Do Directors Owe Fiduciary Duty to Shareholders?

Scope and Definition of ‘fiduciary’, “fiduciary capacity” and “fiduciary relationship”

The Hon’ble Supreme Court in Sri Marcel Martins vs. M. Printer and Ors.[1] defined the term ‘fiduciary’ as-

The word ‘fiduciary’, as a noun, means one who holds a thing in trust for another, a trustee, a person holding the character of a trustee, or a character analogous to that of a trustee with respect to the trust and confidence involved in it and the scrupulous good faith and condor which it requires; a person having the duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking. Also more specifically, in a statute, a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person, trust or estate.

The Supreme Court in this case further noted that-

While expression “fiduciary capacity” might not be capable of a precise definition, it implied a relationship that was analogous to relationship between a trustee and beneficiaries of trust – Expression was wider in its import because it extended to all such situations as place parties in positions that were founded on confidence and trust on one part and good faith on other.

It connotes the idea of trust or confidence, contemplates good faith, rather than legal obligation, as the basis of the transaction, refers to the integrity, the fidelity, of the party trusted, rather than his credit or ability, and has been held to apply to all persons who occupy a position of peculiar confidence toward others, and to include those informal relations which exist whenever one party trusts and relies on another, as well as technical fiduciary relations.”

The Apex Court in this case noted that in order to determine whether a relationship is based on trust or confidence, or whether a party stands in a fiduciary capacity, what Court would take into consideration is the factual context in such questions arises. Earlier to the Marcel Martins case[2], the Apex Court in Central Board of Secondary Education and Anr. v. Adiya Bandopadhyay[3], explained the term ‘fiduciary’ and ‘fiduciary relationship’ in the following words:

“The term “fiduciary” refers to a person having a duty to act for the benefit of another, showing good faith and candour, where such other person reposes trust and special confidence in the person owing or discharging the duty. The term “fiduciary relationship” is used to describe a situation or transaction where one person (beneficiary) places complete confidence in another person (fiduciary) in regard to his affairs, business or transaction(s). The term also refers to a person who holds a thing in trust for another (beneficiary). The fiduciary is expected to act in confidence and for the benefit and advantage of the beneficiary, and use good faith and fairness in dealing with the beneficiary or the things belonging to the beneficiary. If the beneficiary has entrusted anything to the fiduciary, to hold the thing in trust or to execute certain acts in regard to or with reference to the entrusted thing, the fiduciary has to act in confidence and is expected not to disclose the thing or information to any third party.”

Black’s Law Dictionary[4] defines “fiduciary relationship” as-

“A relationship, in which, one person is under a duty to act for the benefit of the other on matters within the scope of the relationship. Fiduciary relationships-such as trustee-beneficiary, guardian-ward, agent-principal, and attorney-client – require the highest duty of care. Fiduciary relationship usually arise in one of four situations: (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act for give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognised as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.”

Some of the notable examples of fiduciary relationships are: Banker-Account Holder, Lawyers-Client, Company-Board of Directors, Donor-Donee to a Power of Attorney[5], Guardian-Minor, etc.

Do Directors Owe Fiduciary Duty to Shareholders?

It is stated in Palmer’s Company Law, which is often cited by Indian courts as authority on company law that the fiduciary relationship of a director exists with the company: the director is not usually a trustee for individual shareholders.[6] Another authoritative book, often cited by Indian Courts answer this questions as-

“Directors owe no fiduciary or other duties to individual members of their company in directing and managing the company’s affairs, acquiring or disposing of assets on the company’s behalf, entering into transactions on its behalf, or in recommending the adoption by members of proposals made to them collectively. If directors mis-manage the company’s affairs, they incur liability to pay damages or compensation to the company or to make restitution to it, but individual members cannot recover compensation for the loss they have respectively suffered by the consequential fall in value of their shares, and they cannot achieve this indirectly by suing the directors for conspiracy to breach the duties which they owed the company. However, there may be certain situations where directors do owe a fiduciary duty and a duty to exercise reasonable skill and care in advising members in connection with a transaction or situation which involves the company or its business undertaking and also the individual holdings of its members.”[7]

The relevant extracts from both these authoritative books were cited by the Supreme Court in Sangramsinh P. Gaekwad and Ors. vs. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Ors.[8] In the same case, Supreme Court also referred to the judgment of in Dawson International plc v. Coats Patons Plc.[9], wherein it was held that the Directors are, in general, under no fiduciary duty to shareholders and in particular current shareholders with respect to the disposal of their shares in the most advantageous way as directors are not their agents and as such are not normally entrusted with the management of their shares. The Court, however, also observed that if the directors take it upon themselves to give advice to current shareholders they have a duty to act in good faith and not fraudulently nor can mislead the shareholders whether deliberately or carelessly, in which event, they may have a remedy.[10]

Thus, a clear distinction has been carved out between the fiduciary duty of the directors with regard to the property and funds of the company and the duty of directors to current shareholders as sellers of their shares. In case of conflict between two interests, the company’s interest must be protected.[11] To sum up, fiduciary duty of the Directors to the company cannot be equated with the duty to the shareholders. However, as a matter of precaution, it is to be noted that such fiduciary duties may still arise in special circumstances demonstrating the salient features and well-established categories of fiduciary relationship such as agency which involves duties of trust, confidence and loyalty.[12] Therefore, absence of special circumstances or special reasons normally would not fetch the concept of fiduciary relationship in a director vis-à-vis the current shareholders.[13] A necessary corollary to the above legal proposition is that the directors do not have any fiduciary duty to advice shareholders as to when and in what manner they should enter with the transactions with the company including acceptance of offer of additional shares. The Supreme Court in Sangramsingh case[14] noted that- “Such a fiduciary duty would arise inter alia in exceptional situations when the directors take upon themselves the task of advising the shareholders who may be his family members or when a transaction of purchase or sale is entered into by and between the director and the shareholders wherein the former taking undue benefit or having ill or improper or ulterior motive or malafide act solely to make pecuniary benefit and gain for himself and to the detriment of such shareholders.”[15]

Knowledge or Intention: Whether required?

In a recent judgment of U.S. Supreme Court, Bullock v. Bankchampaign, N. A.[16] related to private trust and alleged breach of fiduciary duty by one of its trustees, the Supreme Court held that for the purpose of interpreting whether or not there was a breach of fiduciary duty, knowledge or intention can be concluded when the fiduciary knew that it was improper and also acted in a reckless manner which can be equated to intent under criminal law. The Supreme Court emphasized on the degree of recklessness and quoted from one of its earlier decisions that-

“…We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violate a fiduciary duty…That risk “must be of such a nature and degree that, considering the nature and purpose of the actor’s conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor’s situation.” … Ernst & Ernst v. Hochfelder, 425 U. S. 185, 194, n. 12 (1976) (defining scienter for securities law purposes as “a mental state embracing intent to deceive, manipulate, or defraud”).”

Thus, it is evident that even in the absence of intention, mere knowledge may be sufficient to infer intention, if the person was legally duty-bound to act, or not to act, or to act in a different manner, in a given circumstances.

[1]  (2012)5SCC342

[2] Ibid.

[3] (2011) 8 SCC 497

[4] 7th Edn. Page 640

[5] State of Rajasthan v. Basant Nahata, (2005) 12 SCC 77, as cited in The Church Of Christ Charitable Trust &

Educational Charitable Society vs. M/S Ponniamman Educational Trust, MANU/SC/0515/2012

[6] 23rd edition, page 848

[7] Pennington’s Company Law 6th Edn. at page 608-09

[8] (2005)11SCC314

[9] 1988 SLT 854

[10] Supra Note 8 at para 52

[11] Ibid. at para 53

[12] Ibid. at para 58; Peskin and Anr. v. Anderson and Ors., [2001] 1 BCLC 372

[13] Ibid. at para 59

[14] Ibid.

[15] Ibid. at para 81

[16] Bullock v. Bankchampaign, N. A.; U.S. Supreme Court, No. 11-1518; May 13, 2013

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