The concept that directors have a fiduciary duty to the company has been firmly ingrained in the corporate world’s fundamental being, both in spirit and in law. The directors of a corporation are responsible for overseeing or managing the company’s operations. Subject to the topics that have been reserved for the shareholders in the constitution or shareholders’ agreement, an incorporated joint venture is no different in this regard. Nominee directors on the board of a joint venture company are subject to general legal directors’ duties, including the duty to act in good faith in the best interests of the company.

This common law principle was first acknowledged by the Supreme Court of India (“SC”) in its renowned decision in the Nanalal Zaver case, which stated that the directors can be viewed as “trustees” of the business and “shall employ their powers for the advantage of the company and for that alone.” However, these responsibilities must be taken into account in light of the unique situations of nominee directors. Nominee directors often feel a conflict between the wishes of their appointing shareholder and their duties as a director that a director would have to weigh before exercising his “independent judgement”.

Failure to exercise independent judgement by the director can have serious consequences for both the director and the controlling shareholder, as they will be potentially fixed with knowledge of their controlling authority. One instance where a nominee director may have conflicting duties is on the joint venture board of a company, where the interests of the nominee director may conflict with the interests of the board.

Important judicial pronouncements regarding the duty of a nominee director

In the case of AES OPGC Holding (Mauritius) v. Orissa Power Generation Corporation Limited,[1] it was held that if a director is placed in a situation which gives rise to a conflict between the interests of two or more persons to whom the director is answerable, then he is duty bound to take the decision which would be in the interest of the company, failing which he would be in breach of his fiduciary duties. It was observed that such a situation arises more in the case of nominee directors, where there is a clash of interest between the company and the nominators.

In the case of Rolta India Ltd. & Anr. vs. Venire Industries Ltd. & Ors., the Bombay High Court, while dealing with the validity of pooling agreements entered by the shareholders of a company, held that Directors, as fiduciaries of the company and the shareholders, are duty-bound to do what they consider to be in the best interest of the company and cannot abdicate their independent judgement by entering into pooling agreements.

Risks associated with the nominee director

As predicted in these and other examples, there may be significant dangers to both the nominee director and the appointing body if nominee directors do not do due diligence. The following dangers are possible, albeit they will always depend on the structure’s specifics: –

1. The nominee director will be held personally liable for any loss to the company flowing from the breach of his duties.
2. There will be civil and criminal liability for the nominee director and the controlling shareholder, for procuring the breach of duty.
3. The nominee director may take decisions that are considered unlawful and ineffective.
4. The nominee director may be barred from future directorships or from exercising his independent judgment.

Brief analysis of Section 166 of the Companies Act 2013

Section 166 of the Companies Act 2013 codifies the fiduciary duties of directors, in accordance with well-established common law principles.

1. Section 166(2) of the Companies Act 2013 provides that the director shall act in good faith of the company in order to promote the objects of the company, for the benefit of its members, and shall act in their best interests.
2. Section 166(3) of the Companies Act 2013 provides that a director shall exercise his duties with due and reasonable care, skill, and diligence, and shall exercise independent judgment.

The major duties of the nominee directors can be listed as follows-

1. A nominee director on the joint venture board of a company will be required to exercise independent judgment before casting of his vote and cannot only take the views and interests of the nominator into account.
2. Along with the exercise of independent judgment, the nominee director is required to exercise reasonable care, skill, and diligence before taking a decision.