV model rather than the pluralist approach. We now briefly examine the
relevant debates at the time of enactment of the 2006 Act in the UK, before comparing the
language of section 166(2) of the 2013 Act with the language of section 172 of the 2006 Act. We
also briefly examine the significance of another provision in the 2006 Act specifying to whom
the relevant duties in section 172 are owed. In particular, section 170(1) of the 2006 Act clearly
states that the duties are owed to the company.

A minor point is in order here: as we have seen, 43 it is not as if the common law barred directors
from taking into account non-shareholder interests. In the words of Bowen LJ, “law does not say

42
The point that there may be two duties does not detract from the proposition, discussed later, that both the duties
are of good faith.
43
See section II above.

10
that there are to be no cakes and ale, but that there are to be no cakes and ale except such as are
required for the benefit of the company.” 44 Again, the common law did not equate shareholder
interests with short-termism: directors could well have the discretion even in common law to
consider stakeholder interests as a means of promoting long-term shareholder value. 45 However,
the 2006 Act converts that discretion to consider stakeholder interests into a duty to do so.

The common law prior to legislative reformulations cast a duty of loyalty on directors, which
included a duty to act in good faith in the best interests of the company. The test was a subjective
one. The classic formulation is in Re Smith & Fawcett: 46 “[Directors] must exercise their
discretion bona fide in what they consider – not what a court may consider – is in the interest of
the company…” 47 In 1998, when thoughts were given to enacting a new companies statute in
England, the UK Department of Trade and Industry constituted a committee, the Company Law
Review Steering Group (“CLRSG”) for formulating proposals for reform. The CLRSG saw the
question of whose interests the company law ought to protect as being central to any debate on
reform of English law. 48 The CLRSG labeled the two competing principles as ‘shareholder value
approach’ and ‘pluralist approach’. Ultimately, the CLRSG adopted the ESV model as a hybrid.
It expressly rejected the pluralist approach on the grounds that such an approach would require
complete reformulation of the entire law on directors’ duties, and was not desirable or
practicable. The UK government adopted this approach, which made its way to section 172.
Ultimately, section 172 was enacted to read as follows:

(1)A director of a company must act in a way that he considers, in good faith, would be
most likely to promote the success of the company for the benefit of its members as a
whole, and in doing so have regard (amongst other matters) to —
(a)the likely consequences of any decision in the long term,
(b)the interests of the company’s employees,
(c)the need to foster the company’s business relationships with suppliers, customers and
others,
(d) the impact of the company’s operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of
business conduct, and
(f)the need to act fairly between the members of the company.

44
Hutton v. West Cork Railway(1883) 23 Ch D 645, at 673.
45
This is the position adopted by courts not just in England but also in jurisdictions such as Australia and
Delaware: Provident International Corporation v International Leasing Corp Ltd [1969] 1 NSWR 424 at 440
(Helsham J);Paramount Communications Inc v Time Inc 571 A. 2d 1140 (Del, 1989).
46
[1942] Ch 304 (CA).
47
Ibid, at 306.
48
The Company Law Review Steering Group, Modern Company Law for a Competitive Economy: The Strategic
Framework <http://www.berr.gov.uk/files/file23279.pdf>

11
The ESV model in the UK thus asserts that the directors are to act in shareholder interests, but in
doing so to have regard to certain enumerated stakeholder interests. As one author notes:

Under this conception, attention to traditional “stakeholder” interests such as effect of

corporate operations on the environment, employees or local communities, is seen as a
means of generating long-term shareholder wealth and improving portfolio- and firm-
level risk assessment. Enlightened shareholder value thus emphasizes the benefits to
shareholders that can result from focusing corporate management on areas of shared
shareholder and stakeholder concern while recognizing the very real challenges posed by
the diversity of shareholder and stakeholder interests. 49

At the same time, it is clear that stakeholders do not have an independent cause of action against
either the company or the directors that enable them to assert their rights. 50 Moreover, the ESV
approach is designed to be clearly hierarchical in that in case of conflict between various
interests, the directors must prioritize shareholders’ interests, which is the paramount goal. 51
Such a tiered approach is also borne out by the language of section 172 of the 2006 Act, which
imposes an obligation on the directors “to promote the success of the company for the benefit of
its members as a whole”, but in doing so only to “have regard to” the interests of the other
stakeholders. While the success of the company for the benefits of members is the ultimate goal,
having regard to stakeholder interests is only a means to achieving that end.

Finally, in comparing the position in India and the UK, we have already seen that Indian law
does not adopt the ‘have regard to’ approach or a hierarchical approach (that puts shareholder
interest on top), but rather casts a positive duty on directors to cater to the interests of
shareholders and other stakeholders in equal measure. Nor is there is a specific provision in India
clarifying that the duty is owed to the company, leaving open the question of whether there is an
enforceable right given to any of the stakeholders to bring an action for breach of duty. However,
in the UK, shareholder interests continue to be paramount, and it is clear that directors owe their
duties only to the company (and not directly to shareholders or other stakeholders). At first
blush, the textual analyses of the statutory provisions in India and the UK suggest a great deal of
disparity in the treatment of stakeholders as beneficiaries of directors’ duties. While India
appears to have adopted the pluralist approach (that was expressly rejected in the UK), the UK
has expressly resorted to the ESV model (that India seems to have distanced itself from). On that
count, India seems to have granted better protection to stakeholders in comparison with the UK.

However, if we were to dig deeper into the legalities of the enforcement of directors’ duties and
other operational matters regarding the assertion of rights by stakeholders, an altogether different

49
Harper Ho, “Enlightened Shareholder Value”’, p. 62 [emphasis in original].
50
Tate, ‘Section 172 CA 2006’.
51
See Christopher M Bruner, Corporate Governance in the Common-Law World: The Political Foundations of
Shareholder Power (Cambridge University Press 2013) 34, 44.

12
picture emerges. Despite the textual disparity between Indian and English law in the directors’
duties to uphold stakeholder interests, we find that a deeper analysis suggests that the two
regimes are not entirely far apart. Several issues relating to the inability of stakeholders to assert
their rights and take advantage of a seemingly beneficial regime brings the law in India
somewhat closer to English law than it appears at the outset. We examine these matters in the
following section.

IV. THE PROBLEMS: POTENTIAL ISSUES ARISING IN IMPLEMENTATION

The scope and effectiveness of section 166 of the 2013 Act in India ought to be really tested in
its functioning and implementation. In doing so, it is clear that a number of problems emerge.
Stakeholder interests are not as wide-ranging as the text of the provisions would suggest. This is
because stakeholders are devoid of remedies in case directors breach their duty to act in their
interests. The common remedies of derivative action and class action are available only to
shareholders and not to other stakeholders. Moreover, the nature of the directors’ duties
themselves is fuzzy and incapable of clear enforcement. The pluralistic approach towards the
stakeholder theory reveals several shortcomings that make section 166 operate more by way of
rhetoric than legally enforceable rights to stakeholders. To that extent, section 166 of the 2013
Act in India does no better in protecting stakeholder interests than section 172 of the 2006 Act in
the UK, thereby reducing the dissimilarities in the operation of the two provisions.

1. The Lack of Enforcement Powers

The first question that confronts us on a plain reading of section 166 is: to whom are these duties
owed? How are they enforceable? A rather straightforward argument would be one based on a
literal meaning of the words used. The argument would be that section 166 states in terms that
the directors must act in good faith to promote the objects of the company, and must also act in
good faith in the best interests of the stakeholders. Thus, section 166 casts a specific obligation to
act in good faith in the best interests of the stakeholders. This, coupled with the omission of a
provision similar to the English section 170(1) (that clarifies that the duties are owed to the
company), suggests that duties are owed to each individual stakeholders too. It could then be
further argued that as the duty is owed to the stakeholders, there would be nothing to bar a civil
claim raised by the stakeholders, for instance.

We respectfully submit that such an argument would be entirely misconceived. We support our
position by beginning with a brief discussion on duties and remedies under general law, and then
proceed to consider the remedies of stakeholders under company law.

13
The answer to the question of whether a statutory provision gives rise to a civil action depends
“on a consideration of the whole Act and the circumstances, including the pre-existing law, in
which it was enacted…” 52 If one were to examine the section 166 from this angle, it is evident
that the provisions cannot be realistically interpreted to give a right of action to all stakeholders.

First, the text is not all that clear. As we noted in the previous section, the Standing Committee
in its concluding remarks seems to have read the clause in a different manner: the committee
mentions that the duty is one of promoting the objects of the company, and stakeholder interests
are to be necessarily taken into account in promoting the objects. The duty is however still only
of promoting the objects.

Secondly, the categories of stakeholders mentioned in the clause are fairly vague; and at least in
respect of some categories, it is clear that there is no ‘injured party’ except the larger public
interest. For instance, the only easily ascertainable category of stakeholders is ‘employees’. 53 It
is evident that Parliament could not have intended that a right to sue accrues independently to
stakeholders as vague as ‘the community’ and ‘the environment’. Generally speaking, the editors
of Winfield note, “… where there is no [limited, identifiable] class, it is inherently unlikely that
Parliament would have intended a duty, sounding in damages, to the public as a whole in the
absence of plain words…” 54

Thirdly, any such wide understanding of to whom the duty is owed would throw much of the
modern law of negligence into disarray. The law of negligence identifies three approaches to the
question of determination of ‘duty of care’. The first is the “tripartite test”: (i) is the harm
foreseeable? (ii) is there sufficient proximity between the parties? and (iii) would the imposition
of a duty of care be fair, just and reasonable? 55 The second approach involves asking whether
there is an “assumption of responsibility”. 56 Third, there is an incremental approach of
expanding the categories of duty of care by drawing analogies from existing, settled categories. 57
It is evident that none of these approaches readily accommodates a broad idea of a duty of care to
all stakeholders. It would be a rather surprising result if section 166 were then to be interpreted

52
Cutler v. Wandsworth Stadium [1949] AC 3398 at 407.
53
Companies Act, 2013. ‘Creditors’ as a category of stakeholders are conspicuous by their absence in the
statutory provision, and hence are not stated beneficiaries thereof. In the UK too, while section 172(1) of the
2006 does not expressly include creditors as a beneficiary of the provision, section 172(3) preserves the
interests of creditors under general law (which presumably encompasses insolvency law). French, et al, Mayson,
French & Ryan on Company Law (Oxford University Press, 2014), p. 483.
54
WVH Rogers, Winfield & Jolowicz on Tort(18thed, Sweet & Maxwell, 2010), p. 387. They give the example of
Mid Kent Holdings v General Utilities [1997] 1 WLR 14, where a literal interpretation of section 93A the (UK)
Fair Trading Act 1973 would have led to what is termed as an ‘extraordinary’ result “…of allowing any of the
whole population to bring proceedings to enforce an undertaking to the Minister…” It is submitted that an
interpretation of section 166 giving a cause of action to members of the ‘community’ would be no less
extraordinary.
55
Caparo Industries v Dickman [1990] 2 AC 605
56
Customs & Excise Commissioners v Barclays [2006] UKHL 28.
57
Winfield & Jolowicz on Tort (2010), p. 161

14
as brushing away at a stroke the entire basis of the modern law on when there is a duty of care in
tort.

Finally, there is nothing particularly odd or incoherent with saying that the law casts a duty that
is owed by the directors to one person (the company), which involves taking into consideration
the interests of third persons (stakeholders). Company law itself provides for a similar case:
duties owed by the directors to consider the interests of existing creditors. 58 Insofar as existing
creditors are concerned, duties are owed to them through the company. The creditors’ interests
are protected by proceedings in the name of the company to which ratification by the
shareholders is no defence. 59 Thus, no individual creditor can bring any claim against the
company: proceedings are brought in the name of the company itself. This is analogous to the
principle whereby, ordinarily, shareholders cannot bring a claim in respect of the company’s
losses against a third party: the claim must be brought by the company. To that extent, section
166 is consistent with English law whereby in case of a breach of directors’ duties, it is only the
company that is entitled to bring an action, and neither shareholders nor other stakeholders can
directly seek remedies against the directors.60

Thus, conceptually, there is nothing extraordinary with saying that the duties under section 166
are owed to the company. This is a well-established principle of company law, 61 and section 166
does nothing to alter that position.

This still leaves open the point of enforcement. Insofar as creditors’ interests are concerned, that
aspect becomes relevant mainly during insolvency, and the liquidator is empowered to bring the
necessary proceedings in the name of the company. 62 Shareholders enjoy the benefit of bringing

58
Lord Templeman’s statement in Winkworth v Edward Baron Development Co. [1986] 1 WLR 1512 that a
company owes a duty to future and present creditors to preserve its assets, is presumably limited to the context
of a company which is unlikely to remain solvent. See Goode, Principles of Corporate Insolvency (3rd ed,
Sweet & Maxwell, 2005), p. 522.
59
Miller v. Bain [2002] 1 BCLC 266; DD Prentice, ‘Creditors Interests and Directors Duties’ (1990) 10 OJLS
275.
60
An extensive body of literature affirms this point in the context of section 172 of the 2006 Act in the UK. This
is more so because section 170(3) expressly states that directors’ duties are owed to the company. Kiarie, ‘At
crossroads’, p. 331; Tate, ‘Section 172 CA 2006’; Andrew Keay, ‘The Duty to Promote the Success of the
Company: Is it Fit for Purpose?’ (2010), available at http://ssrn.com/abstract=1662411, p. 13;Martin Gelter &
Genevieve Helleringer, ‘Lift Not the Painted Veil! To Whom are Directors’ Duties Really Owed?’ [2015] Ill L
Rev 1069, at p. 1095; Lynch, ‘Section 172’, p. 200; Ahmed Al-Hawamdeh, et al, ‘The interpretation of the
director’s duty under section 172 Companies Act 2006: insights from complexity theory’ [2013] JBL 417, at p.
420.
61
In Percival v Wright [1902] 2 Ch421 it was established that directors owed their duties to the company and not
directly to shareholders.
62
It must be pointed out that loss suffered by individual creditors is not recoverable directly. Analogous to
principles barring direct claims by shareholders in respect of breaches to the company, the loss to creditors is ‘a
reflection of the loss to the company’, and the liquidator can recover this in the name of the company. Any
recovery will go to increase the general pool of assets available in liquidation. See: Johnson v. Gore Wood &
Co., [2002] 2 AC 1; Goode, Principles of Corporate Insolvency, at 522-523.

15
a derivative action in exceptional cases. But how can the law ensure that stakeholder interests are
protected? If the company is the one that can bring an action, but refuses to do so (which is
especially likely in a case where the interests of the majority shareholder and the stakeholders are
in conflict), what is the value to be attached to the pluralist approach? 63 Here, we examine two
possible actions under Indian law that may be brought by persons other than the company
(operating through the board of directors). We begin with class actions (that have been statutorily
recognized under the 2013 Act) and then consider derivative actions (that, although not
statutorily recognized, are possible under common law).

Could there be a case for instituting a class action, for example? The class action provisions are
contained in section 245 of the 2013 Act. That provision entitles members or depositors to file a
class action if they are of the view that the management or conduct of the affairs of the company
are being conducted in a manner prejudicial to the interests of the company or its members or
depositors. The interests of stakeholders are not mentioned here. 64 However, can members argue
that a class action is nonetheless possible, because directors have breached a duty that is owed to
the company, and this breach is prejudicial to the interests of the company? It seems that this is
not what is intended in the scheme of class actions, which seem to be premised in damage to a
class of members. The class action procedure does not seem to be intended to agitate the interests
of members of a class other than the suing class. The specific reference to ‘interests of the
company or its members and depositors’ appears to indicate that interests of other stakeholders
were not in the legislature’s contemplation in crafting the class action remedy. Sub-section (10)
provides that subject to compliance with the other sub-sections, a class action may be filed by a
person or association representing “the persons affected by the act or omission, specified in sub-
section (1)”. As noted above, the act or omission specified in sub-section (1) does not
contemplate the lack of consideration of interests of persons other than member and depositors.

Hence, not only is the availability of the class action remedy limited to members (and
depositors), but it appears that they cannot assuage the rights of other stakeholders in bringing
those actions. 65 Hence, the class action remedy is unavailable to stakeholders in ensuring the
enforcement of directors’ duties of which they are the ultimate beneficiaries.

Another possible suggestion, which could perhaps be made if one were anxious to provide some
remedy to stakeholders, would be for the initiation of a derivative action against breaching
directors to challenge an action that is against stakeholder interests. Since the directors owe a
duty to the company, such a derivative action can be brought on behalf of the company with the
63
Employees may have a right to sue under applicable labour laws; other stakeholders may have some specific
remedies: that however, does not answer the question in principle regarding the enforcement of directors’ duties
in company law, of which stakeholders are the ultimate beneficiaries.
64
However, it may be worth noting that the remedy of class action is available to depositors, who are certain
specific types of creditors of the company. It is not available to other types of creditors or to other stakeholders.
65
From a comparative perspective, this issue is immaterial in the UK context as no such statutory class action
mechanism is available under the 2006 Act.

16
benefit of the action flowing to the company (and not to the initiating party). A threshold
question is: who can bring a derivative action? Can stakeholders bring a derivative action against
errant directors? The answer to these questions is rather straightforward in that the law
recognizes that only shareholders can bring derivative actions on behalf of the company against
directors who have breached their duties. This is so under Indian law where derivative actions
can be brought under common law due to the lack of their express recognition under the 2013
Act. 66This position is concomitant with that in the UK where derivative action is codified under
the 2006 Act and available only to shareholders. 67

This then raises the question of whether a person wearing the hat of a shareholder can agitate
questions that pertain to the interests of non-shareholder constituencies: does a shareholder have
the standing to make claims when her direct interests are not affected? 68 A possible answer is to
say that once the duty is owed to the company and the company does not take steps to enforce
this duty, as a derivative action, the shareholder certainly can do so: she need not prove that any
duty was directly owed to her at all. Ultimately, the duty is owed to the company and breach
necessarily results in legal injury to the company; apart from that, the remedy from the derivative
action flows to the company. The ordinary derivative action can typically be categorized under
the ‘fraud on the minority’ exception to Foss v Harbottle. 69 A derivative action by the
shareholder to enforce a duty to consider stakeholder interests is hard to justify under any of the
existing exceptions to the rule; but in principle, the development of an analogous exception
cannot be ruled out.70 It is however clear that ultimately the fruits of a derivative action enure to
the benefit of the company. The action is ‘derivative’ in order to protect the real interests of the
company, which cannot protect itself if (say) the wrongdoers are in control. This entire logic
breaks down when considering stakeholder interests. Unless the law is expanded – and this
would necessarily involve the legislative creation of an entirely new remedy – to encapsulate

66
For a detailed analysis of the law on derivative actions in India, see Vikramaditya Khanna & Umakanth
Varottil, ‘The rarity of derivative actions in India: reasons and consequences’ in Dan W Puchniak, et al, The
Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, 2012).
67
See Keay, Stakeholder Theory in Corporate Law’, p. 294 (noting, however, that certain other jurisdictions such
as Canada and Singapore do recognize the rights of persons other than shareholders to initiate a derivate action,
subject to the discretion of the court).
68
Some commentators have suggested possible grounds on which shareholders may initiate derivative actions for
breaches of directors’ duties to take into account stakeholder interests. For example, (i) shareholders may sue on
the ground that their long-term interests are affected, (ii) shareholders may have dual capacities, for instance as
employees, or where shareholders are living in the community where the company carries out operations, and
(iii) affected stakeholders may acquire shares so as to become shareholders and obtain the locus standi to
initiate derivative actions. See Keay, ‘The Duty to Promote the Success of the Company’, p. 27; Tate, ‘Section
172 CA 2006’.
69
(1843) 2 Har 461.Under this exception, shareholders initiating a derivative action must show that majority
shareholders or controllers obtained a benefit from wrongful conduct at the expense of the company, which
suffers some loss or detriment. This continues to be the standard under common law in India. See Khanna &
Varottil, ‘The rarity of derivative actions in India’, p. 385.
70
The multiple derivative action is one such analogous development. Arad Reisberg, ‘Multiple Derivative
Actions’, (2009) 125 Law Quarterly Review 209. However, a derivative action by the shareholder to safeguard
the interests of stakeholders is a far wider proposition.

17
stakeholder remedies through shareholder derivative actions, the current law is quite
unsatisfactory in enabling shareholders to seek remedies for breach of directors’ duties to act in
the interests of stakeholders. Here again, analogous positions emanate from both India as well as
the UK.

In these circumstances, a more efficacious remedy may well be necessary. This could potentially
be found in the provisions of section 241 of the 2013 Act. Can the failure to take into account the
interests of stakeholders result in a claim under the oppression and mismanagement provisions?
The very fact that directors are in breach could also be relevant to regulatory sanctions. For
instance, under section 241(2), the Central Government is entitled to apply to the National
Company Law Tribunal (NCLT) for appropriate orders under the oppression and
mismanagement chapter, if the Central Government is of the opinion that the affairs of the
company are being conducted in a manner prejudicial to the public interest. Failing to consider
stakeholder interests is conceivably something that would fall within the scope of this clause. At
the same time, oppression and mismanagement provisions are generally meant to be remedies for
minority shareholders, and it remains to be seen whether they are an appropriate avenue for
assuaging stakeholder interests in case of breach of directors’ duties. 71

In all, regardless of the specific approaches followed towards stakeholder empowerment either in
India or the UK, the statutory provisions that impose directors’ duties to consider the interests of
non-shareholder constituencies are not capable of being enforced by their ultimate beneficiaries.
To that extent, one may question whether the beneficial provisions contained in section 166(2) of
the 2013 Act in India and section 172 of the 2006 Act in India carry any legal wherewithal, or if
they are simply aspirational in drawing attention to the interests of stakeholders that boards may
not afford to ignore.

2. Scope of the Directors’ Duties

We now turn to the content of the duty itself. The words used by Parliament suggest that the duty
on directors is to ‘…act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment…’

The first question that arises is whether the ‘good faith’ qualification applies only to the first part
of the clause (i.e. to the words ‘in order to promote the objects of the company for the benefit of
its members as a whole,’) or whether the qualification applies to the second part as well. The
difference is not merely semantic: if the good faith qualification applies only to the first part, that

71
It is also the case that remedies for oppression and mismanagement are granted only when specified grounds are
satisfied. A mere breach of directors’ duties, with nothing more, may not necessarily satisfy the requirements of
oppression and mismanagement, thereby leaving stakeholders in the lurch.

18
would mean that the second part is an objective test. In other words, is it the case that (a)
directors must act in good faith in order to promote the objects of the company as a whole, and
(b) directors must act in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment? Or is it instead the case that (a) directors must
act in good faith in order to promote the interests of the company as a whole and (b) directors
must act in good faith in the best interests of the company, its employees, the shareholders, the
community and for the protection of environment? In the first interpretation, the ‘good faith’
qualifier operates only with respect to promoting the objects of the company as a whole, while in
the second it also extents to acting in the interests of stakeholders.

It is submitted that the language is capable of both meanings; but the provision ought not to be
construed as giving rise to a duty of objectively acting in the best interests of stakeholders. The
section must be read as meaning that there is a duty on directors to act in order to promote the
objects of the company as a whole and to act in the best interests of the company and the
stakeholders; however, this duty is to be assessed not by an objective test of what the best
interests are. Rather, it would be sufficient if the directors subjectively believe in good faith that
they are acting in the interests of all stakeholders. This again does not make the provision
meaningless: there is a positive duty on directors to actively consider the interests of
stakeholders. If an objective interpretation were preferred, directors would be under a duty to
objectively act in the best interests of all the stakeholders. It would often be impossible for
directors to be objectively right about whether to prefer the interests of shareholders or
employees, for instance. The objective interpretation will also not sit comfortably with the
legislative history and Parliamentary materials, including the Standing Committee’s views.

In sum, therefore, it seems that the best interpretation of the clause is to consider that it casts a
duty on directors that is owed to the company. What directors could have done under common
law, they must do now. To effectively discharge this duty, directors must act in order to promote
the objects of the company, in the best interests of the company as well as other stakeholders.
However, the principle in Smith & Fawcett 72 continues to apply while discharging the duty.

In passing, it is also worth noting that a subjective duty imposed on the directors coupled with a
pluralist approach towards stakeholders’ interest may turn out to be a recipe for failure. The
pluralist approach is confronted with several problems. 73 Due to the subject nature of the duty,
directors could be faced with several choices. For instance, in case of conflict between the
interests of shareholders and stakeholder, or among various types of stakeholders, whose
interests do they ought to prefer? This leaves with directors with substantial (and somewhat

72
See n. 46 above.
73
For this reason, the approach was jettisoned in the UK in favour of the ESV approach.

19
untrammeled) discretion. 74 More dangerously, the opportunity available to the directors to
balance various competing interests may be utilised to foster their own self-interest, and leave
them with little accountability to anyone. 75 All of these could potentially have the effect of
substantially diluting the interests of stakeholders.

The subjective nature of the directors’ duties regarding stakeholder interests is similar to the one
that ensues in the UK where the position is stated rather expressly. As previously discussed,
directors in English companies only need to “have regard” to stakeholders’ interests while
discharging their duties. 76 More pertinently, if the common law that preceded the 2006
Companies Act made the relevant directors’ duties subjective, that position has not altered under
statute. Section 172 expressly provides that a director “must act in the way he considers, in good
faith, would be most likely to promote the success of the company …”. It is clear that directors
enjoy a great deal of discretion in that it is for the directors rather than for the courts to decide
whether and how the various stakeholders’ interests are to be considered when directors
discharge their duties. 77 For this reason, even if a shareholder derivative action were possible, it
would be an onerous task on the part of the claimant to demonstrate the breach of directors’
duties as the situation is dependent upon the subjective opinion of the relevant director, which
can be defensible in a number of ways. 78 A claim, if at all, may lie only if the director acted so
egregiously as to have failed to act in good faith. 79 This may not be easy to establish for a
claimant.

In sum, both in India as well as the UK, there could be difficulties in the implementation and
enforcement of directors’ duties under section 166(2) of the 2013 Act and section 172 of the
2006 Act respectively. In both jurisdictions, stakeholders do not enjoy meaningful remedies in
case of breach of directors’ duties that require them to take care of stakeholder interests.
Mechanisms such as derivative actions and class actions are woefully inadequate. While
shareholders, in theory, could espouse the claims of stakeholders, we are not sanguine that there
is reason for them to do so. Even if they do, we do not expect them to succeed as it would be
incongruous for shareholders to pursue claims on behalf of stakeholders. In any event, the high
degree of subjectivity in the duties imposed on directors not only compound the problems of
stakeholders, but it also confers a great amount of discretion to directors that they could
potentially use to act in their own interest. Both the pluralist approach in India and the ESV
74
See Vikramaditya Khanna & Umakanth Varottil, ‘Board Independence in India: From Form to Function?’ in
Harald Baum, et al, Independent Directors in Asia: A Historical, Contextual and Comparative Approach
(Cambridge University Press, 2016 forthcoming), available at http://ssrn.com/abstract=2752401, p. 26.
75
Keay, ‘The Duty to Promote the Success of the Company’, p. 18;Mark Arnold & Marcus Haywood, ‘Duty to
Promote the Success of the Company’ in Simon Mortimore QC, Company Directors: Duties, Liabilities, and
Remedies (Oxford University Press, 2013), p. 257. It is to avoid such a situation that the UK adopted the ESV
approach that will make boards accountable to at least one constituency, viz. shareholders.
76
Companies Act 2006, s. 172(1).
77
See Keay, ‘Stakeholder Theory in Corporate Law’, p. 287.
78
Lynch, ‘Section 172’, p. 201.
79
See Keay, ‘Stakeholder Theory in Corporate Law’, p. 287.

20
approach in the UK suffer from similar problems when it comes to such implementation matters.
Hence, we conclude in this section that despite the perceived dissimilarities of the approach
followed in the two jurisdictions relating to directors’ duties to consider stakeholder interests, in
the end the ability of the stakeholders to address their concerns remain more or less the same in
both. To that extent, stakeholder power in India is not as extensive as it is made out to be.

V. CONCLUSION

Section 166(2) is likely to be considered by courts and tribunals sooner rather than later.
However, as far as tackling the problems in the existing provision are concerned (some of which
we have pointed out above), it seems that a well-thought out legislative reconsideration would be
more appropriate than fashioning ad-hoc judicial responses. As we have seen, providing real
ammunition to stakeholders on the basis of the existing provision is likely to be a double-edged
sword: any innovative approach by the judiciary is likely to have repercussions on the entire
scheme of the common law which are better addressed by legislative rather than judicial
measures. The question of what remedies are to be provided to stakeholders must be one which
needs to be squarely addressed in any legislative reformulation of the provisions.

Meanwhile, courts and tribunals will have to ensure that the provision does not become a shield
for directors from all accountability. In other words, it will be for the judiciary to ensure that the
provision does not become a means of excuse to the director who acts in neither the
shareholders’ nor the stakeholders’ interests. If a director claims the she acted in good faith to
balance the interests of shareholders and stakeholders, that claim must be scrutinized through
properly manageable judicial standards. Evolving those standards of scrutiny – perhaps by
incrementally developing on the common law standards of scrutiny of the actions of directors –
is likely to be the most important challenge the judiciary will have to address in deciding cases
involving the application of section 166(2).

We do not suggest that courts or tribunals should substitute the judgment of directors with their
own judgment. However, a case may well be made out that a purposive reading of the provisions
compels courts to proactively satisfy themselves that the judgment of the directors was actually
held in good faith, and was based on relevant materials and considerations.

*****

21
Satyam Case

- Raju wanted to use reserves of Satyam to acquire Maytas (real estate business company)
- On December 16th, after close of business for Indian stock markets, the Board of Directors at
Satyam announced its decision to acquire all of privately held Maytas Properties for $1.3
billion and 51 per cent of builder Maytas Infra for $300 million.
- Shareholders (minority) did not approve as there was conflict of interest.
- Satyam’s share price fell by 55 per cent at the NYSE
- Proposed acquisitions were called off a mere 12 hours after being announced
- Satyam founder and Chairman B. Ramalinga Raju and other insiders held 36 per cent in
Maytas Infra and 35 per cent in Maytas Properties
- World bank notification that Satyam was banned from all WB related business for the next
eight years due to "improper benefits to bank staff" and "lack of documentation on invoices”
- Two directors resigned Mangalam Srinivasan, Krishna G Palepu (Prof at Harvard Business
School), Non-exective Director, and Vinod K Dham, Non-executive and Independent Director
- January 6th 2009 – Ramalinga Raju confesses to major wrongdoings

Satyam Computer Services Limited

Balance Sheet as on 30.09.2008 for Q2 (2008-2009)

Accounts as per contents

Reported audited accounts of
As on 30/09/2008 letter by R Raju

I Sources of Funds:

4. Current Assets, Loans and

Advances 8,842.54 2,936.20

Less: Current Liabilities and

Provisions 2,166.05 3,396.05

Net Current Assets. 6,676.49 (459.85)

Total 8,794.98 1,658.64

- For the September quarter Satyam reported a revenue of Rs 2,700 crore and an operating
margin of Rs 649 crore (24 per cent of revenue) while the actual revenue was Rs 2,112 crore
and an actual operating margin of Rs 61 crore (3 per cent of revenue). This had apparently
resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone
 - Resulted in shareholder loss - from Rs 226 per share on December 16, to Rs 6 on January 9 th
2009

- This scam was too simple to not have been noticed

- Who should notice? Auditors, independent directors, Audit Committee
- Thanks to the Satyam scandal, a number of weak chinks in the armour of Indian CG norms
were exposed
o Inefficiency of independent board, who on paper were independent, but in reality
were not
o Failure on part of the audit process - internal audit, statutory audit and the audit
committee
- Bottom line is, US corp gov norms don’t work in India

Indian Corporate governance norms post Satyam

o Increased disclosures under securities laws (under the listing agreement)
 Shareholding pattern
 Financial statements
 Audit reports
 Material event or transaction - completion of expansion and diversification
programmes, strikes and lock-outs, change in management and change in
capital structure
 Investor complaints received and disposed of
 Corporate governance report

o Audit Committee (Section 177)

 Atleast 3 directors out of which independent directors are in majority
 Must be financially educated
 Terms of reference

 the recommendation for appointment, remuneration and terms of

appointment of auditors of the company;
 review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
 examination of the financial statement and the auditors’ report
thereon;
  approval or any subsequent modification of transactions of the
company with related parties;
 scrutiny of inter-corporate loans and investments;

 valuation of undertakings or assets of the company, wherever it is

necessary;
 evaluation of internal financial controls and risk management
systems;

 monitoring the end use of funds raised through public offers and
related matters.
o Nomination and Remuneration Committee (Section 178)
 3 or more non-executive directors of which majority shall be independent
directors
 Duties include identification and recommendation of appropriate senior
management and directors to the board
 Must formulate a policy to provide for appointment and remuneration of
directors, key managerial personnel and other employees
 In the event that a company does not have profits, or where profits are
inadequate, managerial remuneration requires approval of the Nomination
and Remuneration Committee
o Stakeholder Grievance Committee (Section 178)
 To resolve the grievances of the security holders of the company
 A company having more than 1000 shareholders, debenture holders, deposit
holders and other security holders must constitute a Stakeholders
Relationships Committee
 Minimum strength not provided for- however, the chairman must be a non-
executive director
 Similar duties to that of the existing ‘shareholders grievances’ committee
 Expansion of scope from ‘shareholders grievances’ under the Listing
Agreement to ‘Stakeholders Relationships’ under the Companies Act, 2013
 However, a cause of action under Section 178 can be raised only by a security
holder.
o Internal Audit (Section 138)
 Certain companies (as may be prescribed) must appoint an internal auditor to
evaluate the functions and activities of the company
 Separate from statutory auditors
 Such internal auditor may be a chartered or a cost accountant or other
professional appointed by the board- may also engage an external agency
 Rules for the conduct and report of internal audits yet to be prescribed
  However, draft rules suggest

 Every listed company

 public company having paid up share capital of Rupees ten crores

 companies with loans of more than 25 crores

 Audit committee to set up the internal audit

Independent Directors
o The problem that was being faced is that of ‘true independence’. How to you ensure
that a director is truly independent? Previously, the 1956 Companies Act made no
mention of independent directors
o Independent Directors found their way into vogue as a result of the accounting
scandals of WorldCom and Enron. It was felt that having directors who were not
interested in the company would lend a voice of disinterested reason. It would also
help keep an eye on the directors who are interested in the well-being of the company.
Cadbury Committee Report and the Sarbanes Oxley Act both talk about bringing in
independent directors
o 2003 SEBI Report on Corporate Governance brought in the concept of independent
directors into India. SEBI ordered all listed companies to have atleast half of the
Boards of the listed companies as independent. Immediately, this ran into trouble
 The definition of an independent director, pre 2013 was a very loose one. One
that could allow a director to be independent on paper, but in reality, the
person was somehow connected to the promoters of the company
 This, coupled with a tradition of strong and powerful promoters would mean
that directors were either not independent at all, or were intimidated by the
promoter-directors. This resulted in Satyam scandal.
o Under the 2013 Act, the definition of independent director has been tightened
considerably. An independent director in relation to a company, means a director
other than a managing director or a whole-time director or a nominee director,—
 is a person of integrity and possesses relevant expertise and experience
(according to the Board);
 is or was not a promoter of the company or its holding, subsidiary or
associate company;
 not related to promoters or directors in the company, its holding, subsidiary or
associate company;
 no pecuniary relationship through self or relatives with the company, its
holding, subsidiary or associate company, or their promoters, or directors, in
the last two years or during the current financial year;
 neither himself nor any of his relatives—

 holds a key managerial position or is or has been employee of the

company or its holding, subsidiary or associate company in past three
 financial years immediately preceding the financial year in which he
is proposed to be appointed;

 connected through a law firm or an audit firm

 does not hold together with his relatives two per cent. or more of the total
voting power of the company whether by himself or a holding company; or
 is not a Chief Executive or director, by whatever name called, of any
nonprofit organisation that receives twenty-five per cent. or more of its
receipts from the company, any of its promoters, directors or its holding,
subsidiary or associate company or that holds two per cent. or more of the
total voting power of the company; or
 who possesses such other qualifications as may be prescribed